ASB cuts 3rd quarter GDP growth forecast to 0.2% from 0.5% after weaker than expected manufacturing figures

ASB has revised down its GDP growth expectations for the September quarter from 0.5% to 0.2% after figures for manufacturing production for the quarter came in lower than expected.

Figures released from Statistics New Zealand showed manufacturing sales values increased 1.3% over the quarter from June, due mainly to higher meat and dairy prices. However, manufacturing volumes fell 1.4% over the quarter, which was "much weaker" than expectations, ASB said.

"As a result we have revised down our forecast for GDP growth to just 0.2% over Q3, from 0.5%. However, there remains are large degree of uncertainly over this forecast given the unknown impact of the Canterbury earthquake on some of the service sectors," ASB economist Jane Turner said.

Here are ASB's comments

Manufacturing

Manufacturing sales values increased 1.3%, largely due to stronger prices for meat and dairy.  Once removing price effects, volumes were much weaker than expected.  Meat and dairy manufacturing fell 0.9%, while the remaining manufacturing volumes fell 1.9%.  In addition, it appears that stocks also declined and we estimate that ex-food manufacturing production fell around 2.5%. Manufacturing confidence has steadily eased since June, as uncertainty over the global economic recovery has emerged.  Nonetheless, the extent of the decline in non-food manufacturing was a surprise.  There was no mention by StatsNZ if disruption caused by the Canterbury earthquake contributed to the decline in manufacturing sales.

Building Work

Q3 Building Work Put in Place was in line with our expectations, with volumes contracting 3.2% from the previous quarter. The contraction was largely due to a 5.3% quarterly contraction in the volume of residential construction (ASB f/c -5%).  Non-residential construction volumes were down 0.7% (ASB f/c flat).

Prior to the Q3 contraction, the volume of work done had risen for three consecutive quarters. Overall construction activity remains low: the volume of building work done in Q3 was 22% down on the Q4 2007 peak.  Low residential and non-residential consent issuance over the past 6 months was a precursor to the weakness in building work done in Q3, and the low level of construction activity will continue in Q4.  Repairs to earthquake damage from September’s earthquake in Canterbury is one positive for the outlook.  Some of this work is getting started in Q4, though the bulk of new construction will commence over 2011.

Implications

While construction activity was close to expectations, manufacturing production was much weaker.  As a result we have revised down our forecast for GDP growth to just 0.2% over Q3, from 0.5%.   However, there remains are large degree of uncertainly over this forecast given the unknown impact of the Canterbury earthquake on some of the service sectors.