NZ GDP grew 0.9% in December quarter and was up 3.1% from a year ago; in line with expectations

By Bernard Hickey

The economy powered ahead in the December quarter, confirming a broadening of momentum and reinforcing expectations of further interest rate hikes later in 2014 and 2015.

Statistics NZ reported Gross Domestic Product grew 0.9% in the December quarter from the September quarter and was 3.1% higher in the quarter than the same quarter a year ago. Economists said the economy was now growing around 3.5% to 4%, which was generating inflationary pressures and would reinforce the need for further monetary policy tightening.

The result was in line with economists' forecasts and slightly above the Reserve Bank's forecast for a 0.8% rise in the quarter.

Manufacturing grew 2.1% in the quarter, driven by higher food, beverage and tobacco processing, along with more machinery and equipment manufacturing, Statistics NZ said, adding manufacturing was at its highest level since March 2006.

"While dairy activity fell this quarter, exports were up strongly, as production from last quarter was sold overseas," national accounts manager Michele Lloyd said.

Wholesale trade, including machinery and equipment wholesaling, increased 3.2% this quarter. Strong machinery and equipment sales increased investment by 7.5%.

Investment in plant, machinery, and equipment was at its highest level since the series began, Statistics NZ said.

The expenditure measure of GDP was up 0.6% in the December 2013 quarter, driven by exports rising 3.1% and household spending on goods and services rising 1.3%.

Household spending rose 3.4% for the year, driven by a 7.4% rise in durable goods spending, which was the largest increase since June 2005.

Economist and market reaction

Economists said the result was in line with expectations, although the New Zealand dollar dropped around 30 basis points to around 85.3 USc and wholesale interest rates fell a basis point or two after downward revisions to third quarter growth figures.

"The scene is set for a strong pace of expansion over 2014 reflecting a large number of supports, including the goods terms of trade at 40-year highs, rising net immigration, and the rebound of pro-cyclical investment after a concerted period of weakness," ANZ Senior Economist Mark Smith said.

Westpac Chief Economist Dominick Stephens said the result was in line with expectations and did not contain any big fishhooks.

"We are in a pervasive economic upswing owing to the Canterbury rebuild, construction activity in Auckland, consumer buoyancy following house price increases, and a four-decade high in the terms of trade," Stephens said.

"Consequently, the Reserve Bank will have to gradually increase interest rates over the course of the year. As interest rates rise, we suspect that the housing market will slow, consumer buoyancy will gradually diminish, and eventually, GDP growth will slow. But this is a process that could take years," he said.

ASB Economist Christina Leung said the third and fourth quarter GDP results were collectively in line with the Reserve Bank's forecasts.

"We continue to expect the RBNZ to hike in April, July and December this year, with another 100bp over 2015 to a peak of 4.5%," Leung said, adding the result reinforced the bank would lift the OCR by a further 25 basis points on April 24.

ANZ's Smith said the figures confirmed a broadening of the economic expansion.

"The growth outlook is not consistent with an OCR of 2.75%, and the RBNZ is set to keep moving the OCR towards less stimulatory settings," Smith said.

"The sustainability of the upswing – and the extent of OCR lifts – will be determined by the extent to which supply side capacity proves able to keep pace with buoyant demand," he said, adding productivity growth figures from earlier this week were encouraging.

"We remain reasonably optimistic that productivity gains are being achieved, and our expectation is for a further 75pbs of hikes over 2014, and a sub-5% peak in the OCR this cycle."

BNZ Head of Research Stephen Toplis said the economy was headed towards a growth rate at a 10 year high.

"Today’s numbers were yet further evidence of an economy that, for now a least, is sitting in a sweet spot but a sweet spot that must surely be accompanied by rising interest rates and a currency at levels that many will find unwelcome," Toplis said.

"The Government must be rubbing its hands with glee at the way the data is panning out and how it will pan out further. In the week before the General Election New Zealand is likely to print its strongest annual growth reading in ten years in the very same week that the current account deficit, as a percentage of GDP, will likely print at just 2.4%," he said.

"We reckon today’s data is further ammunition to support rate hikes at each of the next three RBNZ meetings as the Bank tries to get rates back to neutral as soon as possible."

Political reaction

Finance Minister Bill English said the figures showed the Government's economic programme was on the right track with growth of 2.1% in the second half of calendar 2013.

"Providing we stick with the Government's successful programme, New Zealanders can lock in the economic gains we're starting to see through more jobs and higher incomes," English said.

"Business and consumer confidence remains high, manufacturing activity has been expanding for almost a year and a half and the current account deficit is less than half of what it was five or six years ago," he said.

New Zealand's 0.9% growth was strong by the standards of other developed countries, comparing with 0.6% in America, 0.7% in Britain and Canada, 0.8% in Australia and 0.2% in Japan, English said.

"We are making good progress but we need to remain  focused on making the enduring structural changes needed for New Zealand to reach its economic potential," he said.

"Now is certainly not the time to put all of this at risk with untried experiments such as going soft on inflation through changes to the Reserve Bank Act or reverting to big-spending and ineffective policies that have failed in the past."

Green Party Co-Leader Russel Norman questioned whether New Zealanders were feeling the stronger economic growth.

“There’s an increasing sense in New Zealand that the benefits of growth under National are not being shared fairly,” Norman said.

“Wages are not keeping up with inflation meaning most New Zealand families are finding it harder to make ends meet. Looming interest rate hikes and on-going power price hikes will leave even more Kiwis falling further behind despite working harder," he said.

“House prices are rising rapidly resulting in falling rates of home ownership. GDP is up but increasing numbers of our children are falling into poverty under National’s economic leadership."

Norman said GDP still had a role to play, but should no longer be regarded as the only metric to measure progress.

“The current growth of GDP does not capture the rapidly declining quality of water in our rivers and lakes or the growing levels of inequality in New Zealand. Until we start measuring what we actually care about, we’ll continue to promote GDP growth over actual human thriving and happiness," he said.

(Adds economist, market and political reaction, details)