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NZ economy expanded just 0.2%q/q in third quarter

New Zealand economy expanded just 0.2%q/q in third quarter

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The New Zealand economy expanded a mere 0.2%q/q in 3Q (J.P. Morgan and consensus 0.4%), the same rate as in the previous three months - 2Q GDP growth was upwardly revised from 0.1%. The third quarter result did, however, mark the second straight quarter of expansion following five quarters of GDP declines.

A smaller drag from inventories, stronger than expected household consumption, and an increase in government spending underpinned economic growth in the September quarter, while declines in net exports and investment prevented a faster rate of expansion. Though economic growth was more subdued than expected in 3Q, with our forecast calling for the economy to continue to garner momentum in coming quarters, we maintain our call for the RBNZ to start tightening policy in March next year.

Probably the most surprising aspect of the third quarter GDP report was the strength in private consumption. Record-low interest rates, strong net immigration flows, and some recovery in the domestic housing market appear to have offset the negative impact on spending of rising unemployment and softer wage growth. Private consumption was up 0.7%q/q over the quarter, the fastest rate of expansion since early 2007. Following the quarterly retail sales report, which showed a mere 0.1%q/q gain in retail sales volumes over 3Q, we had anticipated that private consumption would remain flat. The surprisingly strong rise in household spending was, however, thanks to spending on durable goods, owing to pent up demand for big-ticket items such as furniture and cars.

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Consistent with increasing consumer demand, inventories were run down “only” NZ$748 million over the quarter, less than the record NZ$1.0 billion fall in 2Q. Government spending grew 0.4%q/q in 3Q, after slumping 1.5% in the previous three months.

Investment remained weak in the third quarter, owing to reduced credit availability, with gross fixed capital formation falling 1.8%q/q. The largest contributors to the decline were plant, machinery, and equipment investment, which fell 8.0%q/q, extending a prolonged decline. Residential building fell 5.0%q/q, marking the eighth consecutive quarterly decrease.

Net exports were a drag on economic growth in 3Q as expected, although should positively contribute to growth in coming quarters as the global economy continues to recover and external demand picks up. Export volumes were flat and import volumes were up 0.7%q/q, marking the first rise since 2Q08. Again reflecting firming consumer demand, combined with the stronger NZ dollar, imports of passenger motor cars surged 18.6%q/q.

Given the dated nature of the 3Q GDP numbers, we believe the data has few implications for future monetary policy decisions. Our forecast remains that the RBNZ will kick off the next tightening cycle in March with a 25bp hike to the OCR. We acknowledge that a 50bp rate hike at the commencement of the next tightening cycle remains a risk, but tighter financial conditions, owing to stronger NZD, increased long-term interest rates, and elevated bank funding costs, will continue to do some of the heavy lifting for the RBNZ.


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