23 Dec 2010

Economy shrinks in September quarter

5:08 pm on 23 December 2010

The economy has contracted for the first time in almost two years.

Official figures show gross domestic product, the broadest measure of the health of the economy, fell 0.2% in the three months to September.

The economy had been expanding, albeit slowly, since the middle of last year and most economists were expecting modest growth in the quarter.

Statistics New Zealand says the decline is mainly due to further falls in manufacturing activity, as well as a slowdown in the fishing, forestry, mining and construction sectors.

Household spending rose 0.5%, as people bought big-ticket items ahead of October's GST rise.

Statistics New Zealand says it is not possible to exclude the effect of the Canterbury earthquake but it could have reduced GDP because many businesses were closed and people were unable to go to work.

On an annual basis, the economy grew 1.4%.

UBS senior economist Robin Clements says GDP data can be volatile, so the risk of contraction was a real one.

He says the Reserve Bank will want to see more signs of life in the economy before it raises interest rates.

Government still positive

The Government says the country's economic recovery remains on track despite the data.

Finance Minister Bill English says the country's economic imbalances have built up for more than a decade and will take more than a year or two to fix.

However, he is confident the economy will begin to grow next year.

Mr English says unemployment has peaked and is coming down, export prices remain strong and next year's Rugby World Cup will boost the economy.

But the Labour Party says the quarterly contraction shows the Government's plans for economic recovery are not working.

Finance spokesperson David Cunliffe says the $23 million of tax cuts has done nothing to revitalise the economy.