By Alex Tarrant
Economists are wary of slower domestic growth in the second half of the year after figures released today showed solid expansion in the first six months of 2012.
New Zealand’s economy expanded by more than expected in the three months to June from March, growing 0.6% during the quarter, as measured by Gross Domestic Product (GDP).
Activity in the agriculture, construction, transport, postal and warehousing, and manufacturing industries led the growth, Statistics New Zealand said on Thursday morning.
Offsetting this was a contraction in activity - the fifth in a row - in the electricity, gas, water, and waste services industry, due to a decline in electricity generation.
Other contractions of note during the quarter - given recent news that Norske Skog is halving production at its Kawerau newsprint mill, which could lead to the loss of 100 jobs - were in the printing, and wood and paper products industries.
A poll of 10 economists by Bloomberg gave a median expectation of 0.4% quarterly growth, while a poll of 13 economists by Reuters gave a median expectation of 0.3% growth.
The higher-than-expected growth saw the New Zealand dollar jump about 45 basis points against the US dollar, hitting 82.99 US cents shortly after the release.
The Reserve Bank of New Zealand, in its September quarter Monetary Policy Statement, gave an expectation of 0.4% quarterly growth. Treasury, in its May Budget, had expected 0.6% growth during the quarter.
Second half challenges
Despite the headline quarterly figure coming in above the Reserve Bank's expectation, Westpac economists said following the release that its impact on the RBNZ's attitude would be "modest."
They said the tone of data since the end of the June quarter pointed to slower growth in the current quarter, ending September 30.
ANZ economists said following the figures that the challenge now would be making headway in an increasingly fickle global environment in the second half of this year, and beyond, particularly if the global outlook deteriorated further.
Highest annual growth since 2008
Growth in the March quarter was revised down slightly, from 1.1% to 1.0%.
The expenditure measure of GDP - as opposed to the headline production measure - showed growth of 0.3% during the June quarter from March. In current prices, expenditure on GDP was NZ$205 billion for the year ended June 2012, Statistics New Zealand said.
Meanwhile, economic activity in the year to June 2012 was up 2.0% from the year to June 2011, Stats NZ said.
This was the highest annual GDP growth since the 2.5% rise for the year ended March 2008, it said.
Activity in the June 2012 quarter was 2.6% higher than in the June 2011 quarter.
Agriculture hits high
The seasonally adjusted 0.6% quarterly growth was led by the agriculture sector, Stats NZ said.
“Activity in the primary industries increased 3.6% in the June 2012 quarter, the largest increase since a 3.9% rise in the September 2009 quarter,” Stats NZ said.
“The main contributor to the latest rise was a 4.5% increase in agriculture, forestry, and fishing activity, driven by a 4.7% increase in agriculture production,” it said.
“Higher milk production was the main contributor to the rise in agriculture, due to continuing favourable growing conditions. Activity in the agriculture industry is now at its highest level since the series began in the June 1987 quarter.”
Canterbury activity helping
A 3.3% rise in construction activity over the quarter led a 0.9% expansion in goods-producing industries, Stats NZ said. After declining through 2011, activity in goods-producing industries was now back to its December 2010 quarter level.
The rise in construction activity during the quarter was due to heavy and civil construction (which includes infrastructure such as roads and bridges) and residential building, Stats NZ said.
“This is the largest quarterly increase for heavy and civil construction since the June 1999 quarter, and it is now at its highest level since the series began in the June 1987 quarter,” Stats NZ said.
“Residential building activity also rose this quarter, up 6.2%, with construction in Canterbury helping to lift national levels as rebuilding after the earthquakes begins to get under way,” it said.
Residential building construction was up 11.0% from the same time last year, when it was at its lowest level since the September 2001 quarter.
A 0.8% rise in manufacturing activity over the quarter, boosted by a 5.1% rise in transport equipment, machinery and equipment manufacturing, followed an increase of 1.9% in the March 2012 quarter.
Also contributing to the manufacturing activity increase were rises in the non-metallic mineral (up 9.5%), food, beverage, and tobacco (up 0.6%) and the textile and apparel (up 3.5%) industries, Stats NZ said.
Offsetting these increases were declines in: Printing, down 7.3%; wood and paper products, down 1.3%; furniture and other manufacturing, down 6.8%; and metal product manufacturing, down 0.6%.
Activity in the electricity, gas, water, and waste services was down 2.4% in the June 2012 quarter.
“This is the fifth consecutive fall for the industry, which resulted in a 3.6% fall for the year ended June 2012, compared with the year ended June 2011,” Stats NZ said.
“Electricity generation, due to lower hydro levels this quarter, was the main driver of the fall. Partly offsetting the decrease was a rise in waste collection,” it said.
Despite the strong quarter, activity in goods-producing industries was still down 0.1% in the year ended June 2012 from June 2011.
Activity in the services industries rose 0.7% during the quarter, the sixth consecutive quarterly increase. The rise this quarter was due to a 2.7% increase in transport, postal, and warehousing services, Stats NZ said.
Activity in the services industries was up 2.2% in the year to June 2012 from June 2011.
