New Zealand Growth at Two-Year Low Signals Rate Cut Coming

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New Zealand’s economy grew the least in two years in the first quarter, strengthening the case for central bank Governor Graeme Wheeler to cut interest rates further as soon as next month.

Gross domestic product rose 0.2 percent from the fourth quarter, hurt by a drought that curbed dairy output, Statistics New Zealand said in Wellington Thursday. That’s less than the 0.6 percent forecast by the Reserve Bank, which was also the median of 16 estimates in a Bloomberg News survey.

The local dollar, already the worst-performing major currency in the past three months, slid in anticipation the RBNZ will add to last week’s reduction in the official cash rate by a quarter percentage point to 3.25 percent. Cheaper borrowing costs and a depreciating exchange rate would strengthen export competitiveness -- while stoking a housing market that’s seen prices surge in Auckland.

“This seals the case for a July OCR cut from the RBNZ,” Westpac Banking Corp. economists led by Dominick Stephens wrote in a note after the report. “The big surprise was business investment expenditure, which was very weak,” they wrote, adding that they expect another cut in September.

New Zealand’s dollar was down 1.1 percent at 69.07 U.S. cents as of 3 p.m. in Wellington. The currency has dropped about 8 percent against the U.S. dollar the past three months.

Rate-Cut Bets

Traders are pricing in an 81 percent chance of a rate cut on July 23, up from 61 percent late yesterday, according to swaps data compiled by Bloomberg. ASB Bank Ltd. economists now expect a move next month rather than in September, while ANZ Bank New Zealand Ltd. forecasts two further cuts this year.

Growth slowed as a summer drought hit agricultural output and falling global dairy prices damped farm incomes. Still, consumer spending was underpinned by record immigration and a surge in tourist arrivals as New Zealand co-hosted the cricket World Cup, while rebuilding in earthquake-damaged Christchurch boosted construction.

First-quarter growth was the slowest since 0.1 percent in the first quarter of 2013. Fourth-quarter growth was revised down to 0.7 percent from 0.8 percent. The annual gain in GDP was 2.6 percent, compared with 3.5 percent in the 12 months through December, which was the fastest in seven years.

Wheeler’s Outlook

The RBNZ last week lowered its forecast for annual growth through March 2016 by half a percentage point, to 3.3 percent. It expects the pace to slow to 2.9 percent by March 2017.

Finance Minister Bill English said he’s keeping his 2.8 percent average projection for the coming four years. Growth is still “solid” and sustainable, English said in an e-mailed statement.

Wheeler said last week that weaker prospects for dairy prices will curb incomes while rising fuel costs may damp demand. Slower growth was suppressing inflation, and the economy needed lower interest rates and a weaker currency to get the prices gauge back up to his 2 percent target, he said. Inflation slowed to 0.1 percent in the first quarter.

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, almost halved payments to its farmer suppliers in the season ended May 31 after global milk powder prices tumbled.

First-quarter growth was curbed by weaker output from the agricultural and mining industries, while manufacturing also declined, the statistics agency said. Construction, retail trading and business services increased.

Output from primary industries fell the most since 2010 on farm production and less oil exploration and extraction. Five of nine manufacturing industries shrank, led by food processors.

Measured by spending, rather than output, GDP was up 0.1 percent from the fourth quarter, when it surged 1.2 percent. Investment dropped 1.9 percent, the second straight contraction, and was led lower by machinery and equipment, offset by increases in construction.

Exports rose even as dairy sales declined, underpinned by meat and metal products. Spending by tourists visiting New Zealand boosted exports of services, the statistics agency said.

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