By Alex Tarrant
Economic activity in New Zealand expanded by a worse-than-expected 0.1% in the June quarter from the March quarter, as strength in the services and agriculture industries was offset by falls in construction and manufacturing activity, GDP figures released by Statistics New Zealand show.
The data reinforced forecasts by economists that the Reserve Bank could afford to leave the Official Cash Rate on hold at a record low 2.5% until the March quarter of next year at the earliest.
The weak quarterly figure followed better growth in the March 2011 and December 2010 quarters than first published, with GDP growth in the March quarter revised up from 0.8% to 0.9%, and growth in the December 2010 quarter revised up from 0.5% to 0.6%.
Annual figures show GDP rose 1.5% from the June 2010 quarter to June 2011, following a rise of 1.7% in the year to the March quarter. Annual GDP has now expanded for seven consecutive quarters from the December 2009 quarter.
The median economist expectation had been for a 0.5% rise in GDP over the June quarter, according to a Reuters survey, which ranged from
negative 0.1% growth to 1.0% growth.
Of the big four banks, ASB had forecast 0.1% growth, BNZ 0.2%, and ANZ and Westpac had both forecast 0.7% growth. The Reserve Bank, in its September Monetary Policy Statement, forecast 0.6% growth for the June quarter, which would rise to 0.8% in the September quarter and 1% in the December quarter of 2011.
However BNZ economist Stephen Toplis said before the release that, to be fair to the Reserve Bank, its forecast was probably finalised before the release of the weak building work and manufacturing data from a couple of weeks ago, and before disappointing mining data released last week by MED.
Treasury’s forecasts are less timely, as they were finalised before the May Budget. They built in an expectation of 0.8% growth for the June quarter, although they had forecast a 0.3% contraction in the March quarter, while the headline figure came in at a 0.8% expansion.
Up and down
Stats NZ said in the June 2011 quarter, the notable movements in volume by industry were in:
- Finance, insurance, and business services (up 1.5%), due to an increase in business services.
- Agriculture (up 4.3%), due to increases in volumes of milk and wool.
- Construction (down 4.3%), due to decreases in construction services and residential construction.
- Manufacturing (down 0.1%), following two quarters of strong growth.
Meanwhile, Stats NZ said real gross national disposable income (RGNDI), which is a measure of the goods and services New Zealanders have command over, increased 2.8% for the year ended June 2011, while GDP rose 1.5%.
“The difference between GDP growth in the year to June 2011 and the growth in RGNDI is mainly due to the terms of trade, which reached a 37-year high in the June 2011 quarter. A high terms of trade means that New Zealand's export prices are rising faster than import prices,” Stats NZ said.
The expenditure measure of GDP also rose 0.1% in the June quarter from March, with the main movements in the expenditure measure being:
- Imports (up 1.7%) – intermediate goods imports was up 13.1%.
- Household consumption expenditure (up 0.3%) – household expenditure on durable goods was up 1.1%, partly offset by a 1.3% decrease in nondurables.
- Exports (down 0.5%) – exports of services decreased 5.8%, partly offset by a 0.4% increase in exports of goods.
- Gross fixed capital formation (down 0.4%) – decreases for transport equipment and residential building were the largest contributors to the fall, partly offset by an increase in plant, machinery and equipment.
- General government final consumption expenditure (down 0.1%) – a decline in local government expenditure was partly offset by a rise in central government expenditure.
In the year to the June quarter, in which GDP rose 1.5%, the largest movements were a 9% rise in agriculture activity, followed by a 5.7% rise in manufacturing, while the largest falls were a 10.3% fall in fishing, forestry and mining, and a 10% fall in construction activity.
Finance Minister Bill English said economic growth in the first half of 2011 was greater than Treasury expected:
The economy grew faster than forecast in the first half of 2011, but lower than expected growth in the June quarter shows the recovery remains patchy across different sectors, Finance Minister Bill English says.
Statistics New Zealand today confirmed Gross Domestic Product increased 0.1 per cent in the June quarter, following a revised 0.9 per cent rise in the March quarter. This took annual growth to 1.5 per cent in the year to June 30.
“It’s important to remember that in the current environment the figures will jump around from quarter to quarter,” Mr English says. “The Government’s focus is on building faster and more sustainable growth in the long-term.
“The economy has now grown in eight of the past nine quarters and economic growth in the first six months of this year has totalled 1.0 per cent – ahead of Treasury’s Budget forecasts of 0.5 per cent growth for the six months.
“As the Reserve Bank noted in its Monetary Policy Statement last week, New Zealand’s domestic economy is performing relatively well on the back of strong export commodity prices, stabilising household debt and rising business and consumer confidence.
