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Kiwi growth remains potential

Kiwi growth remains potential. But it's where we're headed that matters.


• The Kiwi economy recorded a strong 0.7% gain in Q3 2019 (Kiwibank 0.6%, consensus 0.5%). But the better than expected gain hides the weakness in Q2.

• Annual economic growth remained lacklustre at just 2.3%, due to downward revisions to the historicals. We had expected a lift to 2.4% (off a 0.6% gain).

• Retailing was strong, as households loosened the purse strings. But the service sectors (70% of economy) were a little weaker. Investment was disappointingly flat as capacity constraints bite.

• Financial markets read the report two ways. The initial reaction to the large 0.7% gain was "game on" for the Kiwi dollar. But then the poor revisions to the prior quarter reversed the moves. And per capita GDP growth remains an economic sore point.

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Here’s our take on the GDP report

Today's report was a misfortunate mixed bag of data and devils in detail. The Kiwi economy recorded a strong 0.7% gain in Q3 2019 (Kiwibank 0.6%, consensus 0.5%). But the better than expected gain hides the weakness in the downward revisions to Q2 data. Retailing was strong, with the largest gain in eight years, as households loosened the purse strings. But the service sectors (70% of economy) were a little weaker. Investment was disappointingly flat as capacity constraints bite. There was an expected fall in residential building (down 0.6%), following very strong growth in earlier quarters. Residential construction activity remains at a historically high level.

It is tempting to say the RBNZ will see the 0.7% gain, compared to their 0.3% gain, as a positive. Not the case. The downward revision to the prior quarter from 0.5% to just 0.1% undoes that 'upside' surprise. And that was supported by the reaction in financial markets. Financial markets read the report two ways. The initial reaction to the large 0.7% gain was "game on" for the Kiwi dollar. The Kiwi spiked (outrageously) to 0.6614 against the USD, from a pre-release level of 0.6582. That was a huge move. But then the poor revisions to the prior quarter reversed the moves, with the Kiwi back down to 0.6580 at time of writing.

Per capita GDP growth remains an economic sore point. According to StatsNZ, GDP per capita rose 0.4 percent in the September 2019 quarter, following a fall of 0.3 percent in the previous quarter. For the September 2019 year, GDP per capita was up 1.0 percent. We need more investment in infrastructure and education to lift our productivity.

Annual economic growth remained lacklustre at just 2.3%, due to downward revisions to the historicals. We had expected a lift to 2.4% (off a 0.6% gain). So a 0.7% quarterly should have given us something closer to 2.5%, not the 2.3% printed. Growth dropped to 2.3%yoy to end 2018, down from 3.4%yoy a year earlier. And growth remained at 2.3% in the year to September 2019. A rather lacklustre performance. The economy is growing below its potential growth rate of ~2.75%. Subpar growth is a thorn in the side of the RBNZ, perpetuating the struggle to lift inflation "sustainably" back up to its 2% target midpoint. The good news is business confidence is now improving, the housing market (particularly Auckland's) is bouncing back, and the global growth outlook has turned positive.

ends

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