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NZ Gross Domestic Product - June Quarter 1999

NZ Gross Domestic Product - June Quarter 1999
Deutsche Bank - Economic Note (New Zealand)


Key Points

GDP (production based) fell 0.3% (s.a., qoq) in the June quarter. This compared with average market and RBNZ expectations for an increase of 0.5% qoq.

Among the production sectors, forestry, fishing and mining fell 8.4% largely as a result of low gas production. Other negatives included: agriculture (down 0.7%), manufacturing (down 1.0%), construction (down 1.9%), electricity (down 1.1%) and general government services (down 0.8%). In terms of the production GDP components, the only bright spots were ongoing growth in transport and communications (up 1.1%) and community services (up 1.9%).

In terms of demand components, the most significant negative contribution came from the external sector on the export weakness (-4.7%) and continuing strong import growth (+2.7%). This weakness more than offset a sharp build-up in the stocks, some increase in residential investment and flat private consumption outturn for the quarter.

Market reaction: Short-term interest rates have fallen significantly as financial market expectations of a near term tightening of monetary policy by the RBNZ have disappeared. The NZ TWI has fallen over 1% so far today but its difficult to determine whether this is a result of the poor June quarter GDP or poor monthly merchandise trade.

Analysis

Today's GDP number was significantly below both the RBNZ and market expectations.

Within the total we observed strong negative contributions from the fishing, forestry & mining and manufacturing. The decline in activity across a broad range of industries to a large extent reflects the on-going impact of the recent drought. However, with the negative effects of the drought beginning to dissipate, we should see some reversal of this weakness from the source going forward.

On an expenditure base, these data showed a sharp decline in the external sector contribution to growth. This reflects the lagged-effect of the drought-related weakness in the agricultural industry, together with strong growth in imports over the quarter. Private consumption was flat over the quarter, while business investment showed only slight growth.

Significantly, there was a sharp build-up in stocks, which given the flat profile for consumer demand suggests that this may be largely involuntary stockbuilding. If proven to be the case, this raises the prospect of lower production levels going forward as these stocks are unwound.

The negative net external sector contribution is of some concern given the latest trade data for August indicating an on-going deterioration in the merchandise trade balance, with the rise in imports continuing to outstrip export growth.

These data further confirm that economic activity in New Zealand remains unbalanced with modest domestic demand accompanied by a significant negative net external sector contribution.

Implications for monetary policy

Today's GDP release was a significant surprise to the financial markets. We had anticipated some downside risk to the Reserve Bank's expectation of 0.5% growth, but a fall of 0.3% was somewhat of a surprise. The weakness in today's data means that it is a virtual certainty that the RBNZ will keep the OCR unchanged at the 29 September review.

Given the RBNZ's expectation for an increase in GDP of 0.5% qoq in the June quarter, the 0.3% qoq decline suggests that the output gap was more negative than previously estimated - which implies lower inflationary pressures. Despite the positive impact of a 0.2 percentage point upward revision to March quarter growth and expected bounce-back in growth in the September quarter, the weakness of these data are likely to dampen the projected acceleration in growth forecast by the Bank over 2000.

However, somewhat offsetting the weaker inflationary pressures from the softer activity profile, is the fact that monetary conditions are now considerably weaker than the Bank had previously anticipated. In particular, the weaker NZD may create some concern within the Bank regarding the prospect a sharp rise in imported inflationary pressures.

While today's weaker than expected GDP data unambiguously lessened the prospect that the RBNZ will raise the OCR at the 17 November MPS, we believe that is premature to suggest that such a move is now completely off the agenda. In making this judgement, the Bank will now look towards activity and pricing data released in the run up to November (including August retail sales, QSBO capacity utilisation, HLFS and CPI data) to gauge the degree of spare capacity and pricing pressure in the economy.

The Data

GDP (Production):::::::::::: Mar99q-::::::::Jun98q- Jun9yr- % change::::::::::::::::::::Jun99q:::::::: Jun99q Jun99yr:::::::::::: Agriculture::::::::::::::::::::-0.7::::::::-3.6:::::::: -4.0::::::::::::::::::::Fishing, Hunting, etc.::::::::-8.4:::::::: 2.5:::::::: 0.0

Manufacturing:::::::::::::::::::: -1.0::::::::-0.2:::::::: -2.7::::::::::::::::::::Electricity, Gas & Water:::::::: -1.1::::::::-2.5:::::::: -1.8

Construction:::::::::::::::::::: -1.9::::::::-5.9:::::::: -7.3:::::::::::: Wholesale Trade::::::::::::::::::::0.7:::::::: 5.6:::::::: 1.9

Retail Trade::::::::::::::::::::0.1:::::::: 2.9:::::::: 1.9

Restaurants & Hotels:::::::::::: 1.6:::::::: 4.8:::::::: 1.8

Transp., Communications::::::::1.1:::::::: 8.8:::::::: 7.8

Finance:::::::::::::::::::::::: -0.8:::::::: 1.5:::::::: 2.2

Personal Services:::::::::::: 1.9:::::::: 0.4:::::::: -0.9

Owner Occ. Dwellings:::::::::::: 0.4:::::::: 0.8:::::::: 1.5

General Govt. Services::::::::-0.8::::::::-0.3:::::::: 0.4

Gross Domestic Product::::::::-0.3:::::::: 2.0:::::::: 0.6

GDP (Expend.):::::::::::: Mar99q- % pt contrib Jun98q- Jun98yr- % change:::::::::::::::::::: Jun99q:::::::: to change Jun99q Jun99yr

Priv. Consumption:::::::::::: 0.0:::::::::::: 0.0:::::::: 1.7:::::::: 1.4

Gov't Consumpt.:::::::::::: 1.2:::::::::::: 0.2:::::::: 2.0:::::::: 3.0

Res. Buldings:::::::::::: 6.9:::::::::::: 0.3:::::::: 1.3:::::::: -15.1

Other Fixed Assets::::::::::::0.7:::::::::::: 0.1::::::::12.1::::::::8.5

Increase in Stocks:::::::::::: --:::::::::::: 2.0:::::::: --:::::::: --

GNE:::::::::::::::::::::::: 2.8:::::::::::: 2.6:::::::: 5.8::::::::1.8

Exports:::::::::::::::::::: -4.8:::::::::::: -1.6:::::::: 2.9::::::::4.4

Imports::::::::::::::::::::::::2.7:::::::::::: -1.0::::::::12.2::::::::7.0

Expenditure GDP:::::::::::: 0.0:::::::::::: 0.0:::::::: 2.6::::::::0.9

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