Economy expands by 0.6% in December quarter surprising the Reserve Bank but not the market; Economists divided over whether slow growth will persist in 2019 

Economy expands by 0.6% in December quarter surprising the Reserve Bank but not the market; Economists divided over whether slow growth will persist in 2019 

New Zealand’s economy expanded as expected by the market, but not the Reserve Bank (RBNZ), in the last three months of 2018.

Gross domestic product (GDP) rose 0.6% in the December quarter, according to Statistics New Zealand. 

This undershot the RBNZ’s projection of 0.8%, but was on par with what the market was expecting.

It was also an improvement from the September quarter, which experienced growth of 0.3%.

GDP rose 2.3% from the December 2017 quarter to the December 2018 quarter.

Given the RBNZ projected growth of 2.7%, some economists believe it may need to reassess its official cash rate (OCR) outlook. 

The annual average growth rate in 2018 was 2.8% – the lowest it's been since 2014. 

Looking at GDP per capita, this increased 0.1% in the December quarter and 0.9% in the December year – the lowest annual growth since 2011. Improving per capita GDP growth was something the Labour-led Government campaigned hard on.

Services sector drives growth 

The services sector drove the December quarter growth, expanding 0.9%, while the goods-producing sector rose marginally by 0.2%. This was offset by the primary sector, which fell 0.8% in the quarter.

Nine of the 11 services industries recorded increases. The growth in the sector was led by a 2.5% increase in retail, trade and accommodation, and a 3.2% increase in transport, postal and warehousing services.

Household spending was up 1.3%.

Meanwhile agriculture, forestry and fishing production fell 0.6% in the December quarter. Agriculture led this decline, down 1.3%.

Low oil and gas activity, largely due to disruptions at the Pohokura gas field, saw mining sector activity drop 1.7%.

Construction was up 1.8%, driven by increases in non-residential buildings and construction services.

Manufacturing activity continued to fall, down 0.4%.

Investment spending in fixed assets was up 1.4%, while business investment rose 1.3%.

The New Zeland dollar jumped on the news. It rose from 68.8 USc to 69.1 USc. 

Economists divided over a 2019 pick-up

There continues to be a fair bit of divergence among bank economists over how the RBNZ will respond to GDP undershooting its projections, ahead of it reviewing the OCR on March 27.

Kiwibank senior economist Jeremy Couchman says: “We expect growth to lift over 2019. 

“The fiscal impulse [more government spending] is key. And per capita outcomes are likely to improve with easing migration flows.

“Nothing from today’s data should worry the RBNZ. The OCR is going nowhere for a few more years, and we see only gradual rate hikes from mid-2021.”

Westpac senior economist Michael Gordon says: “Today’s GDP figures confirm that the economy lost some momentum over the second half of last year, but not to the extent that we thought.

“That gives us a bit more comfort about our view that the growth momentum will pick up again this year, supported by government spending, construction, and rising household incomes.”

ASB senior economist Jane Turner is on a similar page, picking the RBNZ’s next move to be a hike in 2021.

Yet she admits: “With GDP growth slowing over 2018 by more than the RBNZ had expected and with downside risks to 2019 growth accumulating, there is still the risk of an OCR cut in 2019.”

ANZ economists remain the outliers, firmly of the view the OCR will be cut three times, starting in November, to bring it down to 1.00% by late next year.

They see the economic growth rates of the second half of 2018 being the new norm.

Economist Miles Workman and chief economist Sharron Zollner expect the RBNZ to acknowledge the economy’s lost a bit of steam, but “don’t see today’s print as sufficient fodder to pull the Bank out of their data-dependent neutral mode – yet”.

“We don’t foresee the RBNZ significantly shifting its tone until it becomes unambiguously clear that capacity pressures are waning, and therefore will prove insufficient to sustain core inflation near the target midpoint over the medium term.”

Note: The figures in the below graph are adjusted for inflation, unlike the figures in the story.

Economic growth

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13
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0.9% in the second half of 2018. The Grant Robertson economy. Producing company output falling.

The government based many of its tax revenue assumptions on consistent 3% growth till 2022. I believe a lot of the generous handouts being given out at present are based on these optimistic assumptions of future cash inflows, which are clearly diverging from reality.
Let's see what happens next!

From an MMT perspective, I would argue conversely that the government surplus is too large given the private domestic sector's unwillingness to "eat even more credit" and the lack of a sudden export boom. The austerity of the current regime is even greater than National's was. MMT would argue that government spending (G-T) needs to be large enough to offset demand leakages to imports and savings minus the injections from private investment and exports. At the moment, arguably, the surpluses are sucking the life out of aggregate demand. We need either a tax cut for low and middle income NZ or a sensible public spending programme. A Job Guarantee for the underemployed would be a good start to help those at the bottom first. An OCR cut won't help much in my humble opinion.

