New Zealand, recovery on the horizon

The New Zealand economy is tentatively emerging from recession on the back of fiscal and monetary stimulus. Real GDP grew by 0.1% quarter-on-quarter in Q2 of 2009, and this marked the first positive quarterly out-turn since the end of 2007. Manufacturing activity (13.1% of GDP) has contracted sharply, and this is likely to persist as the current strong exchange rate (which has appreciated by 25% since the start of the year) continues to undermine domestic goods production. However, these manufacturing woes are offset by the finance and insurance industry, as a continuing boom in the property market has increased demand for financial services despite contraction in other areas of the economy. Property prices rose for a fifth consecutive month in October. Financial and insurance now represents by far the largest sector of the New Zealand economy and has made up almost one third of real GDP growth over the past decade. Private consumption improved slightly in Q2 of 2009, expanding by 0.4% compared to the previous quarter, thanks largely to rising home prices and a slight recovery in household balance sheets (due to interest rate cuts and deleveraging). There are expectations for continued growth into 2010, provided that the positive factors remain in place. There are also signs of an improvement in the retail industry. Excluding vehicle related categories, core retail sales increased 1.2% in October, led by a 6.4% rise in sales of clothing and soft goods. Consistent with the effects of a rising housing market, there were solid increases in sales of household durables such as hardware (up 7.2%), furniture and floor coverings (up 3.1%), with sales by department stores up 2.4%. Both corporate and personal insolvencies have risen year-on-year. The payment risk profile of thousands firms have been downgraded. Although this has occurred across all industry sectors, younger businesses, construction related industries and the services sector have seen the largest number of downgrades and appear the most vulnerable to cash flow and payment problems. The signs are that Q2 2009 growth marked the end of the recession. The IMF forecasts real GDP to shrink by 2.2% in 2009 but to rebound by 2.2% in 2010, based on the recovery of the global economy, the recent strength in domestic housing prices and a marginally stronger retail environment.