Deutsche Bank Research: NZ GDP - September Q

Data Flash (New Zealand)
NZ GDP - September Quarter 1999

Key Points

GDP (production based) rose +2.3% (s.a., qoq) in the September quarter. This was significantly above both average market and RBNZ expectations for increases of +1.7% qoq and +1.3% qoq respectively.

Among the production sectors, agriculture rose 5.2% on the back of an improvement in climatic conditions. Other positive contributors included: fishing, forestry & mining (+7.5%), manufacturing (+ 1.8%), wholesale trade (+4.1%), transport (+ 2.6%) and construction (+7.0).

In terms of demand components, the most significant positive contribution came from the external sector on the back of export strength (+7.3%), a sharp rise in residential building activity (+10.6%) and continuing private consumption growth (+1.7%).

Somewhat offsetting these positive contributions, import growth continued to remain reasonably robust, while de-stocking over the quarter further constrained activity.

Analysis

Today's GDP number was significantly above both the RBNZ and market expectations. The strength of these data reinforces that the economy continues to build momentum, with sharp recovery in export growth and reasonable growth in domestic spending.

Within the total, we observed strong positive contributions from the agriculture, manufacturing and forestry industries. Strong results were also recorded for wholesale trade and the transport and communications group. The upturn in activity across a broad range of industries reflects the impact of stimulatory monetary conditions and a recovery in sectors recently impacted by negative drought effects.

On an expenditure basis, these data showed a sharp rise in export volumes (+7.3%) on the back of favourable climatic conditions and an improvement in export demand. This reflected a strong rebound in agricultural production and primary food processing over the quarter. Private consumption was also reasonably robust over the quarter, while business investment remained flat.

The sharp +2.3% qoq increase in activity follows on from the surprising -0.3% qoq decline recorded in the June quarter. Given the volatility of these quarterly data, it is sensible to average across the two quarters to give a more accurate assessment of recent trends. On the basis of this approach, quarterly outturns of GDP of around 1.0% appear reasonable, with annualised growth presently in the region of 4%.

Looking ahead, we expect growth to continue to remain reasonably robust, with a Q4 GDP outturn of around +1.0% qoq. However, the release today of November merchandise trade data showing an sharp deterioration highlights that the external sector imbalance remains the key structural problem in the economy going forward.

Implications for monetary policy

Today's GDP release was at the upper end of average market expectations and substantially above RBNZ November MPS projections. The strength of these data is likely to increase market expectations that the RBNZ will raise the OCR at the 19 January review.

In particular, given the RBNZ's November MPS expectation for a Q3 rise in GDP of +1.3% qoq, the +2.3% qoq increase suggests a significantly faster closure of the output gap than was previously estimated. However, partially offsetting the stronger inflationary pressures from the more robust activity, these data also suggest a stronger productivity track, which should help dampen some of the Bank's concerns regarding pricing pressures.

While the strength of the GDP is likely to have increased the market's assessment of a RBNZ move at the January review, our central scenario remains for the Bank to raise the OCR by +50 bps not until the March MPS. We assess a reasonably high hurdle for the Bank to move at an interim review, particularly given their reluctance to elevate the status of reviews to that of MPS releases. Reinforcing this expectation, we assess that the Bank will be especially reluctant to move at the January review, two hours before becoming aware of the December quarter CPI data.

GDP (production) - % change
::::::::::::::::::::::::: Jun99q:::::::::: Sep98q::::: Sep98yr
::::::::::::::::::::::::: -Sep99q:::::::::: -Sep99q::::: -Sep99yr

Agriculture::::::::::::::: 5.2:::::::::::::::3.3::::::::::-2.2

Fishing, Hunting, etc::::: 7.5:::::::::::::::7.7:::::::::: 4.8

Manufacturing::::::::::::::: 1.8:::::::::::::::1.1::::::::::-1.3

Electricity, Gas & Water -0.5:::::::::: -2.5::::::::::-2.0

Construction::::::::::::::: 7.0:::::::::: 10.5::::::::::-0.8

Wholesale Trade:::::::::: 4.1:::::::::: 10.1:::::::::: 4.8

Retail Trade::::::::::::::: 2.0:::::::::::::::4.9:::::::::: 2.9

Restaurants & Hotels::::: 2.5:::::::::::::::9.2:::::::::: 3.9

Transp., Communications::::: 2.6:::::::::::::::9.9:::::::::: 8.6

Finance:::::::::::::::::::: 1.2:::::::::::::::1.1:::::::::: 1.9

Personal Services:::::::::: -1.1:::::::::::::::0.3::::::::::-0.5

Owner Occ. Dwellings::::: 0.5:::::::::::::::1.6:::::::::: 1.6

General Govt. Services::::: 0.6:::::::::: -0.1:::::::::: 0.2

Gross Domestic Product::::: 2.3:::::::::::::::4.0:::::::::: 1.9

Source: DB Global Markets Research, Statistics NZ

GDP (expenditure) - % change

:::::::::::::::::::: Jun99q % pt::::: Sep98q Sep98yr
::::::::::::::::::::-Sep99q contrib:::::-Sep99q -Sep99yr
:::::::::::::::::::::::::::::: to qtr :::::::::::::::::::::::::::::: chge

Priv. Consumption::::: 1.7::::: 1.1:::::::::: 1.8::::: 3.3

Gov't Consumpt.::::: 0.2::::: 0.0:::::::::: 3.8::::: 2.7

Res. Buldings::::: 10.6::::: 0.5:::::::::: 1.5::::: 24.6

Other Fixed Assets -0.1::::: 0.0:::::::::: 7.8::::: 9.5

Increase in Stocks::::: --:::::-0.7:::::::::: --::::: --

GNE::::::::::::::::::::0.8::::: 0.9:::::::::: 3.4::::: 6.8

Exports::::::::::::::: 7.3::::: 2.4:::::::::: 5.2::::: 5.5

Imports::::::::::::::: 2.1:::::-0.8:::::::::: 8.9::::: 13.4

Expenditure GDP::::: 2.4::::: 2.4:::::::::: 2.1::::: 4.1

Source: DB Global Markets Research, Statistics NZ

Chris Green, Senior Economist, New Zealand,

ENDS

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