GDP up 0.9% in Sept qtr and up 2.3% from year ago as services, cow culling surge; Real Gross National Disposable Income per capita down 0.4% for year after 1.8% rise in population and weaker terms of trade

By Bernard Hickey

Overall economic growth bounced back in the September quarter after a slow start to 2015, but it was reliant on tourism and strong population growth and inflation remains subdued enough to keep interest rates lower for longer.

Per capita income fell after the population rose 1.8% and higher import prices reduced the purchasing power of incomes, reinforcing the risks the economy is growing in an income-lite and inflation-lite way.

GDP rose 0.9% in the September quarter and was up 2.3% from a year ago as legal and accounting services expanded strongly and manufacturing grew at its fastest rate in almost three years.

The jump in manufacturing was driven partly by extra culling of cows by loss-making dairy farmers and services sector growth of 0.9% for the quarter was helped by a fast-growing tourism sector. Cconsumption spending by non-residents grew 31% in the September quarter from a year ago to a record high NZ$2.6 billion.

The 0.9% growth in GDP was slightly stronger than the 0.8% consensus forecast from economists, although the 2.3% annual rise was in line with expectations after the June quarter growth was revised down to 0.3% from 0.4%. It was the slowest annual growth rate since the December quarter of 2013, but the quarterly growth was higher than the Treasury and Reserve Bank forecasts for a 0.6% rise.

The bounce-back from growth of 0.2% and 0.3% in the March and June quarters was helped by a surge in population, tourism and included a 10.3% rise in meat manufacturing for the quarter. Dairy cows slaughtered in the September quarter rose 90% from the same quarter a year ago to 182,000. Construction spending surprised by falling 2.9% for the quarter due to lower civil and heavy construction.

The New Zealand dollar rose around 20 basis points to 67.9 USc, having already risen the same amount after the US Federal Reserve's first rate hike in almost a decade at 8 am.

Spending power per capita down

Statistics New Zealand's measure of Real Gross National Disposable Income (GNI) per capita fell 0.2% in the September quarter and was down 0.4% in the year to September after the population rose 1.8% to 4.577 million.

The fall in real GNI per capita also reflected a 3.7% fall in New Zealand's terms of trade as import prices rose more than export goods prices.

Expenditure-based measures of GDP per capita in current prices rose 0.2% for the quarter, but rose 0.4% in real terms. Expenditure-based GDP per capita in current prices was up 0.9% in the year ended September from a year ago, while real GDP per capita was up 1.1% .

The implicit price deflator, which is another way to measure inflationary pressures, fell 0.6% to 1109 in the quarter and was barely up from the 1105 reported for the September quarter of 2015, reinforcing the disinflationary pressures in the economy that the Reserve Bank faces.

Economist reaction

Westpac Senior Economist Michael Gordon said the growth was in line with Westpac's expectations and represented 'payback' for the weaker than expected growth in the first half.

"The growth was domestically-focused this quarter, with weakness in agriculture but strong gains across manufacturing and a range of services. The main sour note was an unexpectedly large fall in construction, related to the lumpy civil components," Gordon said.

"We caution that solid GDP growth needs to be seen in the context of very strong population growth. The pace of GDP growth has slowed in per capita terms, and low inflation and rising unemployment indicate that the economy has been operating with increasing spare capacity," he said.

First NZ Economist Chris Green said the slightly stronger tone to the GDP data at the margin was likely to increase the RBNZ’s comfort in keeping interest rates unchanged at 2.5% over the whole of 2016.

"The slightly more robust tone to these GDP data can be expected to help ally some of these downside concerns," Green said, noting however that risks for the OCR remained "skewed to the downside."

"Looking further ahead, while we expect the NZ economy to be supported by reasonably robust housing market activity, high net migration, strong in-bound tourism numbers and supportive interest rate settings, the likely headwinds of below average dairy prices, rising unemployment and heightened El Nino drought risks, suggests a GDP growth profile around the 2.0-2.5% region over the year ahead," he said.

ASB Senior Economist Jane Turner said there was some encouraging signs of resilience in the data, "but once accounting for population growth, momentum is lacking."

