GDP growth steady at 0.6% in March quarter off the back of higher construction activity; Figures over-shoot Reserve Bank forecasts

GDP growth steady at 0.6% in March quarter off the back of higher construction activity; Figures over-shoot Reserve Bank forecasts

The economy grew more than expected by the Reserve Bank (RBNZ) and most bank economists in the three months to March.

Gross domestic product (GDP) rose 0.6% in the quarter - the same rate it grew by in the December quarter.

Year-on-year GDP was up 2.5% (Statistics New Zealand revised its year-on-year figure for the December quarter up from 2.3% to 2.5%).

This data paints a rosier picture of the economy than the RBNZ anticipated when it in May cut the Official Cash Rate (OCR) and revised its forecast for the quarter down to 0.4%, and its forecast for the year down to 2.2%.

On the face of it this indicates the RBNZ might not move as quickly as some economists expected in cutting interest rates, however looking at the drivers of growth, the economy doesn't look a whole lot stronger than it previously did. 

The NZ dollar only rose slightly from 65.4USc to 65.6USc on the news. 

Weakness behind strong headlines

Growth in the quarter was largely driven by construction activity, which was up 3.7% from the previous quarter. Investment in non-residential buildings was up 9.9%, while investment in residential buildings was up 2.7%. Expenditure in these sectors hit record highs (on a seasonally adjusted basis).

Manufacturing activity was also up 1.4% in the quarter. The biggest drivers were food, beverage and tobacco manufacturing, metal product manufacturing and mineral manufacturing.

There was a fall in transport equipment, machinery and equipment.

A dark spot in the data was slowing growth in the services sector, which makes up a notable two thirds of GDP.

Services sector growth slowed to 0.2% - the slowest rate since the September 2012 quarter.

The main drivers of growth here were health care and social assistance, and transport, postal and warehousing. Meanwhile lower visitor arrivals saw activity in accommodation and restaurants slow.

Turning to the primary sector, which only makes a 7% contribution to GDP, activity fell 0.7%.

Agriculture activity was down 2.3%, largely due to bad weather. This was offset by mining, which picked up substantially due to higher oil and gas exploration activity.

GDP per capita - a measure that reflects productivity and has been stubbornly low for some time - only rose 0.1% in the quarter, a slow-down from the previous quarter.

Economists' reactions

ASB chief economist Nick Tuffley maintained the GDP figures on their own may not be enough to convince the RBNZ that the economy needs further stimulus.

"Yet subdued business confidence and the continued deterioration in global economic conditions may prompt it to make one more cut," he said.

"Furthermore, we believe that the strong Q1 lift in construction output masks a relatively soft quarter for economic growth."

On this point, Kiwibank economists Jarrod Kerr and Jeremy Couchman pointed out the strength in construction growth may not last as capacity constrains bite. They also flagged concerns weak services sector growth. 

Tuffley went on to say: "We continue to expect the RBNZ will cut the OCR 25 basis points again later this year, with August still the most likely timing for that cut."

Westpac senior economist Michael Gordon's take was: "Today’s result should give the RBNZ some comfort about the state of the local economy, at a time when global risks are mounting.

"That said, the indicators for the June quarter so far have been subdued."

The RBNZ had expected GDP growth to hit a floor in the June quarter. 

ANZ senior economist Miles Workman said: "The real test for the RBNZ’s outlook won’t occur until the forward-looking indicators for growth in the second half of the year begin to roll in.

"That’s because the RBNZ are forecasting quite a strong pickup in economic momentum that we think is on the optimistic side.

"While we agree in broad terms that the growth slowdown is bottoming out and will begin to turn a corner from mid-year, we think the improvement will be relatively gradual.

"And that implies softer-for-longer inflationary pressures, which in turn justifies a lower OCR."

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46 Comments

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Not what I expected.

what did you expect?

Not this

Something else, you reckon?

A stall, ~ 0.1% or so based on all the news and the rate cut.

Nah, no worries, we'll just keep juicing the immigration machine. It'll keep the fake GDP numbers looking primo.

That sounds like what Hosking was expecting / wanting

RBNZ have already stated to get inflation on track to 2 percent, GDP needs to be running at 3.0 percent .The Y/Y number will likely be given back Q2 . Four Australian banks all positioned for New Zealand's failure, 0.6 percent was the market expectation., fx movement muted especially on Fed day.

Keep an eye on the PMI... Currently at 50.24 and VERY close to contracting.

In Granny Herald: O&G exploration permits totalling 25% of total offshore issued, gone.

