NZ GDP: Building momentum - ANZ

Sharon Zollner, Senior Economist at ANZ, notes that the New Zealand economy grew a solid 0.9% in the June quarter, a little less than their expectations on weaker-than-anticipated manufacturing growth but still a solid outturn.

Key Quotes

“Q1 was revised up from 0.7% to 0.9% q/q. The economy is strengthening and we expect strong growth over the back half of 2016. Nonetheless, we continue to expect OCR cuts in November and February as the RBNZ responds to persistently low inflation and slipping inflation expectations.

Key Points

The economy expanded briskly in the June quarter. Though a touch weaker than expected by both ANZ and the market, it beat the RBNZ’s 0.8% pick, made before very strong construction data was released. Q1 was revised up from 0.7% to 0.9% q/q. Annual growth lifted to 3.6%.

Per capita growth also accelerated to 0.5% q/q, and the paltry 0.1% q/q previously recorded in Q1 was revised up to 0.3% q/q.

Eleven of 16 production-based industries recorded growth over the quarter. As expected, the construction sector led the charge again, growing 5.0% q/q on top of 5.1% last quarter (sa). It is a relatively small part of the economy (~6% in a direct sense), but nonetheless contributed a third of the total quarterly growth.

Primary sector activity bounced 0.5% after falling 0.2% in Q1. The services behemoth grew 0.7%, fuelled by population growth, with this sector a key driver of growth over the past year. Retail trade and accommodation lifted 1.9% q/q, with strong tourism again a factor. Manufacturing grew 0.8%, whereas we had expected quarterly growth closer to 2%. Food manufacturing rose 1.3%.

Expenditure GDP rose 1.2% q/q, with the housing and building boom leaving its mark all over the data here too. Household consumption lifted 1.9% – it has been quite constrained in light of the housing strength but is up 4.0% y/y. Net exports contributed +0.4%, with timing effects at play. Inventories were a drag on growth, as we expected, with the change in inventories plus the balancing item knocking 1.2% off quarterly growth, but of course, much of this showed up in exports – dairy exports rose nearly 13% q/q. The terms of trade fell in Q2, so real gross national disposable income undershot GDP growth (+0.4% q/q, 2.6% y/y).

The New Zealand economy is clearly strengthening. We may see some statistical inventory-related noise in Q3 but looking through that we expect a continuation of solid figures and above-trend growth.

The mix of growth is gradually becoming more typical of ‘late cycle’ growth, with household debt ratios increasing. That said, the backbone of the economy, commodity prices, is improving, and the fact the current account deficit is so modest despite a rampant housing market is testament to the fact that it is not a borrow-and-spend free-for-all.

Today’s data pipped the published RBNZ prediction of 0.8% q/q, but this prediction was made before the release of very strong construction data. We suspect their unpublished, updated forecast was a little higher than the outturn today. Growth is not determining New Zealand monetary policy at the moment; it is all about low inflation and that’s expected to remain low courtesy of the strong NZD, despite the economy growing at an above-trend rate.”