“However, we still face challenges. The global financial markets, from which we borrow, are increasingly volatile and New Zealand exporters face a headwind from the high Kiwi dollar.
“These challenges reinforce the need for New Zealand to get on top of its longstanding reliance on foreign debt and to build faster, more durable growth based on higher domestic savings and productive investment.
“These features will remain the core focus of the Government’s economic programme,” Mr English says.
Meanwhile, Labour finance spokesman David Cunliffe said the figures showed the economy was going nowhere:
Today’s shockingly bad quarterly growth figures reveal a New Zealand economy that is at a standstill or going backward, says Labour Finance spokesperson David Cunliffe.
David Cunliffe said the GDP rise of just 0.1 per cent in the June quarter had occurred despite a 30-year high in commodity prices. “The 0.1 per cent figure is less than population growth, and GDP is 2 per cent below where it was when National took office.
“The ‘she’ll be right’ complacency of the National Government, despite on-going under-performance, is gob-smacking and poses high risk to our future,” David Cunliffe said.
“Rather than blaming earthquakes, foreign markets and previous governments, it’s time National fronted and took responsibility for the malaise in the economy. National is missing in action in helping to develop regions, and there is no sense of a strategy for developing sectors such as forestry, fisheries or manufacturing, to name a few.
“Meanwhile, the Government is still sending short-term, cost-based contracts offshore, as in the case of the Hillside workshops, while laying off Kiwi workers,” David Cunliffe said.
“Despite billions of dollars of insurance money flowing into Christchurch, the rebuild is already behind schedule. The lack of skills training is so bad the Government is already planning to import overseas workers despite unemployment doubling under its watch.
“Kiwi families are paying the price for this shocking under-performance through longer dole queues, lower wage rises and increased stress as the cost of living skyrockets.
“Labour won’t stand by and let this continue,” David Cunliffe said. “Labour will be hands-on, working alongside business to front the tough issues that must be faced, including:
· Addressing through monetary policy the over-valued and volatile exchange rate.
· Closing tax loopholes to pay off debt without selling SOEs.
· A strong savings policy to grow a pool of local investment capital.
· An active regional and sector economic development strategy.
· More investment in infrastructure.
· Greatly expanded skills training and youth employment programmes.
“Labour is in a hurry to grow the pie for all New Zealanders,” David Cunliffe said. “Today’s shocking figures are an indictment of an economy going nowhere, and a government without a clue.”
ASB economists said the figures should not affect the Reserve Bank much, as the RBNZ had already indicated it was expecting a lower figure than its 0.6% forecasts. ASB continued to expect the Reserve Bank to first hike the OCR in March 2012 by 50 basis points and for the OCR to peak at 4% by end-2012.
Q2 GDP expanded just 0.1% over Q1, in line with our forecast, although weaker than the market expectation of +0.5%. The softer growth follows the previous quarter’s 0.9% increase. Averaging through the volatility, the economy recorded respectable growth of around 0.5% per quarter. This is still a robust performance, given the disruption caused by earthquakes in February and June. Nonetheless, the pace of growth has disappointed, appearing slightly less impressive than initially thought.
Overall, the breakdown of activity was in line with our expectation, with no major surprises. Strong end-of season dairy production, a lift in housing turnover and strong growth in retail volumes underpinned growth, offset by weakness in construction, wholesale trade and communications. The Q2 GDP result highlights that some pockets of weakness remain in the economy.
Underpinning a large contribution to Q2 growth, a pick up in house sales activity underpinned strong growth in real estate and business services. Meanwhile, growth in finance and insurance, although relatively subdued, was also slightly stronger than we expected.
The buoyant lift in retail activity over Q2 also added to momentum. Over the first half the year, growth in retail volumes has been surprisingly robust, with strength relatively broad based across regions. Nonetheless, there was likely an element of earthquake damage replacement contributing to Q2’s retail strength. Over the coming quarters, this area will benefit from a huge lift in activity due to the influx of overseas visitors arriving for the Rugby World Cup tournament.
Good grass growing conditions helped extend the dairy season over Q2, propelling agricultural growth by 4.3%. This strength largely reflects a stronger than usual performance at the end of season (which is typically a low production period).
However, activity in the remaining primary industries was weak, with declines in fishing and mining output, along with stalled growth in forestry activity.
Much of the weakness in GDP was centred in construction and wholesale trade activity, as already foreshadowed in data released earlier in the month. Construction contracted 4.3%, with the weakness led by a sharp decline in residential construction. We continue to expect residential construction will stabilise over the rest of 2011, before lifting strongly over 2012 and 2013 on reconstruction activity.
