New Zealand May Record 0.6% Growth in Recovery Set to Accelerate on China

New Zealand’s economy probably expanded for a fourth quarter, spurred by Chinese demand for the nation’s commodities, boosting the case for the central bank to raise interest rates for the second time in as many months.

Gross domestic product rose 0.6 percent in the three months to March from the previous quarter, according to the median of 14 estimates in a Bloomberg News survey before the report due in Wellington tomorrow. The gain would follow a 0.8 percent jump in October to December, the biggest in two years, and indicate a sustained rebound from the deepest contraction in three decades.

Growth may accelerate as China’s move in the past week to allow a stronger yuan may stoke its demand for foreign goods, such as New Zealand’s timber logs and milk. That in turn may spur New Zealand’s dollar, according to UBS AG; the so-called kiwi has already proved the third-best performing major currency over the past 12 months, spurred by forecasts for higher rates.

“We expect the recovery to gather momentum,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “That will give the Reserve Bank confidence to continue with its policy normalization by lifting the cash rate steadily.”

Reserve Bank of New Zealand Governor Alan Bollard on June 10 raised the official cash rate a quarter-point to 2.75 percent, the first increase in three years, and said he expects to gradually remove monetary stimulus. There is an 80 percent chance of a quarter-point rise at the July 29 review, according to a Credit Suisse index based on swaps trading.

Currency Gain

The New Zealand dollar has gained 12 percent against its U.S. counterpart over the past year, behind Brazil’s real and Canada’s dollar among 16 major currencies tracked by Bloomberg. Prime Minister John Key, the former head of foreign exchange at Merrill Lynch & Co., said earlier this month the kiwi may fail to keep pace with gains in the higher-yielding Australian dollar.

China’s June 19 decision to abandon a fixed peg of the yuan to the U.S. dollar means the currencies “risk seeking” investors prefer will benefit, including the New Zealand and Canadian dollars, UBS analysts said in a research note June 21.

The New Zealand currency rose to a one-month high of 71.53 U.S. cents yesterday. It bought 70.31 U.S. cents at 12:40 p.m. in Wellington trading.

The Reserve Bank forecast this month that growth in 2010 will be the strongest in five years as the recovery takes hold after a five-quarter contraction through 2008 and into 2009. The government expects annual average growth will exceed 3 percent for the next three years.

Finance Minister Bill English on May 20 announced income tax cuts and increased spending on roads and railways to encourage investment and buoy demand.

Logging Gains

In the first quarter, export growth was led by overseas sales of logs to China, the nation’s largest market. China boosted demand for logs after Russia introduced a tax on its exports, the Ministry of Agriculture & Forestry said in a June 15 report. Log exports are likely to rise 22 percent in the year ending June 30, the ministry forecast.

Stronger overseas shipments were hindered by a drought in regions of the North Island that affected milk production.

Fonterra Cooperative Group Ltd., the world’s largest dairy company, said April 15 that many of its farmer suppliers had stopped milking earlier than expected, which will curb production. Dairy export volumes fell in the first quarter, according to government figures published June 10.

New Zealand’s current account deficit, the broadest measure of trade because it includes services and investment, narrowed to 2.4 percent of GDP in the year ended March 31, the smallest gap in more than 21 years, Statistics New Zealand reported today.

Asian Economies

Demand for exports is being driven by global growth, led by China and other Asian economies. In Australia, which buys 23 percent of New Zealand’s exports, growth was 0.5 percent in the three months through March. The Chinese economy expanded 11.9 percent in the first quarter from a year earlier.

As exports recover, consumer spending and the housing market remain subdued, Bollard said June 10. Retail sales rose 0.2 percent in the three months through March, the slowest pace in a year, according to government figures published May 14.

Warehouse Group Ltd., the nation’s largest discount retailer, said in May sales fell 1.9 percent in the three months ended May 2. On June 3, the Auckland-based company told investors consumer confidence is recovering “but it’s likely to take time,” according to a statement to the stock exchange.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.