Data Flash (New Zealand) GDP (Q4 2001)
Data Flash (New Zealand) GDP (Q4 2001)
Result: GDP rose 0.6% qoq in Q4. GDP in Q4 was 2.9% higher than the same quarter a year earlier. Implication for markets: The Q4 outcome was weaker than the RBNZ's forecast of 1.0% qoq (March MPS projection). Although we expect Q1 GDP to exceed the RBNZ's forecast, today's result strengthens our view that the 75bps of tightening priced into the market for the April and May meetings is too aggressive. We expect the RBNZ to deliver 25bp tightenings at both meetings.
While this data is historical, the weaker than expected Q4 GDP outcome strengthens our view that the market is too aggressive in pricing a cumulative 75bps of tightening over the April and May RBNZ meetings.
Today's outcome implies a less positive output gap at the end of last year than suggested by the Bank's latest forecasts (the Bank had expected GDP growth of 1.0% qoq). While we think that Q1 GDP will outstrip the Bank's forecast of 0.5% qoq, offsetting the weaker than expected Q4 result, this number will not be published until late June. From a public relations standpoint, barring a very high Q1 CPI result (due 16 April, DB expects 0.6% qoq), we think that the Bank will have difficulty justifying a step up in the pace of rate hikes in May. This will be especially so if other central banks take a more relaxed approach to re-tightening over coming months. Indeed, today's result may trigger renewed criticism of the Bank's decision on 20 March to begin the tightening cycle earlier than expected.
Beyond Q1, today's NBNZ survey continues to suggest that the economy's current underlying growth momentum is in the vicinity of 3.5% ie not too far away from the economy's current migration-inflated sustainable rate of growth, and broadly in line with the RBNZ's economic projections. But with the risks to growth and inflation lying mainly to the upside, we think that the RBNZ will hike the OCR by 25bps at both the April and May meetings - in our view, a path consistent with the Bank's March economic projections - and by a further 75bps over the remainder of the year (taking the OCR to 6.25% by year end).
GDP (production measure) rose 0.6% qoq in Q4, following growth of 0.2% qoq in Q3. The median market expectation had been for a quarterly rise of 1.1% qoq. The RBNZ forecast growth of 1% qoq in its March Monetary Policy Statement - a forecast that the Bank felt was subject to upside risk. The less widely followed expenditure-based measure of GDP rose 0.7% qoq. GDP in Q4 was 2.9% higher than the same quarter a year earlier while the annual average increase over the calendar year was 2.4%.
The composition of growth on both a production and expenditure basis is set out in the tables below. As expected, domestic demand was the driver of growth during the quarter, although the extent of growth was weaker than we had anticipated. This reflects weaker than expected government consumption and stockbuilding. The external sector made a substantial negative contribution to growth, including a greater than expected impact stemming from the tourism sector as a result of the 11 September tragedy (exports of services declined 7.3% qoq, subtracting 0.3pps from growth).
Private consumption was buoyant (+1.4% qoq), as was investment spending on plant and machinery (+22.5% qoq and a new record high) and construction (residential building, +20.3% qoq). Exports of goods fell by a less than expected 0.9% qoq, due largely to a temporary decline in dairy exports (-10.94% qoq).
The GDP deflator rose 0.9% qoq in Q4, taking the annual rate of inflation to 3.5% from 4.4% previously. The GNE deflator - which best reflects the prices of goods and services purchased in New Zealand - rose 0.8% qoq and 2.0% yoy.
Given an expected rebound in the components of demand impacted by the decline in tourism in the first three months after 11 September, we expect Q1 GDP to grow by around 1.0% qoq.