See Michael Redelll for his empirical evidence of the relative austerity of Labour https://croakingcassandra.com/2018/12/17/hyefu-bits-and-pieces/ (without at all being an advocate of Big Government).

As always, I am not advocating deficits don't matter or inflationary spending beyond the capacity of the real economy to respond!

Having been looking into MMT for a while now, I vehemently disagree with it however I think we will see it in one form or another to keep the bubbles inflated as we have in other countries. It will still fail when tax receipts can't cover the servicing costs (estimated 2040 - 2050 for Japan for example). Thats exactly why I think it will happen, it will be kicking the can down the road further which is very much in vogue right now.

@ cs i agree whole heartily. They pinned themselves in with an overly austere pre-election set of promises and some bad accounting and its doing us no favors.

Automatic fiscal stabilizers are a nice feature of a reasomable social democracy. Nothing new about them. Unemployment benefits of all kinds kick in when the economy tanks and jobs dry up. A good reason for decent allowances, in fact, since they support demand from those with businesses and in employment.
There is no need for very low government borrowing when our teachers are among the lowest paid and nurses want to strike. In New Zealands case attention should be paid to private borrowing. That can get us into just as much trouble as excessive government debt.

Automatic fiscal stabilizers are a nice feature of a reasomable social democracy. Nothing new about them. Unemployment benefits of all kinds kick in when the economy tanks and jobs dry up. A good reason for decent allowances, in fact, since they support demand from those with businesses and in employment.
There is no need for very low government borrowing when our teachers are among the lowest paid and nurses want to strike. In New Zealands case attention should be paid to private borrowing. That can get us into just as much trouble as excessive government debt.

Hold on guys, the current govt should be gone by 2020.

National party, please find yourself a new, capable, and well loved leader. This is the only barrier to be in the office in 2020.

12
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Yeah , if only we had house sales based spending and higher immigration to pump the figures up a bit longer.

You should apply X - or are you awaiting further instructions form the party?

Ummm the world loves Jacinda right now, so I think Labour will stroll in unchallenged

We were warned of this a few weeks ago , and the telltale signs were there for some months now

16
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Increasing per-capita GDP growth is a recipe for killing off our species - along with most others.

So this is a trend in the right direction. :)

It's time we talked about the Prisoner's Dilemma, the Commons, and how the 'Invisible Hand' is an existential threat. Then we need to formulate new objectives - on past the well-being ideas and into the realms of real sustainability.

More Greenie gobbledygook.

If we increase GDP per capita, there is the opportunity to secure improved wellbeing outcomes.

If GDP per capita falls everything starts to become unaffordable, especially things like healthcare, good environmental safeguards, security and recreation.

But it wouldn't last for long because ultra-left or ultra-right extremists would exploit the chaos and seize power.

20
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"If we increase GDP per capita, there is the opportunity ..."

Economic gobbedygook.

GDP is now a useless measure - it is simply tracking the extent which Central Banks are destroying the value of money .

Aced it with that comment.

Doesn't alter the fundamental point that we will quickly land in the shit if we abandon the attempt to produce more with the same inputs, or the same amount with fewer inputs.

Given a growing population, everyone (apart from the plutocrats or party bigwigs - take your pick) becomes impoverished, if we don't pursue efficiency gains.

"Given a growing population".

Why given? I find that the most interesting thing about your post. We need to be aiming for cessation and reduction in NZ - it's the overriding imperative.

It is inevitable that global impoverishment will increase exponentially from now on, indeed if you were looking with the right kind of eyes (h/t Hunter Thompsom) it already is. Efficiency gains are indeed a legitimate pursuit, but incapable of taking up the increasing slack alone.

pdk,

Sometime soon,we need to start discussing ERoEI. The global economy is built on the high energy efficiency of fossil fuels. Hydro schemes have a high ERoEI,but we seem to have no appetite to build more of them and NZ will not not go down the nuclear power road.
At present,all solar based power generation have low ERoEI. I claim no expertise in this area and I know that even without factoring climate change into the calculations,we have to begin transitioning from our fossil fuel dependent economy. But,we must have a well informed discussion and I see little sign of that happening.

It's not for want of me trying!

