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N.Z. Economy Likely Slowed on Rebuilding Delay, Rising Kiwi

Reserve Bank of New Zealand Governor Alan Bollard
Alan Bollard, governor of the Reserve Bank of New Zealand. Photographer: Mark Coote/Bloomberg

New Zealand’s economic growth likely slowed in the second quarter on delays in earthquake rebuilding and a stronger currency, giving the central bank scope to keep borrowing costs at a record low.

Gross domestic product rose 0.5 percent in the three months through June from the prior quarter, according to the median of 15 estimates in a Bloomberg News survey before a government report tomorrow at 10:45 a.m. in Wellington. The economy grew 0.8 percent in the first quarter.

Investors are betting Reserve Bank Governor Alan Bollard will keep the official cash rate at 2.5 percent until next year as a rising local dollar, aftershocks in Christchurch and fallout from the European debt crisis curb the recovery. An extended rate pause may limit gains in the kiwi dollar, the best performer among Group of 10 currencies in the past six months, and underpin spending already getting a boost from the Rugby World Cup this quarter.

“The underlying story remains buoyant, although perhaps less upbeat than initially thought,” said Jane Turner, economist at ASB Bank Ltd. in Auckland. “Many of the industries that will be leading the second-quarter decline are unlikely to remain weak.”

Construction shrank 6.6 percent in the second quarter to the lowest in more than 10 years, according to a government report Sept. 8. It is likely to stabilize in the second half and rebound in 2012 as Christchurch rebuilding gets under way, Turner said.

Current Account

A government report earlier today showed New Zealand’s current-account deficit in the year ended June 30 was 3.7 percent of GDP, less than the 4 percent median forecast in a Bloomberg survey of economists. The gap in the second quarter was NZ$921 million ($757 million), compared with a revised NZ$90 million surplus in the first three months of the year.

There is a 16 percent chance the cash rate will be higher before Dec. 31, according to swaps prices from Westpac Banking Corp. Nine of 17 economists surveyed by Bloomberg News expect the rate will be unchanged until next year.

Bollard on Sept. 15 said momentum in the economy appeared to have picked up, led by increased farm output, high commodity prices and rising household incomes.

Still, he left the cash rate unchanged, saying a strong currency and the risk of a sharp slowdown in global demand could curb exports, which make up 30 percent of the economy. New Zealand’s dollar has gained 12 percent the past six months, the strongest performer among 16 major currencies tracked by Bloomberg.

Currency’s Strength

The so-called kiwi advanced 8.9 percent against the U.S. dollar in the three months through June, the biggest rise since the third quarter of 2009. A stronger currency makes exporters’ goods and services more expensive to overseas customers.

Officials expect 95,000 foreign fans to attend the Rugby World Cup, which began Sept. 9 and ends Oct. 23. The central bank has forecast spending will be boosted by NZ$700 million during the tournament.

First-quarter growth was buoyed by government spending on rescue and urgent repair work after the quake struck Christchurch, the nation’s second-biggest city, on Feb. 22. The temblor wrecked homes and roads, closed the central business district and killed 181 people.

Quake Damage

Continuing aftershocks, including a magnitude 6 quake on June 13, have caused more damage and delayed demolition necessary to commence rebuilding. The need to review about 388,000 claims lodged with the state-owned Earthquake Commission, as well as insurance and regulatory delays, means rebuilding won’t begin until mid-2012, the central bank said last week.

Finance Minister Bill English has said it’s possible the pace of the economic recovery next year will not be as strong as he projected in his May budget.

“You can see perhaps lower growth further out,” he said in an interview on Sept. 14, referring to 2012-13. “When our growth is export driven and the exchange rate is elevated, it’s going to have an effect.”

Consumer sentiment fell this month, according to an ANZ National Bank-Roy Morgan index published last week. Business confidence dropped to a four-month low in August, ANZ said, citing a survey of 455 firms. Companies were less optimistic on the outlook for profits and fewer expect to hire more workers, the Aug. 31 report showed.

“A number of factors both domestic and international, point to an economic backdrop characterized by continued uncertainty and volatility,” Graham Evans, chairman of Warehouse Group Ltd., the nation’s largest discount retailer, said last week. “The extent of any underlying growth in retail spending is uncertain.”

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