Data Flash (New Zealand) GDP - Q2 2001

Data Flash (New Zealand) GDP - Q2 2001

Key Points

GDP (production measure) rose 2.0% qoq in Q2, following a revised 0.3% qoq increase in the Q1 (previously recorded as flat). The expenditure-based measure recorded an increase of 1.8% qoq.

The median market expectation had been a 1.4% qoq increase in production measure.

GDP in Q2 was 3.4% higher than a year earlier while the annual average increase over the year to Q2 2001 was 2.3%.

Production sector breakdown: Activity was strong virtually across the board, with particularly strong growth being recorded in the following sectors: manufacturing (4.6% qoq), construction (7.2%), wholesale trade (3.3%) and transport (3.1%). Retail trade rose 1.7% qoq.

Expenditure breakdown: A strong rebound in investment spending made the strongest contribution to growth. Plant and machinery investment rose 28.4% qoq, reversing a 23.7% qoq decline in Q1. Non-residential construction rose 13.3%. Total business investment rose 18.6% qoq, making a 2.5pp contribution to growth in Q2. Solid growth was also recorded in private consumption and net exports, both contributing 0.8pps to growth. Following an unanticipated build up in Q1, a decline in stocks made a -2.6pp contribution to growth in Q2. The GDP deflator rose by 0.9% qoq/4.7% yoy. The GNE deflator - which best reflects the prices of goods and services purchased in New Zealand - rose 0.5% qoq/ 3.2% yoy.

Market reaction: The NZD moved up a couple of spreads. Debt markets were little affected with the data seen as of historical interest only in light of recent events in the US.

Commentary

Today's very strong outcome confirms our long-held belief that the Q1 GDP data dramatically understated the underlying growth momentum in the New Zealand economy. Averaging across the first half of 2001 suggests a growth pulse of over 1% qoq.

That said, even before recent events in the US we expected a modest slowdown in growth in H2 2001, as the contribution from the agriculture sector slowed somewhat. Based on indicators to hand, we currently estimate GDP growth of around 0.8% qoq in Q3.

Looking ahead, in light of the recent deterioration in the US growth outlook - reinforced, but not caused solely by the tragic events of 11 September - and its implications for growth across the globe, the outlook for the New Zealand economy in 2002 is more sombre.

However, we still expect the local economy to grow by around 2% during 2002. This is below our estimate of the trend rate of growth (which we assess as being around 2.5% qoq). Nonetheless, in our view this would still represent a very good performance in light of the magnitude of the forecast slowdown over the next six months in the US, Europe and much of Asia.

Low interest rates (with one further cut expected), a very stimulatory New Zealand dollar, and already solid domestic economic momentum are the cause of our optimism. In addition, the renewed net inflow of migrants which, if anything, is likely to be accelerated by recent events, should underpin a gradual upswing in residential construction, even if consumer confidence moderates somewhat.

Our central view is the RBNZ will leave its OCR at 5.25% when it announces the result of its review of monetary policy settings on 3 October. However, in light of very substantial downward revisions to consensus forecasts of trading partner growth, we do not rule out the possibility of a further - probably 25bps - easing move. Both the Fed and the RBA are expected to cut their respective official rates by 50bps next week.

The robust Q2 GDP result means that all the key measures of capacity utilisation that we follow are now pointing to an economy that is operating above the level consistent with a stable path for core inflation. While the RBNZ will no doubt be anxious to avoid a sharp slowdown in growth, as evidenced by the Bank's uncharacteristic willingness to join the global easing bandwagon on 19 September, a period of slightly below potential growth - of the sort that we now forecast - is likely to be welcomed (at least internally). This needs to be kept in mind when contemplating the likely extent of further easing that the RBNZ will be prepared to accommodate.

Darren Gibbs, Senior Economist, New Zealand

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