Economy grows at half expected pace in Sept qtr; Revisions show June qtr growth cut in half; NZ did have double-dip recession in 2010; But annual growth highest in 4 yrs

By Alex Tarrant

The economy grew at half the expected pace in the three months to September, expanding 0.2% as strong construction activity was offset by a weaker manufacturing sector, figures released by Statistics New Zealand show.

The New Zealand dollar fell on the news, from 83.60 US cents before the 10:45am release, to 83.34 USc at 11:00am.

The quarterly growth was lower than readings in the US, UK and Australia, although higher than the euro-area average and Japan, Stats NZ said.

While economists polled by Bloomberg had given a median expectation of 0.4% growth during the quarter, the Reserve Bank of New Zealand had picked 0.2%, meaning the reading should not have much effect on its interest rate outlook.

But growth in the first half of the year was revised down, with June’s 0.6% expansion halved, due to lower services activity than previously thought (in the waste management, business services and private administration areas).

March’s 1.0% growth was also cut slightly, to 0.9%.

Growth in 2011 was revised up by a combined 0.7 of a percentage point.

Revisions this quarter also showed the economy ‘double-dipped’ into recession during the second half of 2010. September 2010 quarter growth was lowered from a contraction of 0.1% to a 0.3% contraction, while December 2010 quarter growth of 0.0% was lowered to a contraction of 0.3% as well.

The economy exited a six-quarter recession in September 2009.

Annual growth in the year ended September was 2.5%, the highest annual growth since the year to March 2008, Stats NZ said. That compared with growth of 0.8% in the year to September 2011.

Economic activity in the September 2011 quarter was 2.0% higher than in the September 2011 quarter, Stats NZ said. That was the lowest annual quarterly jump since the September 2011 quarter.

The size of the economy, in current prices, was NZ$208 billion for the year ended September 2012, Stats NZ said.

Construction up, manufacturing & agriculture down

Stats NZ said the main movements by industry in the September quarter were:

• Construction, up 4.5%. Residential and non-residential building activities were both up strongly this quarter, and both were boosted by Canterbury. The upper North Island also contributed to the growth in residential building activity.
• Electricity, gas, water, and waste services, up 4.4%, driven by an increase in hydroelectricity generation.
• Manufacturing, down 1.1%, due to a decrease in metal product and food, beverage, and tobacco manufacturing.
• Transport, postal, and warehousing, down 1.6%, due to declines in road and air transport.
• Agriculture, down 2.8%, falling this quarter after higher than usual growth in the first six months of the year.

Meanwhile, the expenditure measure of GDP (also 0.2% for the quarter) showed:

• Household consumption expenditure, which measures the volume of spending by New Zealand households, was flat this quarter (0.0%).
• Investment in fixed assets was down 1.8%. Increased investment in residential and non-residential buildings was offset by a large decline in investment in plant, machinery, and equipment.
• Exports of goods and services (up 4.0%), mainly driven by a 27.7% increase in the volume of dairy product exports.

Annual growth

Annual growth of 2.5% was the highest since the year to March 2008 year.

It was boosted by primary industry growth of 14.4%, when compared to the September 2011 year, Stats NZ said.

“Agriculture was up 23.3% for the September 2012 year, reflecting higher than usual growth in the first half of 2012. Partly offsetting this increase was mining, where activity for the September 2012 year was 2.4% lower when compared with the September 2011 year,” Stats NZ said.

Here's some reaction from economists:

ANZ

At just 0.2 percent q/q GDP was slightly weaker than market expectations (+0.4 percent) but in line with the 0.2 percent RBNZ pick and our own expectation.

· Historical revisions added 3.1 percent to the level of real GDP. However, estimates of (trend) potential output are likely to be revised up by the same amount, meaning limited implications for the Reserve Bank's estimate of the output gap.

· The expenditure-based measure also grew by 0.2 percent. Falling inventory levels bode well for a better Q4.

· Divergence between tradable (down) and non-tradable GDP (up) continues to highlight an unsustainable mix of growth. With the mix of monetary conditions unlikely to change any time soon (rates on hold, currency high) the best NZ can do is to plough ahead with microeconomic reform to stimulate competitiveness and tradable sector performance.

