By Bernard Hickey
New Zealand's GDP grew just 0.2% in the June quarter, down from growth of 0.5% in the March quarter and below economists' forecasts for growth of around 0.7%.
The Reserve Bank was expecting quarterly growth of 0.9%.
The New Zealand dollar fell sharply after the news and wholesale interest rates also fell in expectation the weaker economy may allow the Reserve Bank to keep the Official Cash Rate on hold at 3% for longer than expected.
Before this result economists had expected the OCR to be on hold until early 2011. The New Zealand dollar dropped to 73.2 USc from 73.8 USc on the news.
The 90 day bank bill rate dropped from 3.16% to 3.15% and the 3 year government bond yield dropped from 4.10% to 4.01%.
Construction spending rose 6.4% in the quarter and new capital investment rose 6.2%, but this was almost completely offset by flat consumer spending and a 4% fall in manufacturing output in the quarter.
(Updated with more market reaction detail, reaction from ANZ, BNZ, ASB, Westpac economists, NZMEA CEO John Walley)
'On hold until March'
BNZ economist Stephen Toplis said the growth was unequivocally soft with activity generally weaker across the board.
"Total economic activity remains 1.5% below its previous peak and is unlikely to get back to this peak until the end of the first quarter next year. Worse still, if you look at the GDP data on a per capita basis you find that activity is down 4.2% from peak and is no higher now than it was back in the June quarter of 2004," Toplis said.
"The weakness in today’s data justified the cautious stance that the RBNZ adopted in its recently released Monetary Policy Statement. Indeed, given that the RBNZ appears relatively easily spooked at the moment, today’s data are likely to be seen as particularly frightening. Formally, the RBNZ was forecasting a 0.9% outturn for Q2. It admitted downside risks to this but would not have been contemplating a 0.2% pick in that mix," he said.
"This being so it firms our view that the next hike in the cash rate will not be until the end of Q1, 2011 at the earliest."
ANZ economist Mark Smith said the economy had lost momentum and the figures were well below expectations.
"Based on today’s GDP numbers, the RBNZ is well and truly on hold until next year," Smith said.
"Since emerging from recession, growth has been anaemic and not of the above-trend variety normally expected from typical cyclical rebounds," Smith said.
"Deleveraging remains a powerful growth suppressant. The economy is also undergoing a physical resource shift away a consumer-centric model towards more earning centric growth. While there was only limited evidence of this dynamic in Q2, such a physical transformation for the economy will take a considerable period to take hold," he said.
ASB economist Nick Tuffley said the Northland drought dragged on agricultural production more than expected and communications output fell sharply for the third consecutive quarter.
"Today’s result reinforces the case for the RBNZ to remain on hold. Now we do not expect the RBNZ to resume the process of returning monetary conditions to normal levels until March 2011," Tuffley said.
Westpac economist Brendan O'Donovan said the drought was a factor in weaker manufacturing activity and that mismeasurement may be responsible for a fall in telecommunications activity, but that the weak GDP justified the Reserve Bank's dovish stance in the September quarter Monetary Policy Statement.
"The reluctance of consumers to participate in the recovery was the rationale for the RBNZ's change in stance at the September MPS. Now it turns out that the consumer was even more reluctant over the June quarter than the RBNZ previously realised - further justification for a dovish stance," O'Donovan said.
""The RBNZ's internal projection for interest rates in 2012 could now be about 20bp lower than the September MPS track. We reaffirm our call that the RBNZ will not hike until March next year. Appropriately, the NZD fell half a cent, and the 2-year swap rate fell 7 basis points. "
'Cut the OCR'
New Zealand Manufacturers and Exporters Association (NZMEA) Chief Executive John Walley said the weak GDP figures and wider balance of payments deficit showed imbalances remained in the economy.
“The Government has talked at length about rebalancing the economy towards exports, saving and business investment, but the outcome clearly demonstrates this is not occurring,” Walley said.
“A high and volatile exchange rate still discourages growth in exports and the lack of tax on assets still encourages investment in property rather than businesses in the traded economy," he said.
The Reserve Bank should have cut the Official Cash Rate this month, he said.
“This latest set of figures shows that fundamental changes are necessary and playing around the edges is not working.”
Here is more detail below from Statistics NZ:
"All manufacturing sub-industries, with the exception of wood and paper products, were down in the June 2010 quarter," acting national accounts manager Stephen Oakley said. "The largest decline was in food, beverage, and tobacco manufacturing."
GDP for the year ended June 2010 was up 0.7 percent when compared to the year ended June 2009. This annual increase in GDP is the first since the year ended September 2008. The expenditure measure of GDP increased 0.4 percent in the June 2010 quarter.
