New Zealand's Gross Domestic Product rose 0.8% in the December quarter from the September quarter, up from a 0.3% rise the previous quarter. Manufacturing grew for the first time in almost two years and consumers started spending again, Statistics NZ figures show. This was in line with economists forecasts, albeit slightly above the Reserve Bank's forecast for a 0.6% rise. Views on whether economy kept powering ahead in the March quarter are mixed, with some pointing to a slowdown in consumer spending and the housing market as signs any recovery will be tepid. Economists still see the first Official Cash Rate increase being around June to September. (Updated to include; * Comments from ASB economist Jane Turner on a solid recovery and the first OCR hike being in June; * Finance Minister Bill English's comments about real per capita GDP falling and moves in the May 20 budget to rebalance the economy back towards the productive sector; * BNZ Economist Steven Toplis' comments that growth in March quarter may be slower and delay any RBNZ rate hike; * ANZ economist Mike Smith still seeing the first OCR hike on September 16; * Newmarket Business Association CEO Cameron Brewer pointing to a weak retailing scene since January; * My view that Bollard should hike the OCR sooner (June 10) rather than later. * Westpac economist Brendan O'Donovan's view the economic rebound is robust and a June hike is justified.) Here's the initial reaction below from ASB economist Jane Turner:
The detail suggests that the economy has made a solid recovery in Q4, with many core components making a recovery earlier than expected. In particular, inventory rebuilding and business investment have picked up relatively promptly. This suggests that the underlying sentiment in business surveys is being translated into action. The economy is showing signs of starting a self-sustaining recovery, and the RBNZ can be more confident that the economy is moving into a position where it can withstand the unwinding of monetary policy stimulus. Q4 growth was slightly stronger than the RBNZ’s expectation of 0.6%, and the Bank can now be less concerned about the recession the economy has just been through, and more concerned about inflation pressures building over the next year. The RBNZ has found itself in a tricky position as inflation pressures have not unwound as far as expected, despite the depth of the recession. The RBNZ’s March MPS displayed increased concern over the future inflation outlook, and inflation and capacity measures will be key areas to watch over the next few months. We continue to expect the RBNZ to increase the OCR by 25 basis points in June.
Here's Bill English's comments:
These figures are another step in the road to recovery, but we are still regaining ground lost during the global crisis and New Zealand's own recession which started in early 2008. Our economy faces numerous challenges and that is reflected in consumer confidence figures which have dipped in the first part of this year. Those challenges include a still fragile global recovery and serious imbalances in our economy built up from years of rampant government growth under Labour and too much borrowing for housing and consumer spending. Those imbalances have held back the export sector for several years and meant real per capita GDP was actually negative in the three years to September, 2008 – at a time when other economies were growing strongly. The Government is committed to tackling these challenges. The Budget in May will set out the next steps to lift economic growth by tilting the playing field towards productive investment, exports and new jobs. We are also putting the brakes on the rapid increases in Government spending that occurred under the previous Government. That is vital if we want to raise the competitiveness of our exporters, lift business confidence, increase incomes and help New Zealand families get ahead.
BNZ economist Steven Toplis said growth was expected to be slower in the March quarter and may actually encourage the Reserve Bank to hike later in 2010 than the bank's current 'mid-2010' outlook.
The Q4 story was one of an inter-related pick up in manufacturing output and an inventory rebuild supported by the first vestiges of an increase in investment activity and a modest improvement in household spending, on both consumer goods and house building. One should note that the rebound in both manufacturing and inventories is coming off a very low base. In the case of manufacturing, current activity is still 16.5% down from its 2005 peak. Typically, bounces in these aggregates contribute significantly to economic activity immediately post recession. Importantly, it was heartening to see that business confidence about the expansion ahead must be genuinely in the ascendancy. Not only did inventories rise but there were the first signs of heightened interest in investment. We caution that the ride will remain bumpy and vulnerable to a series of potential shocks both globally and domestically. Moreover, we think growth in Q1 will actually be a little lower (0.4%) than we had anticipated prior to today’s release. That’s because the “positive shocks” to the economy this quarter were a little higher than we had anticipated and won’t be repeated in the next period. Today’s GDP outturn was modestly stronger than the Reserve Bank’s 0.6% pick. This is an inconsequential difference in terms of the Reserve Bank’s decision making process. If, however, the Bank comes to the same view as ourselves that Q1 might be relatively weak (bear in mind that the RBNZ’s pick for Q1 is 0.9%) then this might argue for the RBNZ pushing through its first rate hike later rather than sooner. Accordingly, close monitoring of the partial indicators will be of great importance over the next few months. It is also worth noting that while the economy is in expansion mode there is nothing in the data to suggest the bounce back in activity will be anywhere near as strong as one might normally expect following the sort of recession we have recently experienced – again moderating likely Reserve Bank action. That aside, risky and unsteady the recovery might be but at least economic activity is slowly but surely stumbling in the right direction. While we are hardly in a state of nirvana, there is no doubt the outlook is far more rosy now than it has been for some time.
ANZ economist Mike Smith still sees the first rate hike being on September 16.
