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New Zealand GDP strong: Boom more broad-based in Q2

New Zealand GDP strong: Boom more broad-based in Q2

Boom more broad-based in Q2

New Zealand's Q2 GDP was close to expectations at +0.7% q-o-q and +3.9% y-o-y (market had +3.8%; HSBC had +3.9%). This is strong, above-trend, growth and shows that the New Zealand economy has been outperforming most of the developed world this year. New Zealand's boom has also become more broad-based, with GDP rising in all industries except the primary and manufacturing sectors. Strong growth in household spending and services sector growth as well as on-going support from a construction upswing show that domestic demand was booming in Q2. Although there are some signs of conditions cooling a little in H2 2014, we still expect New Zealand to outper-form for the year as a whole. We see the RBNZ as needing to lift rates further, with the next move likely in Q1 2015.

Facts

- New Zealand's Q2 GDP rose by +0.7% q-o-q and +3.9% y-o-y (market had +3.8%; HSBC had +3.9%)

- Growth was broad-based across the 16 industries, with only the primary and manufacturing industries showed a fall. The strongest industries in the quarter were professional services (+4.2% q-o-q), wholesale trade (+2.2% q-o-q), construction (+2.2% q-o-q) and retail (+1.4% q-o-q)

- On the expenditure measure of GDP, household consumption was a key driver. After growing by just +0.1% in Q1, consumption was up by +1.3% in Q2 (+3.4% y-o-y). Spending on services and durable goods showed the strongest growth. Investment rose by 1.4% q-o-q to be +7.2% y-o-y. Exports fell by -2.9% q-o-q while imports rose by 2.9% q-o-q, making net exports a significant drag on growth in the quarter (-1.8ppts).

Implications

New Zealand’s economy continued to expand strongly in Q2, with y-o-y growth climbing to +3.9%, which is well above trend. These numbers also show that New Zealand is one of the strongest performers across the OECD this year.

Over the past year, the acceleration in growth has been driven by strong export growth (largely driven by a rapid rise in dairy prices, which have subsequently fallen back) and rapid growth in construction. However, those sectors played only a minor role in Q2 growth. Agricultural production actually contracted by -2.2% q-o-q, as dairy produc-tion eased. However, what is clear from the Q2 numbers is that New Zealand's boom has become more broad-based. Aside from primary and manufacturing production, all other industries showed expanding production and the strongest rise was in services.

The expenditure measure of GDP, which rose by +0.5% q-o-q, showed a similar story. Household consumption and gross fixed capital formation were the drivers of growth, reflecting increased household spending on services and strong infrastructure-related construction work – largely related to the post-earthquake rebuild of the Canterbury re-gion.

The data underscore the broad-based nature of New Zealand’s economic growth. While dairy and construction have been key drivers, other sectors are also experiencing solid growth in activity. In particular, strong consumer confi-dence and migration-driven population growth have been flowing through into increased spending on services, such as eating out, and big-ticket consumer items such as automobiles.

While recent indicators have shown some cooling of growth in the second half of the year, we still see New Zea-land’s growth continuing to run ahead of potential over the next 18 months or so. Although sharp falls in dairy prices and a temporary lull in Chinese dairy imports have impacted primary sector activity and growth in incomes, the me-dium-term outlook for the agricultural sector remains positive. Construction activity will also continue to expand rap-idly, driven by the Canterbury rebuild and strong demand for new housing in New Zealand’s largest city, Auckland. Domestic demand has been building steadily, driven by an improving labour market, strong inwards migration and rising house prices.

Today’s result was close to the RBNZ and Treasury forecasts of +0.8% q-o-q. Given the fairly dovish RBNZ inflation forecasts published last week, we see a possibility that inflation data will come in a little ahead of their expectations over the next year. We expect the RBNZ to continue hiking rates from early 2015.

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