Friday, July 15, 2011

NZ GDP number supports December tightening

March quarter New Zealand GDP came in better than expected. We had been forecasting a small positive increase, reflecting the improving underlying fundamentals at the start of the year offset by a negative shock from the February 22nd Canterbury earthquake. But in the end, the 0.8% q/q increase was twice what we had forecast. Furthermore, the December 2010 increase was revised up from +0.2% q/q to +0.5%. That puts the annual rate of growth at +1.4%.

While the quantum of the number was a surprise, the make-up wasn’t. The increase in consumption was modest at 0.4% q/q for an annual increase of 1.5%. As we know, households are deleveraging and it’s hard to grow consumption at the same time. On a more pleasing note business investment (plant and equipment) showed strong growth with export volumes up modestly over the quarter. These are the two areas we need to drive the recovery given constrained household budgets.

Looking further out, it’s tempting after a positive surprise to pull the next quarter forecast back a bit to simply reflect volatility in the data. We haven’t done that this time, but neither have we taken this result as a sign of higher growth in the quarters ahead. We have “banked” the positive surprise, but left our quarterly forecasts unchanged. That means we still expect a +0.5% q/q for the June quarter.

With regards to monetary policy, you will recall that after the Reserve Bank lowered the Official Cash Rate to 2.5% in March, we believed they would have to take it back by the end of the year. This GDP result reinforces our view that the Bank will hike the OCR by 50 bps to 3.0% in December. There is a risk they start to tighten even earlier.