NZ economic growth tipped to weaken mid-year by new ANZ 'Truckometer', although quake rebuild might keep activity going

Economic growth may weaken over the next six months, according to a new forward-looking indicator, although the authors acknowledge activity from the Christchurch rebuild may help keep headline Gross Domestic Product (GDP) readings above what their new monthly 'Truckometer' tips.

ANZ economists this morning unveiled their 'Truckometer', which is a forward-looking economic indicator designed to give a six-month lead on GDP figures based on traffic volume data from the New Zealand Transport Agency.

The Truckometer had been telling a weak story of late, and had been on a declining trend since October 2011, ANZ economists said in a note accompanying the public release of the new indicator.

"Given the lead to GDP, this suggests weak GDP outturns in Q2 and Q3 this year. In addition, the Truckometer of course under-predicted GDP in the second half of last year, when growth was temporarily boosted by the Rugby World Cup. So adding insult to injury, the unwinding  of this one-off shock will very likely dampen Q1 well below the Truckometer’s cheery prediction in quarterly growth terms," ANZ economists said.

However, it would be unwise to take the Truckometer’s point predictions as gospel.

"Although we’ve been tracking it for well over a year, it’s a relatively new indicator and this is its first big call. More than one new economic indicator has disintegrated on exposure to sunlight. Second, like any indicator, the Truckometer has its hits and misses. Its correlation with GDP growth two quarters later is remarkably high, but it is unlikely to match perfectly. A conspicuous housing market upturn and negative GDP outturns would be unusual bedfellows," they said.

'Truckometer won't pick up Christchurch boost'

The ANZ economists note their Truckometer won't pick up any boost to GDP coming from the Christchurch rebuild.

"Exactly when this will start to seriously impact GDP growth is unclear, but at some point, the Truckometer will start to consistently underestimate total GDP growth for this reason. Let’s hope for the economy’s sake it’s sooner rather than later."

These kinds of issues meant the ANZ Truckometer was best interpreted as an indicator of base momentum and turning points in the economy rather than a spot predictor of GDP outturns.

"However, the broad message coming out of the Truckometer is that we can expect activity data outturns (ex-construction) to be pretty mediocre over coming months. Normally, because of lags in producing economic data, one doesn’t know for sure about an economic soft patch until it’s pretty well over. This indicator, with its unprecedented lead on GDP growth, suggests we’re in the thick of it right now," ANZ economists said.

One bright spot was the pace of decline had slowed, as shown in the endpoint lift in the 3-month average quarterly growth chart to the left.

"If traffic were to bottom out here, the implied decline in economic momentum would be something between the 2006 growth stall and the 2008 recession," they said.

'Lone voice at turning points'

The ANZ Truckometer was a lone voice at present, with most other indicators suggesting a continuation of “grumpy growth”, and some, such as housing market and primary production indicators, pointing firmly up.

"However, given the Truckometer’s unique lead, one would expect it to be a lone voice at turning points. It is not yet a question of “who’s wrong”. But if the Truckometer is right, we would expect to see a wide range of economic indicators lose steam over the coming few months," ANZ economists said.

"The light traffic series (<3.5 tonnes) actually have considerably more weight in the Truckometer than the heavy traffic. This is for two reasons. First, the heavy traffic is inherently noisier. Second, it is the light traffic that provides the 6 month lead to GDP. This suggests that the willingness to buy and drive a car can be interpreted as the ultimate measure of consumer confidence. This confidence is then reflected in other spending, hiring and investment decisions that are ultimately reflected in GDP. Six months is a startlingly long lead, but a wide range of robustness tests have failed to depose it," they said.

"The heavy traffic is, as one would expect, contemporaneous with production GDP. Trucks are moving produce, after all. This provides a robustness check on the Truckometer’s predictions. If the heavy traffic starts to follow the light traffic down in Q2 and Q3, we’ll put more faith in the Truckometer. If not, we’ll discount it accordingly. The prior upward trend in the heavy traffic data has definitely given way, but the volatility makes it difficult to identify whether it is starting to tip downwards in a trend sense."

Housing market 'picking up markedly'

There was considerable uncertainty about the path of the New Zealand economy at present, with some sectors booming, while others were struggling.

"The housing market is picking up markedly, and the dairy sector has had a bumper year. But retailers continue to struggle and petrol prices are near record highs. Interest rates are low; the NZ dollar is punitively high. Dark clouds hang over Europe; Australia is importing our workers, as they don’t have enough of their own," ANZ economists said.

"With such mixed signals and incentives, it is difficult to know how things will pan out. Such is the reality when structural and cyclical forces clash. In such an environment it pays to respect the messages coming from as many indicators as possible but trust none in isolation. The ANZ Truckometer is one indicator flagging challenges ahead," they said.