Decent early 2019, construction can’t dig us out of slowdown

Economy builds a decent start to 2019, but construction can’t dig us out of the slowdown.

The Kiwi economy expanded 0.6%qoq to post a 2.5% annual rate. The details are a little shaky in the Isles, however.

Key Points

• The NZ economy had a respectable start to 2019, expanding 0.6%qoq. The annual rate of 2.5% was slightly above expectations. But growth will cool.

• Construction was the key driver of growth, with “higher investment in both residential and non-residential building”. We suspect the strong growth to cool from here, as capacity constraints bite.

• The primary sector was weak across the board, due to dry conditions. Retail was soft with weaker (Chinese) tourist numbers. The service sectors posted weak results, the softest since 2012.

• We expect growth to ease in 2Q 2019 to ~2.2%. The path (higher) into 2020 is dependent on the fiscal impulse. Further easing by the RBNZ and a weaker currency should assist.

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Growth at the start of 2019 was slightly ahead of forecast. The economy has posted a 0.6%qoq, on par with December quarter growth, taking annual growth to 2.5%yoy. But recent indicators of activity suggest growth will weaken. As had been already signalled, construction sector activity was a key contributor to growth at the start of 2019. However, services sector activity posted a meagre 0.2%qoq – the weakest rate since 2012. Weak tourist numbers, slowing population growth, and a quiet housing market were key reasons for this. A slowing service sector is concerning. Service sector growth tends to be a stable source of growth and makes up around two-thirds of the economy.

As we outlined in our updated forecast note last week (Fake Plastic Trees ), growth is likely to weaken. We are forecasting growth to fall to around 2%yoy in the June quarter. The economy is growing below its potential and with other central banks cutting rates or looking to add stimulus, the RBNZ has more to do to ensure inflation can get back to target. We don’t see the Bank cutting the cash rate at next week’s OCR review. We expect the RBNZ to use the full forecasting round with the new Monetary Policy Committee in August to make the next big decision. We expect the RBNZ to deliver another cut in August to 1.25%. After all, it’s only another 6 week wait. Financial markets (via a lower currency and wholesale interest rates) have done some of the work for the RBNZ in recent weeks. Although more work is required. We still believe there’s a 40% chance the RBNZ is forced to keep going to 0.75%.

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