Watch this space :)

I had been pinning my hopes on solar (ideal for most of the 3rd world which is where energy use will boom and unlike hydo potentially near limitless). Can you supply a link to the low ERoEI for solar; something recent since prices and manufacturing techniques are ever changing. Thanks in advance

Its telling that our key sectors of "agriculture, forestry and fishing production fell 0.6% in the December quarter' and mining (oil and gas) fell 1,7% due to technical issues .

What is the reason for this ?

Lower volumes , or lower commodity prices ?

They all rely on finite resources, and they're all extractive. Yes, even forestry and agriculture as practiced are draw-downs.

So what did you expect Boatman? Evermore?

Could be surface facility related (maintenance) or Downhole well issues that required intervention. Often other wells need shut in at the same time for HSE reasons - hence curtailed production. In addition energy commodities tumbled in Q4 leading to lower net backs for producers unless they were full hedged.

"Techincal issues" for O&G was the shutdown of Pohokura.

Hi Boatman, to answer your question - the country's largest gas field, Pohokura, had both planned and un-planned outages last year. This saw gas production fall. 

For fishing at least, commercial fishing is literally raping the seas, plunder far too much resource from them. this draw down is a natural consequence as the stock is getting harder to find. As PDK suggests, inevitable

11
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Just over 50% of the pre-election Labour predictions of where the growth would be at this point... ouch.

I’m not sure your average voter will be aware or even care for that matter. I cant help but get the feeling that intentions are becoming more important than outcomes in voters minds.

Did anyone actually believe those predictions? Economic predictions made by a political party just before an election... about as trustworthy as a condom stored in a sewing kit.

That's a fine simile. Me gusta.

Pragmatist,

The annoyance is that when one pointed out the innaccuracy of the Labour budget predictions, one was either derided as foolish, partisan, ignorant, biased, etc. by the party faithful. What was sad was that many defended their laughably inaccurate budget forecasts. Some may have been deluded, others were just defending the party line. What as extra special amusing was the economists that stated that the Labour budget was correct, with the wee little caveat about assuming the assumptions were correct. Well, one of the really big assumptions was the outlandishly high GDP growth estimates. I didn't see a single article prior to the election in MSM about the errors in the Labour GDP predictions, although I saw many articles lampooning the "$11B hole", even here on this website. The triumph of sound-bite media over substantive journalism.

It would be good to see a history of the predicted GDP growth vs the real GDP growth over time. Maybe use the last 10 years (or even 20 years) budget predictions on a single chart overlaid with the actual GDP growth that occurred. This would enable the readers to understand the reality has been vs the predictions.

The knee jerk reaction for the NZD to strengthen as the result is not as bad as feared seems short sighted.
Surely the ANZ forecast interest rate cuts are now more likely, whether March or later.

How long will the RBNZ wait before panicking about house price declines, sorry, I mean acting in a deliberate and calibrated manner in response to the deterioration in world trade.

With the numbers coming out of Europe and the predictions on the US economy, seeing these numbers is a good sign for NZ. Falling yes, but not as bad as others.

Interest rates are going to have to tumble to prop up this corpse. Last chance to get into cryptocurrency people. My exchange security tokens are all up between 15% and 30% today (binance excluded as its already up 250%)

I think the economic headwinds are stronger than most think. They have got even stronger since last Friday's tragic events.
I think effective demand for housing is going to remain sickly for a long time, and one of the only things that will provide it some medicine are multiple OCR cuts. Unless that happens, housing starts are going to drop back dramatically.
I pick at least two OCR cuts by this time next year. More if things get worse off overseas.

Which is probably only going to serve to further depress discretionary spending. Either we circulate money through the economy or we push it all into asset bubbles.

Is it adjusted for inflation ? Probably the lowest inflation for awhile too.
Having said that , we have noticed it has been very quiet in the last 6 month ( higher priced discretionary spending wise).

The figures in the story aren't adjusted for inflation, but the figures in the graph are. 

What’s interesting is that the latest numbers are well below what the RBNZ expected. Nothing to do with the effect of a slowing housing market (bubble) of course. Meanwhile in Australia the RBA says the “property risks are 'elevated but contained'”, as the market continues to decline rapidly. Where have we heard that before? Ah yes, Bernanke as subprime unfolded.

RBNZ expected the housing market to be slow and even slightly negative for Auckland.

It will be interesting to see how the minimum wage rate increases impact on gdp, unemployment, and productivity through the next couple of years.

It could have positive effects as well as negative.

I'm picking the effect will be quite negative. Some industries will push production offshore. Time will tell.

And on tax revenues, which are based on net profits, which decline as costs are pushed up by fiat...