December 2012 quarter GDP was significantly stronger than expected. Production-based GDP rose +1.5% over the quarter for annual growth of 3.0% (annual average 2.5%). I was expecting +0.8% for the quarter. The expenditure based measure printed at 1.4% (my forecast 1.0%).
The strength was broad based. On a sector
basis, agriculture and retail trade chimed in with the largest
contribution. Only manufacturing made a
negative contribution. On an expenditure
basis consumption and net exports (exports rose, imports fell) made the
strongest contributions, while government and inventories made negative
Just as we warn sometimes not to read too
much into downside surprises, the same goes for upside surprises. It’s important to keep this result in
context; it follows two quarters (June and September last year) in which growth
was disappointingly soft. Neither does
it change our forecasts going forward. The
tailwinds (construction and stimulatory monetary conditions) and the headwinds
(fiscal drag, high New Zealand dollar, drought) remain the same.
The most you can say about this result in
terms of the outlook is that we go into 2013 with a higher-than-expected base. I’m still comfortable with my forecast of
2.6% annual growth for 2013, having already knocked that back by 0.4% with the
risk of more given the drought conditions.
Risks therefore remain evenly balanced.
With respect to monetary policy, I don’t see
any significant implications from this result. Sure it’s higher than the
Reserve Bank was expecting, but they also hadn’t factored much downside into
their latest set of projections for the drought. They have a bias to tighten, which is
appropriate. As it has been for some
time, the only question is when the right time is to start the tightening
cycle. I’m still happy with my call of
late this year.