Thursday, March 20, 2014

Strong New Zealand GDP growth

GDP growth came in bang on market expectations at +0.9% qoq for the December quarter of 2013.  That’s a great follow-up to the (revised) 1.2% qoq recorded in the September quarter and left annual growth at 3.2% for the calendar 2013 year (annual average of 2.7%).

The data was strong across the board – strong growth may have had its genesis in the dairy and construction sectors but it is now becoming increasingly widespread in nature.  The mining sector was up 10.5% over the year, manufacturing up 3.4%, construction up 7.6%, wholesale trade up 3.8% and retail trade and accommodation also rose 3.8%.

On an expenditure basis, high consumer confidence, rising house prices, strong net migration and strong employment growth are supporting private consumption and residential construction.  Business investment was also strong on the back of high business confidence. 

Business investment is an important part of the recipe to lift potential GDP. Growth is already in excess of potential which we put at around 2.0-2.5% (the RBNZ is more precise at 2.4%, rising to 2.8% as the cycle evolves). The output gap has closed meaning spare capacity has been absorbed and inflation is already off its lows.  This latest result is all the evidence the Reserve Bank needs to continue to follow through with its projected interest rate increases in the months ahead.

We expect annual growth to move higher over the next few quarters as weak drought-affected numbers from last year drop out of the annual calculation and get replaced by quarterly growth rates that will be close to 1% per quarter.  We expect annual average growth of 3.7% in calendar 2014, dropping back to around 3.0% in 2015 reflecting tighter monetary conditions.