Quarterly % change: 0.6% (Westpac forecast: 0.4%, market forecast 0.4%, RBNZ forecast 0.4%)
Annual % change: 2.6% (Westpac forecast: 2.4%)
Annual average % change: 2.0%
- June quarter GDP growth was 0.6%, after 1.0% growth in the first quarter.
- The data was stronger than economists' "data preview" forecasts, after a slew of weak indicators over recent weeks. But 1.6% GDP growth over H1 2012 is roughly equal to our long-held forecast that NZ GDP growth would accelerate this year as the Christchurch rebuild and recovery gathered momentum. These figures seem roughly in line with how the economy "felt" over the relevant period.
- The main drivers of growth were agricultural production, which has benefitted from favourable weather conditions, and construction activity which has been spurred by the Christchurch rebuild.
- Construction activity was 3.3% higher, driven partly by a 20% increase in "other construction" which includes infrastructure work and demolition activity.
- Another key driver was a 12% increase in plant and machinery investment activity. This high exchange rate is driving greater investment activity in NZ.
- Private consumption growth was just 0.2%, which was significantly weaker than we expected. The other key negative surprise was the "balancing item" - a technical adjustment that arises from the process of seasonal adjustment.
The data was stronger than markets expected. The NZD rose half a cent and 2-year swap rates rose three basis points. The rate of GDP growth was certainly stronger than the Reserve Bank was preparing for, so this surprise leans in the direction of higher interest rates. However, the impact on the Reserve Bank's attitude will be modest. Most economists have long expected growth to accelerate as a consequence of the Christchurch rebuild, the RBNZ included. The real question is what happens to inflation following the stronger growth. So far, inflation has been remarkably low. It is also worth noting that these GDP figures are now somewhat dated - the tone of data relating to the September quarter has been slower.
GDP increased 0.6% in Q2, stronger than our, market and RBNZ expectations. A large part of the result reflected the boost from post-earthquake rebuilding, with large increases in construction and core manufacturing output. Added to that was continued strength in activity in the agriculture, forestry and fishing sector, reflecting favourable weather conditions which were conducive to pasture growth. Following on from the 1.0% increase in economic activity over the March quarter, today’s result points to the recovery in the NZ economy gaining a firmer footing.
There was a large increase in heavy and civil construction activity. A large part of this is likely to reflect the rebuilding of infrastructure taking place in Canterbury. In addition, there was a continued increase in residential construction. Building Work Put in Place data released earlier this month had shown a substantial increase in residential construction in Canterbury over Q2, as the rebuilding of damaged houses got underway. We expect rebuilding to gain further momentum over the coming year in light of the increase in building consent issuance and surge in cement sales in Canterbury in recent months.
Rebuilding activity was clearly evident in other construction (i.e. infrastructure), which rose 20.7%. Rebuilding activity also prompted stronger plant and machinery investment. The robust demand for plant and machinery also underpinned a stronger than expected increase in core manufacturing output in Q2.
There was another increase in professional and administration services over the June quarter, although this was more modest than seen in recent quarters. Anecdotes indicate continued strong demand for legal, accountancy and project management services in preparation for rebuilding to take place.
Beyond the rebuilding activity, output in the NZ economy was also supported by continued strength in the agriculture, forestry and fishing sector. Milk production has been very strong since late 2011, reflecting the favourable weather conditions last year which were conducive to pasture growth. The level of milk production in Q2 this year has been much higher than the other June quarters in recent years, which marks a good start to the 2012/13 production season.
Today’s result indicates the recovery in the NZ economy is gaining a firmer footing, with a large part of this reflecting the post-earthquake activity taking place in Canterbury. The surge in infrastructure and residential construction should give the RBNZ confidence that rebuilding is on track. Recent activity indicators point to a further pick-up in rebuilding over the coming year, and this should provide a continued boost to the NZ economy. We continue to expect the RBNZ will leave the OCR on hold until June 2013, but global risks could keep the OCR on hold for longer.
The GDP data suggests the economy ended the first half of the year with a reasonable degree of momentum. The challenge will be making headway in an increasingly fickle global environment in the second half of this year, and beyond, particularly if the global outlook deteriorates further.
The OCR remains low, there is a cyclical springboard to leap from and the Canterbury rebuild will eventually boost activity, but structural imperatives, pending fiscal tightening, the high NZD and lower trend growth are likely to restrict the pace of expansion going forward.
The considerable uncertainties over the future outlook and large degree of policy traction available to the RBNZ are likely to maintain a high hurdle to OCR moves, with the RBNZ in no hurry to move the OCR. Actions by the ECB and Federal Reserve have temporarily helped to ease tensions, but downside risks to the Australian and Chinese economies are more pronounced than they were a few months ago.
In the absence of a concerted deterioration of the global economy our view is that the pending call on resources from a recovery in activity on a limited margin of spare capacity will eventually encourage a higher OCR, but this will not be for some time. We continue to expect a gradual lift in the OCR from 2014 and a historically low OCR endpoint this cycle.
IMMEDIATE MARKET REACTION
The result was stronger than the market consensus, with the NZD jumping around 45 points to 82.90 US cents, and swap rates up around 3bp immediately following the release.