NZ: GDP - March 2001 Quarter

Data Flash (New Zealand)

Key Points

GDP (production measure) remained flat in the March quarter, following a 0.4% qoq increase in Q4/2000. The expenditure-based measure recorded an increase of 0.2% qoq.

The median market expectation had been +0.7% qoq. GDP in Q1 was 0.7% higher than a year earlier while the annual average increase over the year to March 2001 was 2.5%. Revisions were applied to historical data, lifting slightly the overall level of GDP recorded for 2000.

Production sector breakdown: Agriculture and the various service sectors were positive contributors to growth, offset by lower activity in the manufacturing sector (-1.7% qoq), construction (-6.8%) and forestry (-4.5%).

Expenditure breakdown: Negative growth contributions were concentrated in the areas of business investment (-12.1%, subtracting 1.8pps from GDP) and residential construction (-6.0%). The remainder of the components were positive as expected, including a strong net export contribution (exports up 0.9% qoq, imports down 0.7%).

The GDP deflator rose by 1.6% qoq, following a 1.9% qoq increase in the previous quarter.

Market reaction: Bonds rallied 6-8 bps, while bill futures reversed the sell-off following the stronger-than expected US data overnight.

Commentary

While the RBNZ does not publish quarterly GDP forecasts, today's result was undoubtedly a little weaker than assumed by the Bank at the time of its May forecasts. However, considering that the data referred to the March quarter and subsequent information points to an upturn in demand momentum, we do not believe that the GDP result will have a significant effect on the RBNZ's interest rate decision next week. However, looking ahead to the August meeting, if a further rate cut is to be averted, it will be important that these positive indicators continue over the next six weeks and that they are converted into concrete evidence of the emergence of a substantial rebound in GDP growth in Q2. We expect this to occur and, accordingly, retain our forecast that the next move in New Zealand monetary policy will be a tightening in Q1 2001.

Positive indicators for Q2 and beyond include

a continuation of the positive consumer demand trend, which is consistent with a high level of consumer confidence;

continued strong income growth in the farming sector and a significant recovery in the terms of trade (+4.8% in Q1);

the levelling off in the downtrend in the residential construction market, with increased housing turnover pointing to an upturn over coming quarters;

strong May export data, which is consistent with positive anecdotal evidence regarding export trends included in the latest Canterbury Manufacturers Survey;

a bottoming of the global downturn in growth;

businesss survey information, which points to continued solid employment growth; a relatively high level of investment intentions, which is consistent with high capacity utilisation (latest import data points to a rebound in plant and machinery investment in Q2); and

a high value of commercial construction permits.

All of the above is consistent with the continued high level of expectations firms' have about their own activity over the next year (NBNZ business survey). The recorded level of positive sentiment corresponds to around 3% GDP growth going forward.

Our preliminary forecast is for a rebound in GDP growth of 1% qoq or more in Q2.

The RBNZ eased by 75 bps during the March-May period, thereby adding to the stimulus in the system associated with the low NZ dollar and rising terms of trade. Considering the above indicators for Q2 and beyond, we do not expect the RBNZ to lower the cash rate further from here on - despite today's weaker-than-expected GDP result. That assessment is supported by the fact that CPI inflation is still around 3% and that the latest NBNZ survey is pointing to a stabilisation of surveyed pricing intentions at a level consistent with CPI inflation above 2%.

Ulf Schoefisch, Chief Economist, New Zealand

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