The production measure of GDP shows the volume of goods and services produced in the economy, while the expenditure measure shows how those goods were used. The volume of goods and services purchased by New Zealand households was flat this quarter.
An increase in durable goods (furniture and appliances, clothing and footwear, and used cars) was offset by a decrease in services (spending on phone calls, medical services, and domestic air travel). Gross fixed capital formation, which measures investment in fixed assets, was up 6.2 percent in the June 2010 quarter.
This is the largest increase in fixed asset investment since the March 2004 quarter. The main contributors to the increase in fixed asset investment were residential building investment, up 11.1 percent, and investment in intangibles, which includes mineral exploration, up 10.3 percent.
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33 Comments
Kiwi may find a floor at 75au....maybe!
Point 2% isn't "weak"....it's stone cold dead.
The next three months will likely bring a negative number...but no worries right...a massive rebuilding splurge on the shakey mainland will see a return to 'happy times are here again...blah de blah de blah blah'........ Come on ........sing along....
Glad to see you're not convinced a post earthquake building boom will save the economy, Wally.
With most of the two storey brick buildings which have a loose brick or two cordoned off, literally hundreds of businesses remain closed nearly 3 weeks after the event. But then consider that most buildings which need replaced (or repaired) are old and likely to have limited insurance cover and that the existing (or former) tenants are unlikely to be able to afford higher rents in new premises let alone the building (or now land) owners being able to afford (or finance) a new building then you may come around to the view that there won't actually be a rush to rebuild in the short term, except for repairs to institutional buildings and quality buildings with little to moderate damage.
To be honest if you are a building owner likely to receive a cash insurance payout for a wrecked block of suburban shops or a Sydenham shop where literally dozens of neighbouring premises have been vacant for decades - then why would you mortgage yourself to top up an insurance payout to rebuild an unlettable building? Out of interest earlier this year a Colombo St shop (just south of Moorhouse Ave) of 200m2 (modern concrete block construction and now undamaged) sold at a liquidation auction for $122,000 plus GST for a 200m2 building on 220m2 of land (about half the GV). Fair land value would be $500/m2 for an industrial yard in the area and that's about what the full property sold for! Unless you had a definite tenant who wanted that location why would you bother rebuilding an unwanted type of strip shop building?
My view is that there are going to be a lot of carparks in central ChCh for the next few years.
Housing is another story, either the properties are lightly damaged and can be repaired quickly and reasonably economically or they are write offs and need demolished. Many of those owners will just take a cash payout instead of rebuilding, particularly since most of the damage is in less affluent areas where the houses are limited value and the homeowners would be able to get a better house by taking the cash and buying an existing house.
So when you weigh things up, the building boom may not be all that big and it certainly will be drawn out over a very long time so that in all it may only counter the loss in activity from businesses that were victims of the quake.
So don't expect big positive GDP numbers in Q3 and Q4.
"The expenditure measure of GDP increased 0.4 percent in the June 2010 quarter.
The production measure of GDP shows the volume of goods and services produced in the economy, while the expenditure measure shows how those goods were used."
Given that GDP increased by 0.2 percent in the quarter, doesn't the above imply that production GDP must have been negative? Which is presumably why Stats NZ avoided giving that figure.
Our meagre 0.2 percent GDP growth is the result of increased expenditure while production measures actually contracted.
Prediction(s):
1) Subdued net inflation contiunes until mid-2011. Deflation rate continues in things we want, e.g. real estate, etc ... inflation exists in things we need, e.g. food, fuel ... Hyper-up/down anything will not occur
2) Fed slowly removes % payment on excess reserves (roughly at 900 b USD), to halt deflation in things we want, which on the down side pushes up prices on thigns we need (2012 picture). M3 moves into +1-5% range p.a. & M1 drops due to movement of cash into fixed assets.
3) USD devalued (bearish) short-term (1 -3 years), commodity currency considered for global trade use. Especially is there is Grand Unified Parity to USD.
4) OCR goes down in 2011 to 2.5% again, then up again in 2012 until at 4.5% at new normal
5) Europe re-structures, PIIGS default not allowed ... the fiat ponzi scheme continues.
6) China/ India over-cook ... BRICs have too much gold doing nothing. Gold is not what it was ... belief that money is gold is over!
7) Isreal strikes Iranian nuclear facilities ... 2017
8) Financial collapse 2107 ... then rebulid money system using clay coins (soil is rare due to over-population, etc ... may be global warming, not induced by humans but because ...
