Thursday, December 19, 2013

Strong NZ growth

September quarter GDP came in at 1.4% q/q and 3.5% y/y with annual average growth of 2.6%.  The quarterly number was stronger than my forecast of 1.2% and average market and RBNZ forecasts of 1.1%.  The annual growth rate is now at its highest since the September 2007.

Growth in the quarter reflected a stronger-than-expected bounce-back in the agriculture sector which rose 17% and contributed 0.9 percentage points to the quarterly result.  Other sectors were broadly in line with expectations. Residential construction also rose strongly, up 8.5%, but the overall construction sector was down slightly reflecting a decline in non-residential and infrastructure activity.

On the expenditure side of the accounts the most pleasing aspect of the result was a 3.1% q/q increase in gross fixed capital formation that was mostly driven by growth in plant and machinery equipment which was up 11.6% q/q.  As we’ve said for 5 years now, robust and sustained growth in the post-GFC New Zealand economy would require strong growth in business investment contributing to significant gains in productivity.

Statistics New Zealand also rewrote history today.  Growth in 2011 was revised up while growth in 2012 was revised down.  Both the March and June quarters of this year were revised up a combined 0.2%, indicating the economy weathered the drought a tad better than had been reported earlier.

The easy part of the growth story for this year was that given last summer’s drought, the second half of this year was always going to be stronger than the first - the only question was by how much.  This is a solid result, indicating that all the positives we’ve talked about for the economy all year are finally coming through in the numbers.  We expect another strong quarter in December with growth of 1.0% q/q pencilled in.  That will give us annual average growth of 2.8% in calendar 2013 which we expect to rise to 3.7% by the end of 2014.

The better than expected result today along with the positive revisions to the March and June quarters means growth has been stronger than the RBNZ expected this year.  That stronger growth along with the US Federal Reserve’s announcement today that they will start to wind back their asset purchases from January reinforces the expectation of a March 2014 hike in the OCR from the RBNZ.