By Alex Tarrant
New Zealand’s economy grew more than twice as much as expected in the first three months of the year on the back of strong manufacturing, agriculture and business services activity.
Figures released by Statistics New Zealand this morning show economic activity, as measured by Gross Domestic Product (GDP), expanded 1.1% in the March quarter from the December quarter.
This was the highest growth rate in any quarter since the March 2007 quarter (also 1.1%), Stats NZ said. It followed growth of 0.4% in each of the previous three quarters.
Economist polls by Bloomberg and Reuters gave expectations of 0.4-0.5% growth. The Reserve Bank had expected 0.4% growth in its June Monetary Policy Statement, while Treasury had forecast 0.5% in its May Budget.
The New Zealand dollar immediately jumped half a cent against the US dollar to US80 cents. However, by 3pm on Thursday the currency had fallen back to about 79.6 US cents.
Economic activity in the March quarter compared with the same quarter a year ago was up 2.4%, Stats NZ said.
Growth in the year to March 2012 compared with the year to March 2011 was up 1.7%. This was equal to annual growth in the year to March 2011.
Manufacturing, business, dairy
“This quarter we saw growth spread across a number of industries, while in previous quarters the industry picture had been more mixed with growth in some industries offset by falls in others,” Stats NZ national accounts manager Rachael Milicich said.
Stats NZ said the main industry contributors to the increase in economic growth this quarter were (production measures):
Manufacturing (up 1.8%), due to increases in primary food manufacturing and metal product manufacturing.
Business services (up 2.0%), which include professional, scientific, technical, administrative and support services.
Agriculture (up 2.3%), mainly driven by an increase in milk production.
“Continued good growing conditions have been a major factor in the growth this quarter, and is reflected in both the milk production in agriculture and in meat and dairy manufacturing, Milicich said.
Exports down, imports up
The expenditure measure of GDP rose 0.8% in the March quarter from December. Stats NZ said the main movements were:
Household consumption expenditure (up 0.1%). The rise this quarter follows a 0.1% increase in the December 2011 quarter.
Gross fixed capital formation (up 1.7%). The largest contributor was a NZ$168 million rise in investment in plant, machinery, and equipment.
Exports of goods and services (down 1.7%). This decrease was mostly due to a fall in exports of travel services, and coal, crude petroleum, ores, minerals, and gases.
Imports of goods and services (up 4.1%). The rise was led by intermediate goods, capital goods, and passenger motor cars all growing strongly.
Finance Minister Bill English:
The economy grew more strongly than expected in the March quarter, despite ongoing economic and financial market uncertainty in other parts of the world, Finance Minister Bill English says.
The 1.1 per cent quarterly increase in Gross Domestic Product took annual growth to 2.4 per cent compared to March 2011, which is better than growth in most other developed countries.
“We are likely to see fluctuations in growth from quarter to quarter, as households and businesses get used to building their incomes around higher savings and earnings, rather than consumption and debt,” Mr English says.
“Today’s numbers confirm moderate underlying strength in the economy, despite the uncertain international mood and difficulties in Europe in particular.”
GDP growth in the March quarter was reasonably broad-based, including manufacturing, business services and agriculture.
“The economy has grown in 10 of the past 11 quarters, after taking account of recent data revisions, since emerging from the recession which started in New Zealand in early 2008,” Mr English says.
“What’s important for the Government is taking a long-term view of building New Zealand’s competitiveness and productivity, which will help us deal with headwinds from the uncertain global environment. That is the focus of our economic plan.”
ASB economist Christina Leung:
GDP increased 1.1% in Q1, stronger than our, market and RBNZ expectations. Annual average growth for the March 2012 year lifted to 1.7%, from 1.3%. The key upside surprises, from our perspective, were in the stronger services activity in the public sectors and professional services industry. Wholesale trade activity was also stronger than the recent release of the Q1 Wholesale Trade Survey suggested. Overall, the stronger activity in these areas points to domestic demand picking up in the NZ economy.
Manufacturing activity increased more than we expected over Q1, largely reflecting stronger food manufacturing. We had expected a boost to this area from a rebound in livestock slaughter numbers, but this boost is greater than we expected.
The other area of upside surprise was in the increase in mining activity, in contrast to the decline in oil and coal production seen in recent activity indicators. StatsNZ attributes the increase in mining activity to greater exploration activity taking place over Q1. The increase in mining builds on reasonably strong increases in the previous two quarters.
On the expenditure side, stronger public sector activity was reflected in stronger than expected spending in the Government sector. This reflected increased activity in both the central and local government. Stock-building also contributed to stronger than expected expenditure over Q1.
Spending in other areas were generally more subdued than we expected, with private consumption increasing only a minute 0.1%, while business investment increased a smaller than expected 2.1%. This downside surprise reflected declines across other construction, land improvement and intangibles areas. A recovery in investment in non-residential construction and plant and machinery over Q1 are in line with the investment intentions indicators showing businesses expect to increase investment over the coming year.
