Thursday, September 20, 2012

NZ data better than expected

This week we saw New Zealand June quarter GDP and current account data.  Both put in a better-than-expected performance.

Production GDP came in at +0.6 for the quarter and 2.6% for the year (June quarter 2012 over June quarter 2011).  The quarterly result was better than our (+0.4) and average market (+0.3%) expectations.  Agriculture and construction were the stand-out sectors posting q/q gains of 4.7% and 3.3% respectively.  Agriculture continued to benefit from good growing conditions while in construction, the beginnings of Canterbury rebuilding efforts are starting to show through in the numbers.  Manufacturing posted a 0.8% q/q gain.

On an expenditure basis GDP posted a more muted gain of 0.3%.  Household consumption put in a modest +0.2% q/q gain.  Net exports made a positive contribution as import volumes fell more sharply than export volumes over the quarter.  The good news was the increase in gross fixed capital formation, particularly the 12.8% q/q increase in plant, machinery and equipment investment.  We continue to believe that exports and business investment will have to be key components of a strengthening of the economic recovery.

This result doesn’t have any significant impact on how we think the rest of the year plays out:  we think GDP numbers will continue to print at around +0.5% per quarter.  That is based on household consumption remaining subdued, the government sector remaining a drag on growth as fiscal consolidation plays out and solid contributions from business investment and construction (Canterbury rebuild).  That now puts our calendar 2012 GDP growth forecasts at 2.6% (q4/q4) and annual average growth a tad less at 2.5%.  By developed world standards that’s a pretty solid performance.
The June quarter current account deficit came in moderately worse than expected at $1.8b.  The market consensus was for a $1.7b deficit.  However, positive revisions of around $600m to previous quarters meant that the annual deficit as a percentage of GDP came in at 4.9%, slightly better than the market consensus expectation of 5.2% of GDP.  The deficit was 4.5% of GDP in the year to March 2012.  There were no real surprises in the deterioration of the annual deficit: the main culprit was the deterioration in the net international investment balance reflecting improved profitability of foreign-owned companies.

In normal times if the current account deficit was deteriorating and the NZD was overvalued, we would expect the NZD to come under a bit of downward pressure.  But these are not normal times.  With quantitative easing playing out in most of the developed world, the NZD is expected to remain strong especially given there are no concerns about either our willingness or ability to meet our external obligations.  However, the NZD remains vulnerable to the downside as the deficit continues to deteriorate to around 6.5-7% of GDP over the next few quarters.