9) In the year 500,000 AD, 99% of population are poor and still remain on earth ... sun expands (from white dwarf) to engulf earth (super giant phase) removing need for social welfare ... the super doper wealthy are exploring the next frontiers using money made from the Unitied States of Earth 1
Cheers,
"The largest decline was in .... and tobacco manufacturing." ..
Quick, take up smoking and help the economy !!
And 0.2% !! Wolly is right.. its dead. The whole thing reminds me of that Monty Python dead parrot sketch ..
Look, matey, I know a dead parrot when I see one, and I'm looking at one right now.
No no he's not dead, he's, he's restin'! Remarkable bird, the Norwegian Blue, idn'it, ay? Beautiful plumage!
This 0.2% increase in GDP (probably inside the margin of error) is equal to about $400million ($200,000M x 0.002 - $100/kiwi peasant)) but the government injected about $3,000M of borrowed money into the economy over this three month period.
That's a bloody good ROI, spend $30 to get a $4 result. When you're in a hole Bill, stop digging.
This is the stuff JKs old mates will be partying over...Kiwi crossed with whatever else you care to gamble on....wonder how much Bolly is sinking into buying Kiwi...kaching...kaching. And we still have the boot up the bum from the quake to come...followed by...wait for it....the mother of all spring storms....Be lucky if the stuffed bird holds the line at 75au....wait till the main markets open up!
How close to recession are we? Are we in recession now?
If that 0.2% had been below zero, we would have been the first country in the world to double dip! How close was that!
Q2 is nearly certain to be negative, so will Q3 be? Given that ChCh is still in post quake shutdown mode rather than post quake rebuild mode as we are about to enter Q3 the chances of a recession are still very high.
Too true Matt. I work for one of the big 4 and we've had our Market's team running around saying quasi-intellectual snippets along the lines of (assume deep voice) "Yes, it's not looking good at the moment but I wouldn't rule out a 50bps hike at the December review".
50bps hike in December. Seriously, WTF?!?
You should see how defensive they get when you actually point out their ineptitude and absolute ability to not guess anything correctly at all. Makes my day very enjoyable.
From the NZMEA:
Economy as unbalanced as ever - 23 September
Poor GDP figures have followed an increase in our Balance of Payments deficit demonstrating that the imbalances that have plagued our economy for decades remain, say the New Zealand Manufacturers and Exporters Association (NZMEA). At 0.7 percent, growth over the past year is still very weak and the return to an increasing Balance of Payments deficit shows that economic rebalancing is simply not happening.
NZMEA Chief Executive John Walley says, “The Government has talked at length about rebalancing the economy towards exports, saving and business investment, but the outcome clearly demonstrates this is not occurring.”
“A high and volatile exchange rate still discourages growth in exports and the lack of tax on assets still encourages investment in property rather than businesses in the traded economy. Consistently our message in the second quarter was that manufacturing was slow, and that overall growth in the economy was much lower than was being predicted by bank economists and the Reserve Bank. There was no reason to lift the OCR and every reason it should have been cut this month.”
“The Government’s approach of procuring the best possible advice before jumping into reforms has been admirable, but the advice must be given effect if things are to change in the economy.”
“This latest set of figures shows that fundamental changes are necessary and playing around the edges is not working.”
http://www.realeconomy.co.nz/112-economy_as_unbalanced_as_ever.aspx
I've little doubt that if we ask Alan Bollard where he got it wrong he'll not respond.
Bernard - you were calling for the hikes to start, where do you think you got it wrong?
Cheers, Les.
Go here:
Read the report 'A Goal Is Not a Strategy'
http://www.nzinstitute.org/Images/uploads/A_goal_is_not_a_strategy_-_Full_report.pdf
Hopefully Bernard will be able to get Rick in for a double-shot interview when convenient.
Deborah Hill-Cone is getting there:
Exports, not fawning over foreign visitors, is what we should focus on.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10675751
Cheers, Les.
Colin Riden;
Not only is GDP being propped up now by government spending for which they are borrowing money, our GDP for most of the 2000's was propped up by PRIVATE spending for which households were borrowing money. Meanwhile, our "tradables sector" shrank 12% - that is, the real engine of the economy from which all future growth and debt repayment are derived.
It is just sickening that the public generally thinks 9 years of Clark and Cullen was an economic boom time. It was a "suckers boom". Pass that term around.
NZ desperately needs a "great communicator" like David Lange was, who will level with the public and say just how bad things are and just how tough policy making is going to have to be. I am disappointed with John Key so far. John Ansell has designed a poster of "John Key catching Australia by 2020" - with his head in the sand. That's actually 99.9% of the population of NZ. John Key is just "one of us", and does not want to spoil the pleasant chit-chat around the barbecue.
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