Economists note that economic growth slower than the central bank is predicting would see growing speculation of future interest rate cuts - but higher growth figures would curtail such speculation

By David Hargreaves

Probably the biggest thing to watch for from the June quarter GDP figures being released on Thursday (September 20) is not the figures themselves but how the Reserve Bank reacts to them.

The RBNZ, which is picking GDP growth of 0.5% for the quarter, has indicated that it would be prepared to start cutting official interest rates if the New Zealand economy follows the track of current business confidence surveys and starts to markedly slow down.

In the event, the RBNZ's pick for the GDP growth rate in June is likely to be comfortably exceeded on the upside, with the consensus among economists being for a growth rate of around 0.8% - although economists are cautioning that there will be some 'one-off' factors in there.

BNZ senior economist Doug Steel says if the outcome did come out lower than RBNZ projections this would encourage market thoughts of a lower Official Cash Rate in future, "while a higher result would allay such thinking at least for the near term".

"In the bigger picture, we think growth has been holding up reasonably well to date. But we remain alert to the idea that could change."

The RBNZ is set to make its next call on interest rates on Thursday-week (27th). And while there's virtually no chance the OCR will be moved from the 1.75% it has been on now since November 2016, what the central bank says about any likely future movements will be important.

Steel says the GDP figures they will show how well (or not) the economy is holding up in the face of deep business pessimism.

"Business confidence has been negative since last year’s election, easily long enough to start influencing growth in the second quarter of this year if it were to."

ANZ senior economist Liz Kendall and economist Miles Workman said while the second quarter GDP outcome is expected to be solid, it is already being overshadowed by forward-looking indicators of activity into the second half of next year.

"There are concerns about the degree of economic momentum, particularly given the subdued read coming from business confidence surveys and the fact that the RBNZ has expressed concern about the outlook for activity.

"This is in the context of an economy where recent drivers of growth (including construction and immigration) have started to wane, and headwinds are at play from credit constraints, capacity pressure, margin squeeze, and policy uncertainty.

"So far, data for Q3 has been mixed but generally respectable – and there are a number of factors that are supportive of growth. The terms of trade remains elevated, fiscal policy looks set to provide a boost, and net exports are becoming less of a drag thanks to recent exchange rate depreciation. At the same time, the labour market is tight and households appear resilient, albeit a little warier.

'OCR on hold for some time yet'

"Overall, we don’t expect the economy to roll over just yet, although we do think it will be difficult to grow at trend. And in that environment, it will be a struggle for core inflation to return sustainably to the RBNZ’s 2% target, which means that the OCR looks set to be on hold for some time yet. And if the data deteriorates, a cut in the OCR could eventuate quite quickly."

ASB economists who, along with Westpac economists are among the 'bulls' in picking a 0.9% GDP figure for June say that given much of Q2’s lift is really just catching up from Q1’s underwhelming performance (and was reasonably well foreshadowed by indicators)  they were surprised by the RBNZ’s August Monetary Policy Statement Q2 GDP forecast of just 0.5% quarterly growth.

ASB senior economist Jane Turner says the RBNZ "stands to see a significant positive surprise if growth posts close to our expectations".

"However, we are unsure how the RBNZ will respond to this surprise given the continued slide in business confidence, particularly business employment and investment intentions.

"For example, we have just 0.6% growth pencilled in for Q3 (with a growing skew of downside risk), while the RBNZ has a more upbeat 0.8%. It’s likely that as the RBNZ considers its near-term GDP forecasts for the upcoming OCR review, a stronger Q2 outcome would be offset by downward revisions to the second half of 2018.

"Regardless of what Q2 GDP growth does, we anticipate the RBNZ will instead focus on the outlook and continue to emphasise its readiness and willingness to act if weak business confidence does spill over into weaker economic output."

Kiwibank economists, who expect quarter growth to come in at 0.7%, a touch short of market consensus say their forecast would see annual economic growth ease 0.2%pts to 2.5% - "barely growing at trend – and justifying a wait and see approach on interest rates by the RBNZ".

"It looks as though once again the service sectors carried the economy over the quarter (such as professional services, rental and hiring, and wholesale trade). This is a function of past strong population growth. Primary production is expected to recover further in Q2, while the construction sector – pegged down by capacity constraints – is not expected to make a meaningful contribution to growth.