...announcements by US-based Chevron and Norway's Equinor to abandon 25,000 square kilometres of offshore exploration permits...a quarter of all existing offshore oil and gas exploration acreage has been handed back to the Government.

The article goes on to say that the end result will be as predicted: a forced transition from Taranaki gas, to imported LNG for which high capex will be needed, a net increase in emissions as transport costs for that LNG are added, a move back to coal for industrial heat for some high-usage consumers and, in sum, an own goal......

I haven't paid to go behind the Heralds paywall. Why would NZ need to import LNG or use more domestic coal to replace declining Taranaki gas production? Is imported LNG and domestic coal lower cost than other NZ sources of energy -wind, geothermal, solar... ?

Try turning on your lights or work machinery when the wind does not blow and it is cloudy. Some renewables are unreliable.

So are West Coast coal mines going to become economic due to a lack of new gasfield discoveries in Taranaki or elsewhere in NZ? Is that what the NZ Herald and you guys are predicting?

A counter argument is NZ has good energy storage options for hydro. We have a possible pumped hydro scheme that could store enough water to get NZ through a dry Southern Lakes hydro year.
https://talkingtransport.com/2019/01/30/are-we-there-yet-hydrogen-trains...

Unfortunately the South Island pumped hydro scheme would not be ideal for replacing electricity production in Huntly or from North Island gas generation. But smaller North Island grid scale batteries could work in tandem with new North Island based low cost wind or solar to give the same 24/7 guaranteed energy supply as the fossil fuel generators do.

Alternatively if no affordable North Island grid scale batteries are feasible a bigger DC link could be built from the South Island's pumped hydro grid scale battery.

Did the NZ Herald do any sort of economic analysis on these options for NZs future energy production before they jumped to their conclusions?

But smaller North Island grid scale batteries could work in tandem with new North Island based low cost wind or solar to give the same 24/7 guaranteed energy supply as the fossil fuel generators do.

Yeah, sure it can. How many billions of $$ of batteries is it going to take to get thru a cold cloudy week in midwinter? Coal & Gas generation in the North island has ~1.5GW nameplate.. Total installed wind on the national grid is ~650MW, so you'd need to almost triple that just to match nameplate capacity, and wind being a fickle beast means realistically you'd need to double that again to be anywhere near replacing the output of Gas & Coal. That big battery in South Australia is 0.129Gw.Hours of storage (or the equivalent of 5 Minutes of Gas& Coal output if everything is humming along, so be generous and call it 10 minutes.) , and cost AU$100m....

The South Island Onslow Manorburn pumped hydro gridscale battery can store up to 12000 GwH of energy.

But it does not generate any power to replace all the gas and coal you want to get rid of.. so it's f****ing pointless, the south island is already full of hydro lakes that can simply be left full if there was some other generation available instead.

Onslow manorborn is a flat battery in a room full of charged batteries.

Next time NZ has a dry year and the hydro lake batteries go flat causing a nasty spike in electricity prices then Pragmatist you might understand the folly of not charging up the spare Onslow-Manorburn battery.

Charging it with what???? Where are you getting the excess generation to pump water up a hill?

But (personal case, public site here) if'n you have a stonking Battery, charged up and used expeditiously, then the lights Can stay on. But to be realistic, that's not remotely affordable for most. The battery alone is worth the same as the panels and inverter. And the storage capacity for true off-grid, needs to be of the order of two weeks' consumption, to glide through the contiguous clagged-in days of Deep Winter (or most anytime on a West Coast).

On a side note, have you considered adding a small wind turbine to your setup?

No. Our little section is a bird and bee haven and I don't fancy endangering either.

Disable during the day and run at night only? With a remote disable switch for when the bearings start squealing and you can't be bothered getting out of bed.
Best set up I've seen (triggered by a quoted $70k bill to get hooked up to the grid a couple of hundred metres down the road) was solar + micro wind + micro hydro. They were running their house plus guest houses of this. Very unique situation though where the micro-hydro was running off a tiny creek on their land that came from pretty high up and was hitting a flat spot right there. Could run at a good steady output all winter long and still got plenty of juice from it in summer.

Went down the solar/battery path and it didn't really work. The system used around 20% of the energy generated to run itself, and the cost far outweighed the benefit. Best thing for me was when the battery blew up after several system failures and the supplier let me off the contract but let me keep the panels minus battery. I installed a hot water timer, effectively making my cylinder a de facto battery and my power bills for a largish house are between $50 in the summer and $160 in the depths of winter. The battery didn't really make a lot of difference, in my case anyway, but the tech might be better now.