Q1 GDP was significantly ahead of expectations. We wouldn’t rule out some payback coming in Q2 as Q1’s pace is unsustainable and a degree of stock-building went on. The RBNZ’s forecast of 0.4%, which was around the median market expectation, now implies spare capacity in the economy has been eaten up a bit quicker than RBNZ expectations. Interestingly, the RBNZ recently revised down its view on the non-inflationary speed limit of the economy given that capacity pressures had been lifting despite the perception of muted growth. If the RBNZ sticks with its view of a low speed limit then the latest outcome suggests the RBNZ may in future forecast a slightly earlier pick-up in inflation pressures.
Strong historical growth is one thing, but the growth outlook also matters. That outlook remains very murky with Europe a chronic source of risk, and even without that risk we would view NZ’s recovery as only a gradual one. As the RBNZ noted last week, OCR cuts on a marked deterioration in Europe are possible. Greece’s election may be out of the way but the problems among the embattled countries remain as large as ever. We continue to expect the RBNZ to remain on hold until March 2013. Some of the risk of a later start than that have reduced, but Europe will remain the dominant influence on when the OCR goes up – and whether it actually goes down in coming months.
Westpac's Dominick Stephens and Michael Gordon:
- A much stronger result than expected.
- The headline number, growth in production GDP, was much higher even than our above-consensus forecast. The markets responded in kind - the NZD rose half a cent higher, and 2-year swap rates rose 12 basis points.
- Adding to the surprise there has also been another set of revisions to history. Growth is now seen to have been faster over the past year, pushing annual average growth up to 1.7%.
- By sector the upside surprises were broad-based, with no particular standouts, though strength was particularly notable in agriculture, manufacturing, and professional services.
- The surprise notably wasn't in the construction sector - construction GDP contracted by 0.1%, versus our expectation for a 1% increase. In addition Statistics NZ noted that quake-related construction didn't have a significant impact on the outturn.
- The expenditure measure didn't rise quite as much as production GDP, but was still up a very healthy 0.8% over the quarter. For technical reasons we think this might be a slightly better indicator of what growth actually was over the quarter - we will explore this issue in more detail in our bulletin later today.
- The main surprise on the expenditure side was in consumption, which rose 0.1% compared to our expectations for a post-Rugby World Cup fall. But it looks as if this was driven by a massive 16% rise in overseas spending by Kiwis, with an offsetting jump in imports of services.
We will investigate the details and report more fully on the state of the economy in the March 2012 quarter later today.
BNZ economist Doug Steel:
Wowser! Today’s 1.1% Q1 GDP growth blew all forecasts out of the water and certainly the market consensus view that had settled on a 0.5% expansion. And even though we had 0.6% on the board, truth-be-told we were wondering if the outcome might be a bit weaker rather than a lot stronger. Not so.
Moreover, the positive quarterly surprise was reinforced by historical revisions that added a point or two to growth for each quarter of 2011. This helped lift the annual expansion in GDP to 2.4%, compared to market expectations of 1.3%.
Looking across the industries there was no major stand-out surprise, relative to our forecasts at least. Rather, growth was just generally a bit stronger across most components. That makes the overall conclusion the economy genuinely moved forward at a reasonable pace in Q1 a bit easier to believe. Even if the exact pace is debatable (note the expenditure measure of GDP rose 0.8% in the quarter).
At the risk of downplaying the stellar result, there, however, are a couple of cautionary tales in the details.
The first is the large increase in inventories. By our rough calculations the change in inventories added a massive 1.5% to growth in the quarter. Of course, this does not necessarily mean that production growth will peel right back in Q2. It might be firms gearing up for anticipated growth ahead, particularly those connected to the construction sector.
Encouragingly, the inventory build was not universal but concentrated in the manufacturing sector – particularly in the food and beverage and also the metal industries. The inventory build also related to lower export volumes and higher import volumes during the quarter. It could just be timing. While it is difficult to be sure of the drivers, inventory indicators will be worth watching over the quarters ahead because clearly there is the possibility that an over-hang develops. We don’t think we are at that point.
That leads to a second point of caution in today’s figures – relatively weak demand. Household spending growth was again soft, posting its second consecutive 0.1% quarterly expansion, and residential investment (think house building) fell 0.6%.
We anticipate both these components of demand to pick up over the coming year and very strongly in the case of residential construction (as earthquake rebuilding activity gets up a head of steam). That said, to the extent that business optimism about their own activity is based on such an outlook there is some room for disappointment.
Speaking of which, today’s bumper GDP result is a timely reminder to those that were seriously doubting previous business survey activity results as an indicator of what is happening on the ground. We were always a bit wary of discounting the strong survey results, while also acknowledging the risks of very positive expectations not being fully met. Indeed, we have noted on numerous occasions that there were clear upside risks to the prevailing views on the economy based on these surveys while also noting the obvious downside risks from offshore. At this juncture, both risks remain.
Despite the cautions noted above, we still take a considerable amount from today’s result. It strongly supports our long-held view that New Zealand’s economy recovery is well and truly on track.