'More momentum than expected'

"Despite a fall in annual growth, this is still stronger than the 2.3% yoy forecast by the RBNZ in their August Monetary Policy Statement (MPS). While GDP is seen as ‘old news’, our forecast suggests that there may have been a little more momentum in the economy than expected by the Bank.

"Of more importance for inflation though is future growth. Despite what business confidence shows, we expected decent growth over the second half of the year supported by a higher terms-of-trade, a weaker currency, low mortgage rates and a boost in government spending."

Westpac economists note that their forecast of a 0.9% rise in GDP is at the top of the range of market forecasts.

"More notably, it’s quite a bit higher than the Reserve Bank’s forecast of 0.5% growth in its August Monetary Policy Statement.

'The difference is important'

"This difference is important, given the RBNZ’s recent comments that it is nearing the trigger point for cutting the OCR.

"Financial markets have taken those comments to heart, with interest rate markets giving close to a 50% chance of a cut in the next year, and the New Zealand dollar falling to its lowest levels since early 2016. How would the RBNZ’s thinking be swayed if GDP turned out in line with our forecast?

"You could argue that June quarter data is dated, and that plunging business confidence suggests the possibility of a downturn yet to come.

"Indeed, the RBNZ’s own comments seemed to gloss over the June quarter outcome, and focused on the need to see a pickup in growth in the September quarter, when increased government spending and transfers to households are expected to kick in.

"A better than expected starting point for the economy still matters, and it’s unlikely that the RBNZ would be able to dismiss all of a June quarter surprise as temporary. Nevertheless, we’re also keeping a close eye on the flow of high-frequency data for any signs that the economy has taken a turn since June. The handful of indicators that we have so far don’t point to any change in the economy’s momentum one way or another."

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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28 Comments

all is ok, our transparent PM has announced that the GDP figures are good - in the 0.8 - 0.9 range. All ahead of schedule. Money markets have pounced and not surprisingly the NZD is up. Brilliant work Jacinda. Total amateurs

Wish she'd told me first!

Large back-pedalling on that in the MSM, Kane02. Seems that our PM may have confused GDP with sumpfink else technigal in the interview. At least, that's the Charitable explanation.

The PM need not be an economist but some common sense is eexpected.
She wants businesses to pledge their undying faith in her (and her government's) economic management skills but can't tell the GDP growth figure and government's fiscal position apart. God help us!

Statistics New Zealand has just said no hints to anyone about its economic growth figures.

So is the PM confused or are her staff (aided by Stats) trying to cover up a breach of information security and/or screw up? Neither is a good look, but which would be worse?

Welcome news if GDP growth is holding up.

Rule no 1 - always assume a cover up.
Rule no 2 - always assume a cover up.
Rule no 3 - always assume a cover up.
Rule no 4 - just because you are paranoid, doesn't mean they aren't covering up.

Question to pose: if our dollar keeps slipping long term vs the USD then will that not force us to put up the OCR like emerging markets are having to do?

I understand we are far removed from emerging markets parallels but can we keep ignoring a constant slipping dollar as would it not import inflation?

Weaker dollar is what we need for export growth, but it will be a fine balancing act because the impact of importing inflation could have a dramatic impact on households disposable income, particularly those that have stretched themselves. We'll be in wait and watch mode for some time yet and the NZ dollar will keep falling.

Given we are in perpetual trade deficit as a country it seems to me that increased cost of imports will be more negative than the benefit of increased value of exports.

Foyle. I couldn't agree more which is why I still think that rates will be on the rise by the middle of next year to slow the fall of the NZ dollar.

Falling NZD won't bite importers on their pockets yet , at least as long as high influx of migrants continue.

I met with my several managers whose employers / own businesses rely on imported goods and they all seem to agree that the higher import costs are being set off by a falling wage bill. Decently-skilled Asian students and workers continue to enter NZ in droves and are gladly willing to work for much lower salaries than their Kiwi counterparts at mid-level positions.

For those who don't know, net migration is falling because of an increase in outward migration, while inward numbers are still soaring. This trend may carry on for a while as little has been done to reduce inward migration in the short run.

Her's a corollary question Nic - with the rising costs of manufacturing in China, and the "trade war", with a falling NZD would that not present an opportunity for the Government and business to look to attracting manufacturing opportunities?

With a low dollar, we could be making things relatively cheaply, while still paying good wages, offering improved employment opportunities, and (re)building a manufacturing base to compliment and further develop our technology base?