"We continue to expect two further OCR cuts next year, but RBNZ may take some time to swing toward our view," she said, noting ASB still saw the Reserve Bank having to cut the OCR by a further 50 basis points from June next year to 2.0%.

"The RBNZ may want to be mindful that despite peak annual growth of 3.7% over the past year, inflation pressures remain very muted," she said.

"On a per capita basis, growth has been very subdued.  If it were not for strong tourist activity the NZ economy would be in a vulnerable position as NZ heads into a dairy-sector downturn."

ANZ Senior Economist Mark Smith said the data confirmed momentum had strengthened after a sluggish first half, but risk was still skewed lower for the OCR.

"The economy is on a stronger growth trajectory and we have some optimism looking into 2016, but some recoil is to be expected given the impact of a likely dry summer on agricultural and food manufacturing and the recent weakening in housing market activity," Smith said.

"Today’s solid data is consistent with a period of stability in the OCR. But given the inflation backdrop, the risk profile is skewed to the downside. We are paying close attention to five things: the NZD, global funding markets, China and export prices, our Monthly Inflation Gauge and domestic credit growth. If combinations of these factors begin to shift, then a lower OCR next year could well be still on the cards," he said.

BNZ's Doug Steel saw signs of growing consumer inflation in the national accounts, pointing to a quarterly rise of 0.6% in the personal consumptione expenditure (PCE) deflator, up from 0.3%  in the June quarter and deflation of 0.2% in the March quarter. The PCE rose 1.0% from September 2014. Although he also pointed to the strength in the New Zealand dollar today that puts the TWI at 73.6, which is 6.0% above the Reserve Bank's forecast for the March quarter of 2016 of 69.4.

"Other things equal, this would reduce around 0.6% off the Bank’s eighteen-month-ahead inflation forecasts," Steel said.

"Speaking of inflation, while it is clearly low at present it was interesting to see the private consumption expenditure (PCE) deflator in today’s national accounts tick upwards. While the PCE deflator is conceptually different to the CPI, it is another gauge of consumer price inflation and it just snuck up to the bottom of the CPI target band," he said.

Political reaction

Finance Minister Bill English said the figures showed the Government was on track to deliver more jobs and further wage increases.

"It is clear the economy was softer than expected in the first half 2015 on the back of lower dairy prices. But New Zealand is a confident, open economy that responds quickly to international fluctuations - and we are seeing that in the more positive performance that has occurred since July," Mr English says.

"Of course risks remain - particularly with a potentially significant El Niño cycle over the summer. Treasury has factored in an impact of 0.3 per cent of GDP, but the final result could be larger," he said.

Labour Finance Spokesman Grant Robertson pointed to the fall in economic growth over the first nine months of 2015.

“Per capita GDP still remains lower now than it was at the end of 2014. This shows many Kiwis are not getting ahead under this Government. It is why employment is falling and unemployment is rising," Robertson said.

“Although some headline figures in today's GDP numbers appear encouraging, the details show the economy is struggling to keep up with population growth," he said.

“The economy is meant to work for people, not the other way around. Along with unemployment at six per cent and rising, this emphasises the fact that this is a job-‘lite’ recovery. Growth in jobs and incomes are not meeting the needs of New Zealand workers or businesses. National's Plan A is clearly failing New Zealanders. Bill English has now admitted Plan B is needed, but the lack of urgency from the government is letting New Zealand down."

Green Co Leader Metiria Turei said relying on migration to drive GDP growth was not a sustainable way to grow, adding that unemployment had averaged 6.3% under the National Govenrment while it had averaged 4.6% under the Labour Government of 1999 to 2008.

“The National Government will settle for short-term growth of any kind, happy to expand polluting industries like oil mining and dairying without any kind of plan about how to pay for the long term costs these industries are causing to our air, our climate, and our fresh water," Turei said.

“Not all GDP growth is necessarily good or sustainable. We should ensure polluters pay for their mess and invest in industries that are clean and sustainable," she said.

(Updated with more detail, picture, charts, economist and political reaction)