By Alex Tarrant
New Zealand’s economy is in better shape than was thought, with economic activity rising 0.8% in the March quarter, double market expectations, figures released by Statistics New Zealand show.
Reuters and Dow Jones Newswires surveys of economists put the median expectation for GDP growth at 0.4% in the March quarter from December, while a Bloomberg survey pointed to growth of 0.3%.
The New Zealand dollar jumped sharply following the figures, touching 85 US cents from 84 US cents just before the release. Economists hardened their forecasts for a hike in the Official Cash Rate as soon as December. Some suggested an earlier rate hike and a larger first rate hike was now possible.
The Reserve Bank of New Zealand and Treasury had both picked quarterly growth of 0.3%, meaning expectations for the next hike in the Official Cash Rate should lean further toward a 25 basis point hike in December 2011 as opposed to March 2012.
Meanwhile, the slump in economic activity from March 2010 was not as bad as initially thought, with Stats NZ revising growth figures from June to December upward. June quarter GDP growth was revised from 0.1% to 0.2%, September quarter from negative 0.2% to negative 0.1%, and December activity from 0.2% to 0.5% growth.
Annual figures show GDP grew 1.5% in the year to March 2011, above expectations of 1.2% growth.
Manufacturing activity led the way in the March quarter, rising 3.6%. Large increases were seen in machinery, metal product, and food and beverage manufacturing, Stats NZ said.
Real estate and business services activity also helped push up the headline figure, rising 1% over the quarter due to increases in business services activity. Wholesale trade rose 1.5%, its sixth consecutive increase, Stats NZ said.
The biggest downside to growth came from construction activity, falling 4.3% over the quarter due to decreases in both residential and non-residential building.
Statistics New Zealand had delayed the release of March GDP figures as it sought to ensure it had properly taken into account the effects of the February 22 earthquake in Christchurch. In a release, Statistics New Zealand said that additional analysis showed GDP was being measured accurately at the national level, despite the disruptions in Canterbury.
Finance Minister Bill English said the GDP figures came amid signs the pace of the recovery was picking up.
“The Government has moved swiftly to provide financial certainty for rebuilding Canterbury, and this will have a positive impact on the economy as this work gets underway," English said.
“The rebuild, along with near record commodity export prices, interest rates at 40-year lows, improving business and household confidence, lower household debt and the upcoming Rugby World Cup, give us confidence in the outlook for New Zealand’s economy," he said.
“We’re also confident this recovery will be built on a sound platform of higher savings, exports and productive investment, rather than the excessive borrowing, consumption and government spending of much of the past decade.
Earlier and bigger rate hike?
ANZ economists said the result was much stronger than the market and the Reserve Bank had forecast.
"There were also upward revisions to historical data. In combination with the stronger than expected Q1 GDP outturn this implies the level of economic activity is far higher (1.1 percent) than the RBNZ assumed in June. · Though the Q1 GDP data is dated (we are now at the start of Q3 after all), it still has important implications for monetary policy. December remains our core view for the first rate hike. But the risks of a 50bp hike first up, or even an earlier move, has risen," ANZ said.
Westpac economists said economic activity was responding to low interest rates, high commodity prices, stable house prices and some inward migration.
"For the RBNZ, evidence of a robust economic recovery, combined with a resurgent housing market and high inflation expectations, strengthens the case for resuming rate hikes," Westpac Chief Economist Dominick Stephens said.
"Our view remains that the next OCR hike will be in December this year, subject to how market conditions pan out in coming months. The high exchange rate will do some of the work in containing inflation pressures, and a range of unresolved sovereign debt concerns in the Northern Hemisphere could still prove to be a spoiler for the global recovery," Stephens said.
RBNZ behind the curve?
BNZ economist Craig Ebert pointed out the GDP figures showed the economy is about 1.5% stronger than the Reserve Bank expected when it cut the Official Cash Rate on March 10 to 2.5% from 3%. He also said the hit to confidence from the February 22 earthquake was only temporary and was now strong again.
"So, we have to ask, what is the justification now for continuing to run with the record-low OCR of 2.50%, particular with accumulating risks of rising inflation, let alone the way an unduly low cash rate will delay the rebalancing process the macro-economy still needs to adopt?," Ebert said.
The Reserve Bank may point to problems overseas and the stronger New Zealand dollar as factors helping to control inflation, thus delaying the need for an early Official Cash Rate hike, economists said.
Ebert said markets now sensed the Reserve Bank was 'late' or behind the curve in raising rates.
"The “solution”, in this context, is for the RBNZ to get back “on the curve” in order to guard against a re-stretched economy with attendant core inflation pressure. We certainly believe the Bank should soon reduce its OCR stimulus, in the least, near term, the 50 point “insurance cut” it put in place just after the 22 February earthquake," he said.
"However, we also believe the RBNZ will probably drag the chain, once again, until it is eventually forced to play catch-up. This is why we have simply retained our outlook on the OCR – of a 25bp hike in December, beginning a steady string of similar increments at subsequent meetings, with a 5.00% peak in mind for early 2013. At the same time, however, we need to increase our risk assessment of the stimulus-removal process beginning earlier than December, and with some of the near-term adjustments being in 50-point licks rather than 25."
ASB's economists said they now expected the RBNZ to lift the OCR in December, having previously forecast a January hike. "There are still many risks out in the global environment, particularly the escalating European debt crisis. But, barring flare‐up of the crisis to the point that NZ gets adversely affected, we expect the growing confidence in NZ’s recovery will prompt the RBNZ to act sooner," they said.
(Updates with NZ$ reaction, English comments, ANZ, ASB, BNZ, Westpac economist comments, link to Economic growth chart here and below)