Sounds idealistic but setting up manufacturing is not just about installing plant and machinery in an empty piece of land, and magically churning out high-tech goods.
Developed nations frontrunning the industrial race (Germany, SK, Singapore etc.) have been investing heavily in innovation, infrastructure and skills for generations. Things that are on the assembly line now had to be conceptualized, designed and tested years ago.
The only option that leaves us is to convince foreign companies into manufacturing in NZ. Yeah right that's gonna happen!

https://www.edb.gov.sg/en/news-and-resources/insights/innovation/singapo...

Agree that it is idealistic, but we need to start somewhere. And jumping to your last sentence, with China's history of failing to respect patents, to out right piracy of products, NZ will at least be seen to have a somewhat higher level of integrity and trustworthiness that will likely see patents, even if held in another country, respected, and intellectual property protected.

As a country we need to become less conservative and more entrepreneurial, looking for opportunities, and rather that just seeing negatives, seeing what we can do to minimise them and/or maximise on the advantages and benefits. this would also support our own creative base, to manufacture products here.

To rebuild our manufacturing base, we need to start somewhere, and it will likely be small, but taking advantage of any opportunity is what we need to be doing. Government support will be necessary, but we need to start somewhere, and such a move will help us to diversify our economy away from a clearly overloaded agrarian sector, and over reliance on Fonterra.

As to attracting foreign companies to manufacture in NZ, well that'll come down to what we can offer them.

to paraphrase other commenters on this and other blogs, we need to move away from investment in property to other more productive investments that actually create real value. The sooner this starts the sooner we will be profitable and self sustaining at it.

Well said Murray. It could take a great deal of political and public will at first to transition the economy.
Also, we have unutilized industrial skills within our borders, which can be expanded on if need be. Numerous Asian expats with advanced degrees in engineering and tech are forced to work in hospitality or drive cabs due to a lack of opportunities in our service-focused economy for people with limited English language skills.

TM, good point. It's compounded when not only does the NZD basket fall, but when the USD price of commodities like oil rises. Double whammy. A thread or six ago I quoted the example of truckstop diesel: up from 92c to 1.28 (that's close to 40%) in a year. And as that particular commodity is an input to fairly much everything else from farming and fishing to FMCG, it is a potent factor in boosting inflation.

"the June quarter GDP figures being released on Thursday (September 20)"
Am I correct to assume that "the June quarter" represents June, July & August?

No. The quarter ended 30th June 2019 - so April, May and June

Well that is what I originally thought. Why on earth does it take over 2 1/2 months to deliver these figures, surely time is of the essence?

Yeah. By the time we find out the growth results of Qx, Qx+1 is almost behind us.

But that's Good Enough for Gubmint work....

2 1/2 months to produce GDP figures is absolutely unacceptable.

Given that GDP is a measure of how many people visited the Titanic casino, without noting what keeps it afloat, I find it interesting that people bother to comment. GDP was always flawed, the Chch 'rebuild' proved that.

Time we counted real things.

Whatever it is it will be less than population growth from the 60k odd fake students and basket weavers Labour keep importing.

Two Keynesian economists, John Maynard Keynes and Paul Krugman, were walking down the street one day when they passed two large piles of dog shit.

Keynes said to Krugman, "I'll pay you $20,000 to eat one of those piles of shit."
Krugman agrees and chooses one of the piles and eats it.
Keynes pays him his $20,000.

Then Krugman, feeling richer, says, "I'll pay you $20,000 to eat the other pile of shit." Keynes, feeling bad about the money he lost says okay, and eats the shit.
Krugman pays him the $20,000.

They resume walking down the street.

After a while, Krugman says, "You know, I don't feel very good. We both have the same amount of money as when we started. The only difference is we've both eaten shit."

Keynes says: "Ah, but you're ignoring the fact that we've increased the GDP by $40,000.

That is really all you need to know about GDP... it's all dogshit.

I see that shit all the time, every time I look at the window I see people paying other people $20k to eat dog shit. Your stories are so real bilbo, can you tell me the one about your ring and that naughty guy Gollum who kept trying to stick his finger in it.

To be fair most of the dog shit eating happens in the privacy of government offices, council offices, real estate agencies, university arts courses and funy business schools. We are a civilized country after all and we wouldn't eat a meal without cutlery.

Resource consent fees? Fees to draw a line on a title to creat two smaller sections? Done far faster and at 1/100th of the cost 100 years ago, I suspect.