By Bernard Hickey
New Zealand's economy grew at its slowest rate in two years in the March quarter as a slump in oil production, dairy output and business investment more than offset strong tourism and household spending.
The result was much weaker than expected and prompted economists to harden their forecasts for another Official Cash Rate cut on July 23. The New Zealand dollar fell sharply back to five year lows and wholesale interest rates eased four to five basis points. ANZ Chief Economist Cameron Bagrie, who correctly predicted last week's first OCR cut, said he now expected a third OCR cut later in the year.
Statistics New Zealand reported GDP grew just 0.2% in the March quarter after a 2.9% fall in farming, forestry and mining output, which was the largest fall since September 2010.
Economists had expected GDP growth for the quarter of around 0.6%, while the Reserve Bank had also forecast 0.6%. It was the slowest quarterly growth rate in two years.
The 0.2% growth was down from a revised 0.7% growth figure for the December quarter. GDP in the year to the March quarter was up 3.2% from a year ago, but GDP for the quarter was up 2.6% from the same quarter a year ago.
"Oil and gas were big factors in the lower GDP growth this quarter. There was less extraction and exploration, as international prices fell," said national accounts manager Gary Dunnet. Mining production fell 7.8%.
Agricultural output also fell 2.3% in the quarter because of the drought and lower dairy prices, but this was offset by a 2.4% rise in retail trade and accommodation spending, driven in part by strong tourism growth linked to the Chinese New Year and the Cricket World Cup. Tourism spending rose by 2.3% during the quarter.
Household spending rose 0.7% in the quarter, while investment spending fell 1.9% as more construction spending was offset by drops in machinery and equipment investment.
Market and economist reaction
The New Zealand dollar dropped sharply immediately after the release of the data, hitting a fresh five year low of 69.06 USc.
It had risen from overnight lows after the FOMC statement suggested US interest rates would rise later this year, but the weaker than expected GDP data increased expectations for rate cuts in New Zealand.
Westpac Chief Economist Dominick Stephens said the weaker than expected GDP figure "seals the case for a July cut from the RBNZ."
"The big surprise was business investment expenditure, which was very weak. This is an ill tiding for the state of business confidence and growth going forward," Stephens said.
He later said the "shocker" GDP data made a third cut likely in 2015 and fourth cut possible.
"We were struck by the weakness in business investment, which doesn’t suggest a great deal of confidence about the economy’s longer-term growth prospects."
ANZ Senior Economist Mark Smith said the weaker than trend growth helped explain why inflation had receded and cemented ANZ's expectation of a July 23 cut to 3%.
"Local and external headwinds are building and we see a sub-trend pace of growth momentum persisting into mid-2015," Smith said.
"With declining pressure on supply-side capacity, more policy support is needed to return low inflation towards the middle of the inflation target," he said.
ANZ Chief Economist Cameron Bagrie later said via twitter:" ANZ now calling two more OCR cuts before year end so 3 in total. We were forecasting July cut after June cut. Now one more later on year."
ASB Chief Economist Nick Tuffley said he now expected the Reserve Bank to cut again in July, rather than his previous view of September.
"The GDP result will swing more forecasters and market participants into focusing on a July cut, increasingly making that move the path of least regret for the RBNZ," Tuffley said.
Political reaction
Finance Minister Bill English said the economy remained strong.
"We are seeing solid, sustainable economic growth that is giving businesses around the country the confidence to invest another dollar and hire another person," he said.
"The lower dairy output was in line with Treasury's forecasts, which see the economy continuing to grow at around 2.8 per cent on average over the next four years. This results highlights that New Zealand is closely tied to international markets, and risks are ever-present."
Labour Finance Spokesman Grant Robertson said the growth was less than half that forecast by the Treasury and signalled rough weather ahead.
“John Key and Bill English made a losing bet that dairy prices would remain strong and they wouldn’t have to invest in other areas of the economy. They got it wrong, and they’ve got no Plan B," Robertson said.
“The Government squandered the opportunities they had in the good times to invest in diversifying the economy, boost R&D, and revitalise the regions. Instead they sat on their hands," he said.
(Updated with more detail, market reaction, political reaction)
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