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Deutsche Bank - NZ:Q1/2000 Commentary

Data Flash (New Zealand)
NZ:Q1/2000 Commentary

Key Points

GDP (production based) rose 0.8% qoq in Q1 2000 - marginally higher than the median expectation of 0.7%. The RBNZ's had forecast growth of 0.6% in its May Monetary Policy Statement. Activity in the quarter was 5.5% higher than the same quarter a year earlier.

In terms of production sectors, growth in the transport:::::and:::::communications:::::industry contributed half of the overall growth in the quarter, with transport benefiting from buoyant activity in the agriculture and tourism sectors. A further large contribution was made by the construction sector, reflecting strong growth in residential building activity.

Although the strongest growth was recorded in the sectors named above, moderate growth was recorded across a broad range of sectors with a net 8 of the 26 production sectors recording higher activity during the quarter (17 sectors recorded higher activity while 9 sectors recorded lower activity). However, a net 12 sectors had recorded growth in Q4.

Output in the manufacturing sector fell 0.9% qoq, driven by a large fall in activity in the machinery and equipment subgroup. However, this has to be seen in the context of growth of nearly 5% qoq in Q4.

The expenditure based measure of GDP rose 1.0% qoq and 5.9% yoy.

In terms of demand components, residential building activity grew nearly 16% qoq, contributing 0.7 percentage points to overall growth. Export volumes rose 2.1% qoq and also contributed 0.7 percentage points to overall growth.:::::Stockbuilding made:::::a:::::negative contribution to growth in Q1 following the pre- 2YK build-up in Q4, while private consumption fell marginally.

Import volumes were unchanged in Q1 after excluding the impact of the importation of a frigate in Q4. The import penetration ratio was little changed from year earlier levels but down marginally compared with recent quarters.

Market Reaction

With growth more or less as expected, there was little market reaction to the GDP data. Bank bill futures rallied 2-4 ticks.


Today's outturn was broadly in line with our expectations, both at the aggregate and component level. Therefore, our view of the path of the economy over the period ahead is largely unchanged.

Around three-quarters of the growth in GDP during Q1 can be attributed to 3 of the 26 production sectors: construction, transport, and communications. The construction sector is virtually certain to record a heavy fall in activity in Q2 given the pronounced fall in building consents recorded since November last year. While we still expect reasonable growth in the transport and communications during Q2, we also expect to see an increased proportion of sectors recording zero or negative growth. Our preliminary forecast is for growth of 0.3% qoq in Q2 and 0.6% qoq in Q3.

The GDP deflator rose by just 0.2% qoq in Q1. The consumption deflator rose 0.5% qoq while export prices rose 3.2% qoq. However, the deflators for residential building and other fixed investment fell. These falls seem slightly odd given the price rises recorded in the producer price and capital goods prices indexes.

GDP growth in Q1 was only marginally stronger than the estimate contained in the RBNZ's May Monetary Policy Statement. Thus, the Bank's estimate of the current output gap is likely to have changed little as a result of today's outturn.

Going forward, we would expect the RBNZ to concur with our view that the near-term growth outlook appears much weaker than the Bank anticipated in May (the RBNZ's inflation forecasts were based on growth of 1.1% qoq in both Q2 and Q3). Thus the contribution of excess demand pressures to the medium-term inflation outlook is likely to be somewhat weaker than previously envisaged.

However, as we have emphasised on numerous occasions, the impact of rising commodity prices and the weak NZD exchange rate means that external prices are placing intense upward pressure on inflation. We expect annual inflation to rise from the current rate of 1.7% to 3.0% by Q1 2001. Thereafter, we expect inflation to reduce gradually to around 2% but this forecast is conditional on some recovery in the exchange rate from current levels. We anticipate that the RBNZ will have revised up its internal forecast of inflation to around 2.7% by Q1 2001, falling to 1.8% by Q1 2002.

Implications for monetary policy

Looking ahead to the 5 July OCR review, we expect the RBNZ to leave the OCR unchanged at 6.5%. However, we see the decision as finely balanced.

On the one hand, the Bank will be very concerned about the near-term deterioration in the inflation outlook and the potential for that to spillover into higher inflation in subsequent years. On the other hand, as noted above, we think that the Bank's internal projection will show inflation falling back towards the midpoint of the target range within an 18-24 month horizon.

Tactical considerations are also likely to paramount. At present the market is pricing no probability of a rate hike in July. The Bank will be conscious that a surprise rise in the OCR might simply lead to a sell-off in the NZD, thus accentuating the near-term deterioration in the inflation outlook.

We expect the RBNZ will take comfort from the fact that the market is currently almost fully pricing in a 50bp hike in the OCR at the 16 August:::::Monetary Policy:::::Statement.:::::Our expectation is that the Bank will take the opportunity to deliver on the market's expectation, especially if the sharp decline in business and consumer confidence proves short- lived. Alternatively, a 25bp rate hike in August followed by a further 25bp hike at the October interim review can not be ruled out.

GDP (production) - % change::::::::::GDP (expenditure) - % change
GDP:::::::::: Q4/99 Q1/99- Q1/99y GDP::::: Q4/99 % pt Q1/99- Q1/99y
(Production) -Q1/00 Q1/00 -Q1/00y (Expend.) -Q1/0 contrQ1/00 -Q1/00y
% change::::::::::::::::::::::::::::::% change::::: 0 ib to:::::
:::::::::::::::::::::::::::::::::::::::::::::::::: chge
Agriculture:::::1.2:::::9.4 4.0:::::::::::::::::::::::::::::::::::
Fishing,::::: -1.5:::::-4.1 1.4:::::Priv.:::::-0.1 -0.1 2.8 2.8
Hunting, etc.:::::::::::::::::::::::::Cons.
Manufacturing -0.9:::::6.1 4.2:::::Gov't:::::-10.9 -1.9 4.8 7.2
::::::::::::::::::::::::::::::::::: Cons.:::::
Electricity,:::::0.6:::::-2.2 -2.3:::::Res.::::: 15.8 0.7 38.7 22.0
Gas & Water::::::::::::::::::::::::: Buldings:::::::::::::::
Construction:::::6.2:::::21.9 9.1:::::Other::::: 1.6 0.3 5.6 7.4
::::::::::::::::::::::::::::::::::: Fixed
::::::::::::::::::::::::::::::::::: Assets
Wholesale::::: -0.2:::::6.8 7.9:::::Increase:::::-- -1.0 --:::::--
Trade:::::::::::::::::::::::::::::: in Stocks
Retail Trade:::::0.6:::::5.6 5.0:::::GNE::::: -1.8 -1.9 5.5 6.5
Restaurants & 0.7:::::1.6 4.5:::::Exports:::::2.1 0.7 7.5:::::6.2
Transp.,::::: 3.0:::::12.1 10.6:::::Imports:::::-5.6 -2.2 6.1 11.1
Finance::::::::::0.9:::::1.3 1.3:::::Expenditure 1.0 2.2 5.9:::::4.8
::::::::::::::::::::::::::::::::::: GDP
Personal::::: 1.6:::::3.6 1.9:::::::::::::::::::::::::::::::::::
Owner Occ.::::: 0.6:::::2.1 1.8:::::::::::::::::::::::::::::::::::
General Govt. 0.5:::::1.8 0.8:::::::::::::::::::::::::::::::::::
Gross Domestic 0.8:::::5.5 4.4:::::::::::::::::::::::::::::::::::
Source: DB Global Markets::::::::::Source: DB Global Markets
Research, Statistics New Zealand:::::Research, Statistics New Zealand

Darren Gibbs, Senior Economist, New Zealand,

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