Westpac economists are now picking that the Reserve Bank will hike interest rates five times next year in response to the strongly growing economy.
In the wake of the stronger than expected 1.4% GDP growth for the September quarter, Westpac senior economist Michael Gordon said the bank's economists now saw the Official Cash rate hitting 3.75% by the end of the year, up from their previous pick of 3.5%.
"...We believe that recent developments – stronger than expected near-term growth, the Fed’s early ‘tapering’, and the reduced risk of rate cuts by the Australian central bank in the near future – could encourage the RBNZ to move faster than previously signalled.
"We now expect three consecutive OCR hikes from March to June (previously we expected the RBNZ to pause at the April review), with further hikes in September and December, bringing the cash rate to 3.75% by the end of next year," he said.
ANZ economists now rate the chances of an interest rate hike in January at 1-in-3.
Senior economists Mark Smith and Sharon Zollner said the Official Cash Rate (at 2.5%) is "lower than it needs to be".
"With the demand picture assured the question is rapidly becoming how much capacity the economy has to meet this demand without generating inflation, particularly given the construction-specific nature of growth outside the dairy boom," they said.
"Our core view continues to be that despite today’s data surprise, the Reserve Bank will begin to lift the OCR in March, given they would naturally prefer to kick off a tightening cycle with a full Monetary Policy Statement and press conference to explain their actions.
"However, they may not have this luxury. Two key pieces of data are set to be released before the OCR Review in late January: the Quarterly Survey of Business Opinion, and Q4 CPI.
"Should capacity and inflation indicators from the former, and non-tradable inflation from the latter, print higher than Reserve Bank expectations (and we think they will), a January move is certainly in play. It is becoming increasingly clear that the Official Cash Rate is lower than it needs to be. We would currently put 1-in-3 odds on a January move."
The numbers
Statistics New Zealand said Gross Domestic Product rose 1.4% in the September quarter on the back of the largest expansion in the agricultural sector in 25 years.
The extremely strong result, on the back of a rebounding dairy market following drought earlier this year, is stronger than the average expectation of economists for a rise of 1.1%.
The Reserve Bank also forecast a 1.1% rise, so the higher than expected figure will give the central bank encouragement and room to begin its expected cycle of interest rate rises early next year.
The dollar immediately spiked from US82.2c to US82.6c before retracing to US82.35c and then falling back toward US82c, which may well be more about reaction to the news that the US Federal Reserve is beginning the long-expected "tapering" of its accommodative monetary policy.
This increase in GDP is the largest since the December 2009 quarter and follows a revised 0.3% (from 0.2%) rise in June.
Stats NZ has carried out changes to the methodology and extensive revisions to previous GDP information. See here for the Stats NZ information release on the latest GDP figures.
Weaker in some sectors
ASB economist Christina Leung said beyond the effects of the drought, although there was weaker activity in some sectors over Q3 they generally reflected payback after a strong first half of the year.
"This is particularly the case for heavy and civil engineering construction and professional services. Heavy and civil engineering tend to be volatile from quarter to quarter, reflecting the lumpy nature of many infrastructure projects. The underlying trend for overall construction activity remains one of improvement, and we continue to expect the Canterbury rebuild and stronger house-building demand to drive construction growth over the coming years."
She said the result provided "further encouragement" for the RBNZ that the NZ recovery is on a solid footing.
OCR timing risks 'shifting'
"We still expect the RBNZ to first lift the OCR in March, but this latest outcome shifts the risks to a more even balance around March than our slight bias to a later start. The RBNZ still has a couple of other factors to consider: one, the reaction to the Fed tapering announcement has not dented the strength of the NZD as yet and the recent strength could persist; two, assessing the LVR impact will still be difficult in January."
Minister of Finance Bill English said New Zealanders’ "hard work" was now starting to pay dividends.
"Despite the worst drought for several decades earlier this year, New Zealand now has one of the faster growing developed economies in the world."
English said New Zealand’s latest 3.5% annual economic growth (from September 2012-September 2013) compared with 2.3% in Australia, 1.8% in the US, 1.9% in Canada, 2.4% in Japan, 1.5% in Britain and a negative 0.4% in the Euro area. Growth across the OECD averaged 1.4% in the year to September.
Strong dairy
The strong increase in dairy production was the main contributor to a 17% rise in agriculture, which makes up about 5% of the New Zealand economy.
"Dairy farming has really bounced back from the drought this year," Stats NZ's acting national accounts manager Steffi Schuster said.
"The increase in agriculture is the largest in more than 25 years, as good weather boosted production well above the weak June quarter."
Dairy product manufacturing also increased this quarter, which contributed to a 1.5% rise in total manufacturing.
While manufacturing production was up, exports of dairy products fell this quarter, leading to a build-up of inventories. The $770 million increase in total inventories this quarter is the largest build-up since the series began.
Increases in agriculture and manufacturing production were partly offset by declines in:
- Construction (down 1%), as falls in infrastructure and commercial construction outweighed an increase in housing construction. Investment in housing was up 8.5% from the previous quarter.
- Business services (down 0.8%), with most sub-industries down, except for architectural and engineering services.
Economic activity for the year ended September 2013 was up 2.6%.
The expenditure measure of GDP was up 1.1% in the September 2013 quarter. The main movements were:
- Investment in fixed assets (up 3.1%), driven by increased imports of plant, machinery, and equipment. This was also reflected in a 4.5% rise in imports of goods and services.
- Build-ups in manufacturing and distribution inventories, as supply of goods exceeded demand this quarter.
- Volume of spending by New Zealand households (up 0.4%), mainly due to increased spending on durables like furniture and motor vehicles.
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