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.