Economic activity posted the strongest growth in Q4 2009 in almost two years – an encouraging sign. An inventory led rebound in the manufacturing sector helped drive growth. Inventories added 2.6 percentage points to expenditure GDP growth. Looking across the expenditure components, it is clear that monetary policy is working. Interest rate sensitive sectors such as private consumption and residential investment grew strongly. However, business investment remains weak (although the mix was more positive). We continue to believe a pickup in business investment remains a critical aspect that needs to improve before the recovery will show real legs. Absent this ingredient, there is still a recovery underway but it’s more statistical in nature coming off a low base for a host of sectors. The recovery remains on track, but we think it won’t be until the second half of this year that we will see it becoming truly self sustaining and “real”. Specifically, domestic pockets have weakened into Q1, although prospects for continued restocking should provide support and some sectors such as forestry already had strong momentum. We continue to look for a September start to the RBNZ’s monetary policy tightening cycle.
Newmarket Business Association Chief Executive Cameron Brewer said the retailing scene had softened since the end of December.
“The latest Auckland Chamber of Commerce business confidence survey and the Westpac McDermott Miller consumer confidence survey both point to a drop in confidence in the first quarter of 2010. What we might currently be experiencing is a bit of a double dip in economic performance, "Last year when the economy technically came out of recession everyone rejoiced and there was a bit of a rally leading into Christmas. That’s what this latest economic data shows. However so far this year it’s been pretty quiet overall. Unfortunately the March quarterly economic performance figures may prove to be less positive than the December figures. "Consumers are taking a wait and see approach this year. Subsequently people are keeping their hands in their pockets. Confidence is down, unemployment’s up, petrol's up, house prices are down, and interest rates are set to start climbing from June. "Another two factors that are adding to business and consumer uncertainty, even subconsciously, are Auckland's imminent and massive amalgamation and the National Government’s second Budget on 20 May, which given all the tax changes is lining up to be the most significant in 20 years."
Westpac economist Brendan O'Donovan's view the economic rebound is robust and a June hike is justified.
The key wrinkle in the recovery story is the housing market. The finance, insurance and business services industry (which includes real estate) grew only 0.1% in Q4, mainly because house sales fell 10%, bank lending was slow, and growth in the stock of owner occupied dwellings was low. This slowdown marks a real change, as it came after four excellent quarters for the finance and real estate industries. The economy is following the same well-worn path that it trod after the recessions of 1992 and 1998. We expect the baton of recovery will soon pass from inventory investment to residential construction. The experience of past recoveries suggests quarterly GDP growth will accelerate further in 2010. We are forecasting 1% for Q1. There has been some moderation in confidence and spending indicators for Q1, and this will no doubt show up as slower growth in retail trade than we experienced in Q4. However, that should be more than made up for in other areas: * Building consents suggests a strong lift in Q1 residential construction. * Climatic conditions have supported good agricultural production. * The need to rebuild inventories and strong demand from Australia bodes well for manufacturing. * Sharp falls in mining exploration and health care are unlikely to be repeated. * Real estate and finance have been stable rather than declining in Q1. It does get difficult to imagine a growing economy when unemployment is high and finance is tight. It is worth bearing in mind that at the start of the past two recoveries, unemployment was higher and finance was tighter than today. Unemployment and credit are lagging indicators, and tend to improve well after recoveries have begun. GDP growth was bang on economists' median forecast, and therefore market reaction was muted. Swap markets did get het up last night on worries of a positive GDP surprise. When that did not eventuate, 2-year swap rates retreated 6 basis points. The Reserve Bank, however, has had a 0.3 percentage point upside surprise once the Q3 revision is taken into account. We expect that will strengthen the Bank's conviction that June is the right time to begin increasing the OCR. Markets appear to be underpricing the risk of a June hike, which has after all been well signalled by the man who makes the decision.
My view It's time to hike Alan. The robust economic growth recorded in the December quarter is another sign to Reserve Bank Governor Alan Bollard that the crisis is over, the economy is recovering and it's time to remove the monetary stimulus of an Official Cash Rate set at a record low 2.5%. Statistics NZ figures show GDP grew 0.8% in the December quarter from the September quarter, which was more than the Reserve Bank's forecast of 0.6%. It included a rebound in manufacturing output off a low base, some stocks rebuilding and some extra consumer spending. Business investment has also rebounded somewhat. All of this should suggest to the Reserve Bank that the 'animal spirits' that power an economy are finally showing through in output. They will also start to drive some inflation pressures. The Reserve Bank highlighted some of those pressures in its last Monetary Policy Statement, which suggested headline Consumer Price Inflation could hit 5% by the end of this year, thanks to increases in ACC levies, Emissions Trading Scheme costs and a possible GST increase. The underlying pressures are also bubbling higher with the Reserve Bank seeing core consumer price inflation nudging up to peak of 2.8% in late 2011 from 1.5% later this year. The Reserve Bank has some leeway, but not that much, particularly if the recent jump in the world oil price and weakness in the New Zealand dollar are sustained. Bollard has consistently said for months that the first hike won't happen until the middle of 2010. The question now is how soon can he get away with calling it the middle of 2010? The next OCR decision is on April 29, which may be just a little too soon. The next dates are June 10 and July 29. Those who have moved to floating mortgages should expect to start paying more from June 10 onwards, just as they're preparing to start paying a GST rate of 15% on everything they buy. The shops might be a little slower than many people expect come Christmas time. This is the inevitable result of de-leveraging after a credit-fueled consumption boom that lasted through most of the 2000s, or the 'Naughty Noughties' as I like to call them. Watch on our video page here. Watch on YouTube here.