Indeed, there were even some things that argue the Q1 result might have undersold the underlying performance. For example, the expected hangover from the Rugby World Cup in Q3 and Q4 was evident in the Q1 0.6% contraction in retail trade. This is unlikely to be repeated in Q2. In fact, the indicators are pointing upwards. Also, we wonder if a 3.0% quarterly decline in information media and telecommunications will be repeated, although, it has to be said, this sector and its measurement issues remain a wildcard quarter to quarter.
Overall, while today’s results validate the pick-up story we’ve been promoting, we wouldn’t want to get overly excited by it. Indeed, the balance of details in the Q1 GDP report gives us no reason to change our 0.4% view on Q2 GDP growth, or indeed our medium term growth outlook.
On that we still expect a strong pick up in construction activity from its current very low base (today’s numbers show that construction activity is 25% below its previous peak). Meanwhile we anticipate agricultural production and associated processing to pullback a bit on the expectation that grass growth is closer to normal from the past season’s extremes.
But it is also very important to acknowledge the improved economic standing position. After all, it is the output gap that is important for medium term inflationary pressure and monetary policy decisions rather than what the actual pace of growth is per se.
Following today’s Q1 GDP results we estimate the output gap sits close to zero. That is, there is little spare capacity in the economy, at least on average. This means it will not take much growth to generate domestic inflationary pressure down the track from here.
The RBNZ, in its June MPS, estimated that there was a degree of overall slack in the economy, with an estimated the output gap at 1.1% in March 2012. On a straight mechanical basis, today’s 2.4% annual growth suggests this gap estimate would have narrowed dramatically, given that the Bank gauged current potential growth at around 1.2%. While there are other things to consider, likethe soft looking demand components and world risks, the Bank will be well aware of trying to not repeat its mistake during the mid-2000s boom of under-estimating the degree of excess demand in real time – the likes of which Deputy RBNZ Governor John McDermott talked about in a speech in Hong Kong this week.
That said, we do not think the RBNZ will be reaching for the hike button just yet. But it certainly reinforces that further OCR reduction is not, and in our view never was, required on domestic economy grounds.
International developments still need close monitoring (not only in Europe but not the weak Chinese PMI numbers this afternoon). Just as today’s numbers highlight the potential upside risks to domestic growth, there are still plenty of downside risks lurking offshore.
So, there’s no reason for us to chance our core OCR view. But it is cemented by today’s GDP numbers, and highlights that not all the risks on the tightening cycle are that of further delay. At some point, New Zealand’s interest rates will have to be normalised, to guard against imbalances being sustained, or worsened. We see the first hike in the OCR in March 2013.
We should be clear that although the output gap appears close to zero we still see near term annual inflation being close to 1% in Q2 and Q3. This partly reflects the retreat in food prices from a previous spike and recent very rapid drop in petrol prices. In fact, on our estimates the latest round of petrol price cuts will see annual CPI inflation move very close to the bottom of the RBNZ target band in Q2 and maybe even push below it in Q3.
Of course, the RBNZ should not react to this explicitly as for all the direct and immediate downward influence on headline inflation it also increases household and businesses purchasing power – ultimately lifting demand and upward pressure on prices elsewhere. Well that’s the theory. The RBNZ would really only take note if lower petrol prices were to seriously pull down inflation expectations. While these expectations have come back from uncomfortable highs over recent quarters, they still have a ways to fall to be non-threatening.
Just like the RBNZ did not react to a higher headline CPI figures when commodity prices spiked (and GST was increased), it should not reaction to low headline figures as the commodity cycle swings the other way.
Policy is more about the medium term inflation pressures. And today’s GDP figures, and the ongoing recovery we see, suggest these will be building before too long. They need monitoring, even if it is difficult to tear yourself away from the goings on in Europe and elsewhere.
Labour finance spokesman David Parker:
Growth in our economy is still being fuelled by borrowing with new GDP figures today showing exports down and imports up, Labour’s finance spokesperson David Parker says.
“Annual growth over the last year of 1.7 per cent is weak for an economy coming out of recession, and what growth we are seeing is being paid for by borrowing that the ANZ bank is calling ‘the danger zone’ and the BNZ is calling ‘a very clear risk for New Zealand’s credit rating’.
“The biggest factor in GDP growth is still dairy production. That is good to see, but the economy cannot rely on our dairy herd alone. Even with a strong dairy season we imported more than we exported. Borrowing and our international liabilities are getting worse, not better,” David Parker said.
“For a long time the value of our exports has not covered the cost of our imports and interest bill. Now it’s not even covering imports, and the interest bill is growing much larger.
“We urgently need to modernise the economy with more help for our exporters, universal KiwiSaver, and pro-growth tax reform.
“As the ANZ has commented, ‘Our high investment income deficit and external debt underscore the need to lift nationwide saving’.
“Because we are spending more than we earn and not increasing exports New Zealand is moving into the danger zone,” David Parker said.