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NZ: GDP - Q2 2001 Preview

Data Flash (New Zealand) - Preview

As we release this research, the full impact of the tragic events that took place in New York City on 11 September remain unclear. Needless to say, our thoughts are above all with everyone affected by these events. It is also unclear at this juncture how the operations of the major financial exchanges and markets will be affected, and how long any interruptions will be for those markets whose operations may be suspended.

Notwithstanding these terrible events, however, we believe our responsibility as researchers remains to provide the best advice we can to you, our customers, so that you can continue to manage the financial risks you face.

Release date: Friday, 28 September, 10.45am (NZT) Deutsche Bank forecasts: 1.6% qoq / +2.9% yoy / 2.0% ann. av., balanced risk RBNZ August forecast: 0.9% qoq / +2.2% yoy

Key Points

Following yesterday's manufacturing survey - the last of the GDP partials to be released and much stronger than we had expected - we have settled on +1.6% qoq as our estimate of growth in production-based GDP during Q2. We think that the risks around our estimate are balanced. The corresponding forecast for Expenditure GDP is 1.8% qoq. These forecasts assume that Q1 GDP is not revised substantially.

This growth represents a very substantial bounce-back from the flat outcome recorded in Q1, which was driven, in particular, by a significant weakening in plant and machinery investment (an outcome that probably reflected the lagged response to the sharp decline in business confidence and investment intentions in mid 2000).

As the chart above suggests, our new indicator model, developed with the help of Statistics NZ, points to a very strong rebound in plant and machinery investment in Q2. This rebound will compliment broad-based growth across the economy, leading to an above trend result for the quarter.

Abstracting from this volatility and taking into account the negative impact of the electricity crisis, we think that the current growth `pulse' is of the order of 0.8% qoq - above the economy's potential growth rate.

Monetary Policy Implications

The data will be released only days before the RBNZ's 3 October OCR review. An outcome of this magnitude will allay any remaining RBNZ concerns about the weak Q1 GDP outcome and will demonstrate that the domestic economy is exhibiting surprising - yet explainable - resilience in the face of widespread global economic weakness. Partial indicators suggest that growth in Q3 is shaping up to be similarly robust.

However, medium-term growth prospects have become much more uncertain over recent weeks, both due to the general trend of global economic data (reinforced by the sharp fall in US consumer confidence recorded overnight) and as a result of the events in the United States on 11 September.

In regard to the latter, should this tragedy have a lasting negative impact on confidence and spending - a clear risk - the economic slowdown in the US will likely be more drawn out than initially expected.

Consequently, as discussed in an accompanying note, there is now an increased probability that the RBNZ undertakes one or more further easing moves notwithstanding the current good performance of the New Zealand economy and upside inflation risks, These moves - which we think would be prudent at this stage - are likely to be presented as additional `insurance' against spillover impacts from potential negative consequences for the US economy as a result of this week's tragic events. Moreover, the risk that this may happen as early as the 3 October interim review now exceeds 50/50 in our view.

Detailed Breakdown of GDP Forecasts

Our forecasts for the key components of both the production and expenditure based components of GDP are set out below (the actual forecasts are based on a considerably more detailed breakdown of the data).

Production GDP

Primary Industries: Strong growth in both dairy and meat production is expected to have underpinned a 3% qoq rise in production in the agriculture sector. Forestry production is also estimated to have increased by 3% qoq, following a 5.3% qoq fall in Q1.

Manufacturing: The primary component of this sector should rise very strongly, reflecting the downstream impact of strong dairy and meat production. Despite the impact of weak global demand on demand for manufactured goods (especially capital goods), strong domestic demand appears to have resulted an increase in production in the non-primary sector. Overall production in the manufacturing sector is estimated to have increased by 2.0% qoq.

Construction: A very sharp rise in non-residential construction is expected to contribute 0.17pps to GDP growth in Q2. Residential construction appears to have been broadly flat.

Services: This sector will benefit from very strong growth in retail and wholesale sales and further solid growth in real estate and business services. However, the electricity crisis, which has seen generation shift from hydro production towards less efficient thermal production, is estimated to subtract 0.12pps from Q2 GDP growth.

Government: A continued expansion of spending by local government is expected to have contributed 0.06pps to Q2 GDP growth.

Unallocated/Residual: This component - which captures residual seasonality and unallocated production - is expected to add 0.3pps to growth in Q2 (this component deducted 0.1pps and 0.2pps from growth in Q1 2001 and Q4 2000 respectively).

Expenditure GDP

Private Consumption: Private consumption is estimated to have increased by around 1.0% qoq in Q2, a little weaker than growth in retail sales (the latter includes tourist spending which is reclassified as `exports - services' for the purposes of the national accounts.

Public Consumption: Following growth of 1.4% qoq in Q1, growth of 0.3% qoq is expected in Q2, in line with Budget forecasts.

Investment: Our indicator model suggests that a very sharp rebound in plant and machinery investment has occurred in Q2, following a much sharper than expected decline in Q1. Together, with a strong increase in non-residential construction, this is expected to result in a 12.6% qoq rise in investment spending, contributing 2.4pps to GDP growth in Q2.

Stocks: Last quarter's unexpected stock build in the wholesale sector is expected to have been reversed fully during Q2, subtracting 1.7pps from growth. Exports: The Overseas Trade Indexes suggest that goods volumes rose around 3% qoq in Q2, driven by strong growth in commodity exports. Tourist arrivals data suggests that services volumes will also have increased strongly in Q2, following 4.5% qoq growth in Q1.

Imports: The Overseas Trade Indexes suggest that goods volumes rose around 3% qoq in Q2, driven by the recovery in domestic demand (especially for capital goods). Services volumes are expected to have fallen slightly in Q2 - continuing the trend of the past year - partly reflecting fewer trips overseas by NZ residents.

A range of other indicators, not used directly in constructing our GDP estimate, support our view that GDP will post a very healthy rebound. For example,

the number of hours worked rose 0.3% qoq on an HLFS basis and 1.7% qoq on a QES basis;

full-time equivalent employment rose 0.6% qoq on an HLFS basis and 1.0% qoq on a QES basis;

the NZIER's measure of capacity utilisation remained at a high level in seasonally adjusted terms while an indicator of trading activity from the same survey recorded a strong rise.


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