As drought continues to grip a large part of the country, I have shaved a bit off my GDP growth in the March and June quarters of this year. That reflects a number of factors including reduced milk production and food processing as well as lower value-add in electricity generation. I’m now expecting 0.6% growth in the March 2013 quarter (previously 0.7%) and 0.5% in the June quarter (0.7%).
Lower milk production in this latter part
of the season follows a strong first half of the season. Indeed full-year production could still come
in just ahead of last year. That’s no
consolation to farmers though whose profitability will be hit by the combination
of drought and the persistently firm exchange rate, although rising
international dairy prices may assist to some degree. Dairy prices were up 10% at the most recent
auction last week. Longer term the
impact of lower stock levels as farmers reduce stock numbers will be felt through
The Reserve Bank may not have yet factored
the drought into the GDP forecasts they will release with their March Monetary
Policy Statement this week, but I expect they will at least highlight it as a
risk. More generally recent activity
data has probably surprised to the upside.
Also, the Bank will likely boost their estimate of growth in the last
quarter of 2012 upwards from their initial estimate of +0.4% q/q to something
closer to our +0.8%. That data is
released next week with the late surge expected to result in annual growth of
2.2% for calendar 2012. My forecast for
calendar 2013 is 2.6%.
Other factors the Bank will be digesting
are the continued strength in the exchange rate (the Trade Weighted Exchange
Rate Index has appreciated around 4% since their last set of projections), the
continued gradual improvement in global economic conditions, the lower starting
point for its inflation projections (the December quarter CPI was lower than
expected), the weak labour market and continued signs of strength in the
residential housing market.
Collectively those factors are expected to add
up to “no change” in monetary conditions this week and likely little change to
the Bank’s forward interest rate projections indicating a tightening in
conditions from early 2014. That will be
based on a cyclical strengthening in economic growth over the course of the
year reflecting a strong rebound in construction activity. Given my predilection
to believe there is less spare capacity in the economy, I’ve still got the
first tightening pencilled in for December.