· We’re not jumping to conclusions over softness in Q3. The early part of the year looked overcooked and we’ve seen some payback. Amidst a myriad of structural headwinds and tailwinds, combined with cyclical support (interest rates), we fully expect GDP outturns to remain volatile.

· Growth looks set to remain in a 2 to 2½ percent range. The real issue is identifying the drivers of growth outside of the construction sector against a fickle global and labour market backdrop. This is likely to place ongoing onus on monetary policy support given pending fiscal tightening and the high NZD.

Westpac

Quarterly % change: 0.2% (Westpac forecast: 0.0%, market forecast 0.4%, RBNZ forecast 0.2%) Annual % change: 2.0% (Westpac forecast: 2.1%) Annual average % change: 2.5%

Data summary

September quarter GDP grew 0.2%, and with 0.4% of downward revisions to growth in the first half of this year, the overall picture was softer than market expectations. Annual average growth rose slightly to 2.5%, the fastest pace since the year to March 2008. Growth was hard to come by for the quarter outside of construction, and even that was less than we expected (up 4.5%).

Residential and non-residential building both recorded strong gains, but were partly offset by a fall in infrastructure work. Electricity generation made the only other substantially positive contribution, up 4.4% after a 5.8% drop in Q2. The share of hydro generation, which has a higher value-add, rebounded from markedly low levels in the first half of the year. Agriculture and food manufacturing both fell in Q3. While growing conditions remained favourable, they were less so compared to the stellar first half of the year.

Statistics NZ has made major revisions to the history of GDP, as a result of annual benchmarking, methodological improvements, and new indicators for some sectors. This has lifted the level of production GDP by around 3%; it also appears to have made GDP more volatile compared to the old series, with a more pronounced cycle in the rate of growth over recent years. Implications The result was softer than the median market forecast, reinforced by the downward revisions to the previous two quarters. The NZD fell 30 points to 0.8335 and the two-year swap rate fell 4bps to 2.70% after the release.

However, it was much in line with Treasury and RBNZ forecasts, and certainly fits with the widespread view that Q3 will mark the low point in growth for the year. If we were to take a positive spin on these figures, it would be that the revisions to GDP measurement have made growth quite a bit more cyclical than we previously thought - if +0.2%qtr is the lowest that it gets, that bodes well for some strong recorded growth in coming quarters as the Christchurch rebuild gathers pace.

ASB

GDP increased 0.2% in Q3, softer than our and market expectations. The weaker than expected result reflected payback in many areas of strength seen in Q2, with declines in infrastructure construction and agriculture production over Q3. In addition to the softer than expected Q3 result, there were downward revisions to growth over the first half of 2012. Overall, these results suggest the boost from earthquake rebuilding is not as great as first thought in service sectors and in infrastructure work.

While overall construction activity increased over Q3, there was a decline in heavy and civil construction activity, which mainly consists of spending on infrastructure. This reflects payback from the large increase seen over the previous quarter, perhaps highlighting that some construction projects are quite lumpy. On the expenditure side, this was reflected in the large decline in other construction and plant and machinery investment.

However, rebuilding was reflected in the increase in residential and non-residential construction, in line with the results seen in Q3 Building Work Put in Place data. The increase in building consent issuance recently suggests rebuilding in these areas will continue over the coming quarters. The smaller than expected boost from rebuilding was also reflected in activity in the professional services sector, which was broadly flat over Q3.

In addition, StatsNZ notes downward revisions to services activity drives much of the downward revision to GDP over Q2. While rebuilding has driven demand for professional services, the boost to this sector appears not as strong as initially thought. Another area of downside surprise, from our perspective, was agriculture production. While we had expected a decline from the strength seen over the first half of 2012, this decline was greater than what milk production figures suggested.

To the extent favourable weather conditions conducive to pasture growth boosted milk production over the first half of 2012, production is now easing from these high levels. This drove weaker than expected activity in both the agriculture and food manufacturing sectors. There was a large decline in mining, with StatsNZ noting lower oil and gas extraction activity.

