GDP grew 1.5% in December quarter; Highest growth since December 2009 quarter; Much stronger than expected; Dollar rises

New Zealand's economy grew by 1.5% in the December quarter, according to Statistics New Zealand.

The figure is much better than market expectations, which on average were for a 0.9% increase. The rise is the highest since December 2009. The news sent the Kiwi dollar immediately about US0.5c higher, though it then gradually started slipping back a little.

Economic activity for the year ended December 2012 was up 2.5%. This is the highest annual growth in GDP since March 2008, when the economic recession began.

Westpac economists, who had earlier this week put out a top-of-the-market pick of 1.2% for the GDP growth, said today's figure was "a significant development".

Chief economist Dominick Stephens and senior economist Michael Gordon said markets had long doubted the stimulatory effect of the Canterbury rebuild.

"Those doubts will now be dispelled," they said.

"To put it in perspective, the surprise to the Reserve Bank today is equivalent to the maximum downside impact they could reasonably build in for drought.

"We feel this data is a step towards backing our call for earlier and more aggressive OCR hikes than the market is currently pricing."

Statistics New Zealand's national accounts manager Rachael Milicich said 15 of the 16 industries included in the figures recorded increases in activity in the last three months of 2012, "reflecting the broad-based nature of growth in this quarter".

Finance Minister Bill English welcomed the figures. “Indications are that growth will continue this year as consumer and business confidence rises. A lift in household spending signals that people are feeling more secure and optimistic. We are also seeing a pick-up in construction activity beyond the re-build in in Christchurch and which will flow-through to other parts of the economy," he said.

"“We are on track for 2-3%-plus growth over the next few years, though internationally the problems of high debt and low growth remain and, at home, the impact of the drought is very likely to temper overall growth in the economy."

Those factors make it important for the Government to continue to focus on its Business Growth Agenda initiatives aimed at improving New Zealand’s productivity and competitiveness as a way of fostering job growth and lifting wages. “As we have previously noted, New Zealand is still performing better than most other OECD countries. New Zealand’s GDP growth of 3 per cent in 2012 compares with 1.6 per cent in the US, 1.1 per cent in Canada, 0.4 per cent in Japan, 0.3 per cent in the UK and -0.9 per cent in the Euro area. “We expect our growth to continue as the Government retains tight control of its spending, households and businesses pay down debt, and very low interest rates and low inflation continue their long run.”

The industries with the largest contributions to growth were: agriculture, forestry, and fishing (up 2.6%), mainly due to the largest quarterly increase in forestry and logging activity in 13 years; retail trade and accommodation (up 2.3%), due to the largest quarterly movement in retail trade since the March 2007 quarter; wholesale trade (up 2.1%), now back to pre-recession levels; construction (up 1.8%), due to infrastructure construction, which includes roads, bridges, and power plants.

The expenditure measure of GDP was up 1.4% in the December 2012 quarter. The main features of this growth were: household expenditure on goods and services rose 1.6%, the largest quarterly volume increase in six years; investment in fixed assets rose 2.2%, with increased investment in plant, machinery, and equipment, and infrastructure construction; exports of goods rose 2.1%, with log exports up while dairy exports are down. Imports of goods fell 3.1%, mainly due to capital goods.

Statistics NZ said forestry and logging production grew 9.0% in the December 2012 quarter, the largest increase since September 1999.

"Forestry and logging activity is now at its highest level since the series began in June 1987," Statistics NZ said.

Exports of forestry primary products also rose as measured by the expenditure measure of GDP. Agriculture activity increased 1.5%. This increase was due to increased poultry, deer, and other livestock farming. Partly offsetting this was a fall in dairy production, which is reflected in a decrease in dairy products exported. Mining production also increased, up 5.6%, after a 6.8% fall in the September 2012 quarter. The latest increase was driven by exploration activity.

Statistics NZ has included in its release a section relating to the potential impact of the current drought.

It says that the dry weather that New Zealand is currently experiencing is likely to impact on GDP during the 2013 year. The Government has indicated the drought might cost the economy about NZ$2 billion this year.

Statistics NZ says in GDP, the quarterly indicators for agriculture are outputs such as milk production and slaughter numbers. These numbers are reconciled to annual benchmarks as more comprehensive data becomes available.

"In the current quarterly method, there are no indicators for intermediate consumption (the goods and services used during production) so intermediate consumption is usually updated annually. During periods of drought, the value added of agriculture can be affected by changes to both output and intermediate consumption," Statistics NZ says.

"Output is boosted as animals are sent for slaughter, and declines as production (such as milk production) falls. Output impacts do not always show up during the quarter when dry weather is experienced because the effects can last several quarters. A drought can affect future production, through reduced herds or conception rates. Intermediate consumption can go up as farmers purchase feed to replace grass or move stock to other areas. We will supplement existing quarterly indicators with other available data to measure the impact of the drought, but the full impact will not show up until the more comprehensive annual data is incorporated."

English says factors such as the drought make it important for the Government to continue to focus on its Business Growth Agenda initiatives aimed at improving New Zealand’s productivity and competitiveness as a way of fostering job growth and lifting wages.

He says New Zealand is still performing better than most other OECD countries, with our GDP growth comparing with 1.6% in the US, 1.1% in Canada, 0.4% in Japan, 0.3% in the UK and -0.9% in the Euro area.

“We expect our growth to continue as the Government retains tight control of its spending, households and businesses pay down debt, and very low interest rates and low inflation continue their long run.”