GDP growth in the June quarter was a surprising 1%, well ahead of the economists' consensus pick of 0.8% and the biggest quarterly rise in two years.
The magnitude of the increase means that the possibility of Official Cash Rate cuts - brought up by the Reserve Bank - have likely been taken off the table. The RBNZ itself had picked GDP growth for the quarter of just 0.5%, so will have been very surprised by the outcome.
The New Zealand dollar quickly gained from US66 cents before the news came out to about US66.4c.
Statistics NZ said GDP per capita was up 0.5% in the June 2018 quarter, following a flat quarter in March.
Annual GDP growth for the year ended June 2018 was 2.7%.
The size of the economy in current prices was $289 billion.
Growth was broad-based, with 15 of 16 industries recording higher production. Mining was the only industry to decline, reflecting one-off factors.
“Once again service industries led growth. Goods-producing and primary industries also saw rises this quarter,” Stats NZ's national accounts senior manager Susan Hollows said.
The largest contribution to growth came from agriculture, up 4.2%.
Growth of 1.0% in the service industries was broad-based, with all industries recording a lift.
“The real strength of services this quarter lay in a consistent performance across a range of industries,” Hollows said.
Retail trade and accommodation, wholesale, and transport industries all rose, reflecting higher household spending.
Within primary industries, agriculture’s strong performance was supported by growth in forestry. A 20% fall in mining – its largest fall in 29 years – provided a strong offset.
“Quarterly growth in agriculture was the strongest since September 2014, with the dairy season ending well after earlier weather disruptions,” Hollows said. “An unplanned shutdown stalled gas production, which led to the fall in mining as well as some offset to manufacturing activity.”
Manufacturing was further affected by lower petroleum and chemical product manufacturing following a planned shutdown at Marsden Point refinery.
Growth in electricity generation was the largest in nine years, with wet and cold weather likely to have influenced both production and demand.
What does it mean for the RBNZ?
ASB economists Nick Tuffley and Jane Turner noted the 1% quarter-on-quarter increase in GDP was well above the Reserve Bank's August Monetary Policy Statement (MPS) forecast of 0.5% growth.
"Growth over the quarter was reasonably broad-based, and would have been stronger if not for some temporary disruption to activity in the gas industry. The RBNZ faces a considerable upside surprise to its near-term GDP growth outlook ahead of next week’s OCR review, but some of this could be tempered if the RBNZ revises its second-half 2018 GDP growth forecasts lower," Tuffley and Turner said.
"Focus will now shift to how fast the economy grew over the third quarter, with concerns that weak business sentiment points to a slowdown in the underlying trend pace of economic growth over the second half of 2018. We expect the RBNZ to wait until February 2020 before lifting the OCR, and the risk of a rate cut over the next year remains on the radar."
Westpac economist Michael Gordon said not only was the overall result stronger than expected, the details were more encouraging for the economy’s growth prospects ahead.
"We expected a solid underlying picture, but with some one-offs that would boost the growth rate in the June quarter. Instead, growth was shared widely across the economy, and the one-offs - in areas such as electricity, transport and government services - weren’t as big as we expected, which means there’s less risk of an unwind in the next quarter," said Gordon.
"Today’s result is significant for the Reserve Bank’s OCR decision next Thursday. The RBNZ has said that if economic growth doesn’t accelerate in the way that it expects, it is likely to move towards OCR cuts. Its forecast in the August Monetary Policy Statement was for a 0.5% rise in GDP for the June quarter, though there has been a substantial amount of data since then pointing to a stronger number. Today’s result doesn’t guarantee that the economy is on an accelerating path, but it does argue against the case for OCR cuts in the near future," Gordon added.
"The NZ dollar-US dollar rose 0.5 cents on the result, and two year swap rates rose by five basis points."