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Q2 GDP bounceback forecast, but underlying growth weak

NZ GDP probably bounced back in second quarter, concealing weaker underlying growth

By Jonathan Underhill

Sept. 14 (BusinessDesk) - New Zealand's economy probably bounced back in the second quarter, after one-off factors dented growth in the first three months of 2015, but the recovery masks weaker underlying growth, reflecting the impact of low dairy prices, falling business investment and subdued trading partner demand.

Gross domestic product grew 0.6 percent in the second quarter, according to a Reuters survey of forecasts ahead of Thursday's release of the official measure by Statistics New Zealand. That is triple the pace of the first quarter, when drought milk production in the South Island and mining output was affected by a shutdown of the Tui field off the Taranaki coast to connect the Pateke-4H well.

"Those factors were more than fully reversed in the June quarter," along with a recovery in hydro generation as lakes re-filled from the first quarter's low levels, said Michael Gordon, senior economist at Westpac Banking Corp, in his GDP preview.

"Our forecast of a 0.7 percent rise in GDP partly reflects the reversal of some short-lived factors that depressed growth in the March quarter," he said. "However, the underlying pace of growth has clearly slowed since last year."

Last week, the Reserve Bank lowered its assessment of the economy, saying annual growth was about 2 percent, down from its July estimate of 2.5 percent, and cutting its projections for quarterly GDP through until the third quarter of 2016. Weaker trading partner growth was weighing on domestic demand via lower export prices, the residential rebuild in Canterbury appeared to have peaked in early 2015, and business investment had slowed, "consistent with lower capacity pressure, export prices, and reduced business confidence," it said.

The were still bright points. "Low interest rates, the strong net inflow of migrants and related strength in the housing market, and low world oil prices" were expected to underpin consumption, although overall, "annual consumption growth is forecast to slow to around 2 percent and remain around this rate throughout the central bank's projection horizon," it said last week.

Ports of Auckland chief executive Tony Gibson said last week the outlook for the coming year was subdued, given lower dairy prices and the impact of a weaker New Zealand dollar, with weaker import trade, slower growth in car volumes and a decline in bulk exports. Fonterra Cooperative Group's farmers are facing their lowest payout in a decade this season, business confidence fell to a six-year low last month and consumer confidence fell to a three-year low.

Westpac's Gordon said that stripping out volatile one-off items "would suggest an underlying growth pace of about 0.4 percent for each of the last two quarters – not recessionary, but a meaningful slowdown compared to last year, when annual growth topped 3 percent for the first time since the global financial crisis."

The New Zealand dollar tumbled after the monetary policy statement on Thursday morning, having been bid up ahead of the announcement. Traders said the market was partly spooked by governor Graeme Wheeler's identification of additional risk factors for the local economy, including the El Nino weather effect, which threatens to curb farm output over the summer months, and the potential for a sharper downturn in China or a more determined devaluation of the yuan.

Wheeler indicated he has a further quarter point official cash rate cut up his sleeve, which could be used dependent on the flow of economic data.

Ahead of the GDP figures on Thursday, the government statistician is scheduled to release the balance of payments for the second quarter on Wednesday.

Westpac is forecasting the current account deficit widened to $2.4 billion in the second quarter from $1.8 billion three months earlier, while the annual gap is expected to have grown to $9.08 billion, or 3.8 percent of GDP, from $8.6 billion, or 3.6 percent.


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