My setup is LG panels, all with optimisers, and battery (the 400VDC RESU10 job) plus Solaredge inverter. It's a relatively high-spec set-up. And yes, I will add a HWC timer into that - RPi Zero W based - have all the bits, just need to rip together a Python script and get the sparky to patch it all in. HWC runs off separate night rate supply at the moment, so I will get it running off ordinary power, but only if it wants to draw current if battery is below (say) 30% during night-rate times - current clamp in the HWC feed - OR during times when battery is over say 70%, is charging, and time is between say 1030 and 1600 (can interrogate panels output as an alternative). Haven't worked out the details yet but can get a JSON feed from the Solaredge monitoring site at any time.

I don't care about the sunk cost, but over the last year power costs on a modest net grid import of 7000 kWh have averaged 15c/unit. And we run a heat pump, a bunch of woodworking tools (induction motors) and a spa out of all that. Battery life? Too soon to tell, as Chou En-Lai is reputed to have said about the effects of the French Revolution.

Very cool. You can always use your hot water cylinder as a dump-load to maximize your self consumption. Its kinda the same as a battery and should add a few % to the ROI. details here PCBs here

LNG & Coal make up about 20% of our electricity supply, wind and geo are unable to take up that slack without significant investment

So if we dont get it locally we need to bring it in

https://en.wikipedia.org/wiki/Electricity_sector_in_New_Zealand

Pretty sure our gas pipelines are not LNG.. just high(ish) pressure NG.

The GH website, although 'paywalled' has the entire article in raw html.....

Overall, the NZ economy is doing pretty well: low inflation, low unemployment, low interest rates, sustained economic growth, strong commodity prices, annual trade deficit narrowing, improving terms of trade, widespread sectoral growth, reasonable business confidence, low bankruptcy levels and buoyant consumer markets.

Hardly the type of conditions associated with slumping house prices......

TTP

So you reckon the govt are doing a pretty good job with their economic management?if the economy is as sound as you think then hardly the basis for ocr cuts.

There is a global trade war coming. All major economies are slowing down. NZ is a small open economy so is being affected. The government is responsible for coming up with the best response to changing economic environments. Global economic conditions is not something the government can fix though.

16
up

... and yet with all those supporting factors house prices in Auckland ARE falling. Imagine what will happen if some of those factors turn negative?

Your comment would be accurate if you ignore history. Low unemployment always precedes economic decline and recession. The other information such as trade, business confidence, consumer confidence and bankruptcy change dramatically when things sour.

Everyone has 20/20 vision in hindsight.

e: also you've never told us how much property you're buying. How much have you bought so far this year?

Not sure how low interest rates signals the economy doing well?

So true NM, it shows some basic misunderstanding by TTP.

Low interest rates mean that retirees can't afford food or need to switch to eating dog roll so they don't starve. Or if retirees can afford to eat it means they have to put their money into risky investments at an age when they can't recover from the bad times. The low interest rates are also a form of social welfare for the economy. All good things to TTP.

as long as house prices are being pumped, TTP is happy.
What's social conscience?

Looks like someone forget to tell the construction sector about the housing downturn and collapse in sales volumes. Poor buggers are merrily borrowing and building away while sales volumes have been falling off a cliff. We’ll find out pretty soon if there are enough buyers willing to take on the debt to purchase all this stock, the Q2 REINZ figures so far for April and May would suggest that this could present a little challenge.

Exactly. Things are creeping close to the cliff's edge. Today's construction figures are fool's gold

DGM have difficulty accepting that the NZ economy is doing pretty well........

Read their woeful commentaries above - and below.

Pervasive negativism of DGM goes undisputed........

How will DGM ever get a footing on the property ladder with such unfortunate attitude-of-mind?

TTP

Perhaps they will wait until we have some distressed sellers out there. Never better value than orphaned assets.

JW, agreed. The construction sector is a slow moving ship not a nimble light craft. As you say they are building based off economic conditions prevalent in 2017. Times change. All this stock coming on line doesn't look as though it's going to do anything other than sit there. The hangover is going to be all the longer with the sheer quantity of stock being built.

100% right

Sounds a bit like some of the Aus cities ey?

I could make 1000 mud pies and we could sell them back and forth to each other a billion times .. NZ GDP would be spectacular ..

Clearly a foolish metric to primarily measure an economy on.

Just sold a property. From the time I started advertising took a week and I had one signed agreement 16 potential buyers and sold in 2nd week. The housing market is good.