Implications:

The weaker than expected Q3 result, combined with the downward revisions to growth over the first half of 2012, suggest that while rebuilding provided a boost to economic activity this boost is not as great as initially thought. The revisions mean the level of GDP is lower than previously thought and there is consequently a greater degree of slack in the economy. Overall there appears to be much less momentum in the economy than we had previously assumed. We have consequently revised our OCR forecast to expect the first OCR increase in December 2013 (previously September).

We are still wary that the housing market risks triggering stronger inflation pressures than the RBNZ currently anticipates. However, with the NZD likely to hold up, there is the potential the RBNZ uses some macro-prudential tools (capital buffers, core funding ratio, loan-to-value ratios) to try and take some of the heat out of the housing market before first lifting the OCR, which also argues at the margin for a later start.

JP Morgan

The New Zealand economy grew a modest 0.2%q/q in 3Q (J.P. Morgan and consensus 0.4%q/q), with the composition of the report showing the production side hitting a bit of an air-pocket in 3Q in working through some inventory adjustments. It was known heading into the release that export demand was solid in volume terms last quarter, but that mostly was acting to clear a significant backlog of stocks after bumper commodity production in 1H12.

That story was essentially carved into today’s result, with output of primary industries (agriculture and mining) falling, exports on the expenditure side surging, and inventories a very large drag. The surprise relative to our forecasts came in the composition of demand, where the strength in imports was greater than expected relative to its usual sources of non-structures capex and goods consumption. Plant and machinery capex fell a very sharp 17.6%q/q, admittedly after a 10%q/q-plus gain in the prior quarter, but a very large fall nonetheless given that imports were up 2.6%q/q. With goods consumption relatively soft (but in line with our forecast), that left transport equipment capex as the lone channel of cap-ex strength (+10.7%q/q). This was enough to overwhelm the continued acceleration in residential building (+7.4%q/q) and strength in other non-resi building (+12.5%q/q), and pull gross fixed capital formation down 1.8%q/q.

Lastly, fiscal consolidation continues to leave a bigger footprint on the labour market data than it is on government spending in GDP, being growth-neutral in 3Q. On the production side, the drag came from the output of primary industries, which agriculture output down 2.1%q/q and mining down 7.4%q/q. Services output was flat, representing the mixed bag of subdued consumer activity in conventional retail, and continued growth in spending on other services like education, health care, and public administration.

Output of the goods producing industries was robust, up 1.2%q/q, capturing the brisk run-rate of activity in construction (+4.5%q/q) and also utilities (+4.4%q/q thanks to the lift in hydro supply activity that helped depress electricity prices in 3Q). Given that the large mark-down in inventories recorded today leaves the export sector quite well positioned for solid output gains in coming quarters (and the output gauge of GDP is the official one in New Zealand), the real question for the outlook surrounds domestic demand. Today’s release came with revisions, which generally act to make the latter part of 2011 stronger and first half of 2012 softer.

The swings and roundabouts in the revisions pulled down the %oya run rate on growth going into today from 2.6% to 2.5%oya, so are not major, but obviously show less momentum of late. In a sense, this is not surprising given that the data until today had shown essentially no benefit, nor hangover from the Rugby World Cup late last year. The growth outlook continues to be well-supported by building activity, and today’s report if anything consolidates the case that earthquake reconstruction is giving a demonstrable boost to growth. Further, given that this activity is effectively funded through the insurance sector (and in turn by drawdown on offshore reinsurers), there need not be any crowding out of other types of spending.

Nevertheless, the contraction in plant and equipment capex shown today leaves us watchful on broader non-construction capex activity. The RBNZ’s reconstruction narrative requires some spillover to the other elements of domestic demand, including broader business spending and consumption, so that has to turn up at some point for us to conclude that things are on track. In our forecasts, it does so in 2013, and the growth accounting for 4Q similarly is shaping up pretty well so far. Nonetheless we remain watchful on business spending. Today’s ANZ business survey will be interesting on that front.

(Update adds reaction from economists').