Thursday, September 22, 2011


June quarter GDP came in lower than expected at +0.1%. We had expected an increase of +0.3% while the average market expectation was +0.5%. This was a marked slowdown from the revised +0.9% (previously +0.8%) in the March quarter. The December 2010 quarter was also revised up from 0.5% to 0.6%. We effectively got our +0.3, it’s just two-thirds of it came via revisions to past data!

The annual rate of growth now stands at 1.5% for the year to June. The sectoral breakdown was much as we expected with a rise in the agriculture sector and declines in both construction and manufacturing.

We are not viewing this as a loss of momentum for the New Zealand economy. Rather we believe March probably overstated the strength of the economy while June understated it. Put together, +1.0% for the six months feels about right.

Of course this is all history. The question is where to from here? We continue to think the growth outlook remains relatively positive, although risks around the global economic outlook cloud that somewhat.

On the positive side the terms of trade is at 37-year highs. While commodity prices have softened somewhat recently, he expect the terms of trade to remain at healthy levels. That provides a significant income boost to the New Zealand economy. To-date that has not shown through in economic activity as the primary sector has been focussing on debt repayment. There is anecdotal evidence, however, of increased on-farm investment activity recently which is positive.

Recent wage growth means that households are now able grow consumption while still focussing on debt repayment. That has been reflected in relatively healthy levels of consumer confidence. However, we continue to expect only modest consumption growth over the medium-term. Right now the Rugby World Cup is providing a boost to consumption which will be reflected in September/October retail sales data.

Business confidence remains at healthy levels, despite the cool winds blowing from overseas. That bodes well for investment in the period ahead. As with the outlook for all developed economies, we have looked to business investment (and exports) to be key areas of economic growth, especially while households are constrained by deleveraging.

It appears the New Zealand housing market is bottoming out. However, as with consumption, we are not expecting a strong recovery. The exception is of course in the Canterbury region where earthquake reconstruction will provide a significant boost to construction activity in 2012, although the precise timing remains uncertain.

That of course assumes that global economic and financial conditions do not take a serious turn for the worse. That is the key risk to the outlook: We would not be immune from a sharp slowdown in global growth. Already increased finance sector risk is having an impact on the cost of funds. A sharper slowdown in global growth than we currently would also have a negative impact on commodity prices.

Our forecasts currently have annual GDP growth at 2.3% for the year to December 2011, followed by 3.6% in the year to December 2012.