Core manufacturing activity growth slowed over Q2, following robust growth over the previous 2 quarters. The outlook for manufacturing remains relatively upbeat, and we expect to see continued, albeit more modest, growth over the coming year.
Communications remained an area of weakness, falling 1.6% due to declines in telecommunication activity and postal services. This has been an area of chronic weakness over recent years. Measurement issues within the telecommunication and internet usage are likely to be underestimating activity. Meanwhile, postal activity appears to be suffering from long-run trend decline.
Business investment increased 1.3% in Q2. As expected, there were sharp declines in the lumpy transport component. However, this was offset by strength in other areas. Other Construction picked up 7.7%, following on from the previous quarter’s 3% increase. This is likely to be related to earthquake repairs on infrastructure. Encouragingly, there was also a 4.7% increase in plant and machinery equipment investment. Business confidence surveys have shown an improvement in sentiment in recent months. Firms’ investment intentions point to a continued recovery in business investment over the coming year, as businesses become more confident about the recovery in demand ahead and look to expand operations.
Exports were slightly weaker than expected, largely due to a sharper than expected decline in exports of services which fell 5.8%. This was largely due to a decline in visitor numbers as a result of the February earthquake and June’s ash cloud travel disruption. Over the second half of the year, we expect exports of services to be a key driver of growth, with increased visitor numbers due to the Rugby World Cup.
Looking ahead, over the second half of 2011 Rugby World Cup related activity will underpin GDP growth. Moving onto 2012, we expect the recovery in underlying demand to become more apparent. Earthquake reconstruction activity should also add to activity from the second half of 2012.
There are few fresh implications from this number for monetary policy. The RBNZ had indicated that data subsequent to the finalising of its MPS forecasts meant the outcome was likely to be lower than its published 0.6% forecast. Moreover, the pivotal influence of global debt issues meant the RBNZ was already unlikely to lift interest rates this year. We see the GDP release as merely reinforcing the apparent lack of urgency the RBNZ has to lift rates.
Given widely-held expectations that GDP will be materially stronger in the second half of 2011, we don’t believe the outcome will materially affect the RBNZ’s view of NZ’s recovery. The RBNZ’s growth outlook has swung from being at the optimistic end to (in the September MPS) the conservative end of the range of expectations. Our own forecast for Q3 GDP remains the same at 1%, and followed by 1.3% in Q4, boosted by the Rugby World Cup. Beyond that, we would characterise the growth outlook as gradual.
We continue to expect that the RBNZ will wait until March 2012 to lift the OCR by 50bp and for the OCR to peak at 4% by end-2012.
Westpac economist Dominick Stephens' initial reaction was one of surprise:
This data was significantly weaker than we or the Reserve Bank anticipated. Clearly, there is now less pressure to increase the OCR.
It is odd that such a weak growth read should pop up at a time when the broad swathe of capacity and confidence measures were clearly tightening. Business and consumer confidence was rising, labour was becoming more difficult to find, and firms were more likely to report capacity as the limiting factor to expansion, rather than demand. We will investigate this dichotomy (perhaps Q1 growth was overstated?), but at this stage we are more likely to consider this weak read as a pothole rather than a renewed broad-based economic slowdown.
The NZD fell 70 pips touching a low of 79.89, and the 2-year swap rate fell 5 basis points.
ANZ economists said they still saw the economy better placed to weather downside risks stemming from the global environment:
The NZ economy barely expanded in the second quarter of 2011, with the 0.1 percent increase in activity considerably weaker than market or RBNZ expectations. The NZD and market interest rates fell in response.
The production-based GDP measure showed wide sector divergences. Manufacturing, construction and mining subtracted from growth, offset by strength in agriculture and business services. Construction was especially weak, as expected, subtracting 0.2 percentage points off growth.
The expenditure measure of GDP also increased 0.1 percent, with large sector divergences also apparent. Net exports were far weaker than expected, with residential investment also weak. A 0.7 percentage point contribution from inventories was the major positive offset.
Q1 GDP growth was revised up to 0.9 percent (from 0.8 percent). Our take is that the underlying momentum in the economy in the first half of 2011 was around 2 percent per annum, consistent with our view of annual trend growth.
We still see the economy better placed to weather the downside risks stemming from the global environment. While we expect to see a much improved performance over the second half of this year, boosted by the Rugby World Cup, any impact from a weakening global economy will be an end of year and early 2012 story.
(Updates with English, Cunliffe reactions, chart, ANZ, ASB, Westpac, BNZ reactions, corrects Reuters expectation range)