New Zealand climbs out of recession

       New Zealand's economy unexpectedly grew in the second quarter, ending its longest recession on record and raising expectations the central bank may start raising interest rates as soon as January.
       Data yesterday showed gross domestic product rose a seasonally adjusted 0.1% in the second quarter, compared with a revised 0.8% drop in the previous three months and ending five straight quarters of contraction.
       Economists in a Reuters poll had forecast a 0.2% contraction, while the Reserve Bank of New Zealand (RBNZ)had predicted a 0.1% fall.
       Growth was driven by gains in domestic consumption and primary industries, including forestry and mining,which analysts said might prompt the RBNZ to reconsider its stated policy of keeping rates at record lows until late 2010.
       "The market is going to continue to push for the bank to tighten policy much sooner than what the bank is currently stressing," said Deutsche Bank chief economist Darren Gibbs.
       Markets now see an 80% chance of a quarter point rate rise in January, up from less than 50% before the data,according to overnight indexed swaps.An increase in March has already been fully factored in.
       The RBNZ's oft-stated intention to hold rates at current or lower levels was seen as under further pressure from the data.
       "The bank will need to normalise rates sooner than the market had discounted," said Sue Trinh, a senior currency strategist at RBC capital Markets.
       The RBNZ had said in a statement on Sept 10 that it expected to eventually tighten monetary policy, if the economy recovers as projected, although it projected only a "patchy recovery" with a weak an uncertain outlook.
       The central bank slashed its cash rate by 575 basis points between July 2008 and April this year to 2.5% to support the economy, but has been on hold since then.
       A Reuters poll, conducted before the GDP data release, had a majority of the 14 economists expecting the next move to be a hike in the middle of 2010.
       As the possibility of an early RBNZ hike comes into view, short-term rates are expected to keep rising more quickly,causing the swap curve to flatten.
       The spread between the one- and three-year issues is now at 165 basis points, near a record peak of 170 basis points reached in August.
       A Credit Suisse measure shows the market is now pricing in around 150 basis points of tightening for the next 12 months, up from 126 basis points early this week.
       Finance Minister Bill English said the economy was through the bottom of the trough and was stabilising, but still faced pain. Despite marginal quarterly growth, the economy shrank 2.1%from a year earlier.
       "However for most people the real measure of recession is unemployment,which is expected to keep rising for some time yet," English said after the data release.
       Unemployment hit a six-year high of 6% in the second quarter and is expected to rise as high as 7.5% next year.
       Household consumption, which makes up around 60% of the economy,rose 0.4% in the June quarter, the first increase since December 2007 quarter.