Friday, June 20, 2014

Economic growth in New Zealand

This week’s GDP release confirmed the New Zealand economy entered 2014 growing strongly largely thanks to the three C’s of confidence, construction and commodity prices.  March GDP growth came in at 1.0%, a touch under our forecast of 1.1%.  Thanks to positive revisions to prior quarters, year-on-year and annual growth came in stronger than expected at 3.8% and 3.3% respectively. That’s the fastest annual average growth since late 2007.
There were no real surprises in the result – construction was the start performer rising 12.5%.  But this followed a couple of flat quarters so much of this was due to timing/catch-up.  Growth elsewhere was more modest but generally broad-based.  A couple of sectors went backwards over the quarter.   The decline in wholesale trade followed a strong prior quarter so we put that down to data volatility.  The decline in business services was more meaningful and consistent with recent softer housing (real estate) data.

We are now well into the June quarter and the pace of growth appears to be moderating somewhat.  While business and consumer confidence remain at healthy levels they are off their recent highs.  Recent housing market data has been a touch softer than expected, although we put at least some of that down to the way Easter and ANZAC fell in April with many folk taking an extended break over the two long weekends.  Retail spending growth has also lost some momentum recently.

Dairy commodity prices have fallen faster than we thought they would and Fonterra’s opening milk price forecast for 2014/15 is commensurately lower.  The May BNZ-BusinessNZ manufacturing PMI for May showed another decline although the index remains in expansion territory.  And of course the Reserve Bank of New Zealand has begun the process of withdrawing the significant monetary stimulus in the economy and is expected to continue to do so.

There are a couple of recent developments that are positive for the growth story.  Despite the Reserve Bank raising interest rates, fixed rate mortgages have actually fallen recently on the back of lower global interest rates.  And of course net inward migration has continued to climb.  The construction sector will continue to underpin growth in the period ahead, although not at the pace seen in the March quarter.

While the pace of growth is expected to moderate from the June quarter of this year it will remain solid and, importantly, in excess of our potential to grow without generating inflation.  That means pressure on resources, upward pressure on inflation and further tightening in monetary conditions.

For more information on the outlook for the New Zealand economy, equities, fixed interest and the NZD, have a look at our latest issue of New Zealand Insights which you can find here.