Surprisingly strong economic growth may persist into March quarter, economist says

Thursday 17th March 2016

New Zealand's run of producing stronger-than-expected economic growth may extend into the first three months of this year as a robust tourism industry and an expanding service sector continue to deliver pleasant surprises.

Gross domestic product rose 0.9 percent in the three months ended Dec. 31, beating the Reserve Bank's forecast for growth of 0.7 percent in the quarter as the central bank underestimated the turnaround in the economy through the second half of last year. On an expenditure measure, GDP climbed 1.1 percent, almost twice that projected in a Reuters poll of economists which also underestimated the 1.4 percent growth in September.

The Reserve Bank anticipates GDP growth will slow to 0.7 percent in the first quarter of 2016 and noted increased pressures on productive capacity through the latter half of last year, even as a growing population, assisted by high net immigration, flooded the labour market.

Darren Gibbs, chief economist at Deutsche Bank New Zealand, said the economy is performing better than what people generally think as housing pressures seep out of Auckland into other regions, and as the labour market continues to generate new jobs even with the extra capacity.

"The risks around that 0.7 have got to be skewed to the upside," Gibbs said. "There is good momentum out there, there's still a lot of confidence. I certainly struggle to get negative about where the economy is heading in the short-term, and we're doing all of this when terms of trade is taking a decent hit."

New Zealand's service industries grew 0.8 percent in the December quarter, and expanded 2.4 percent from the same quarter a year earlier. Retail trade and accommodation rose 1.7 percent in the December quarter, and was up 5.5 percent on the year, while the professional, scientific, technical, administration and support category grew 1.5 percent in the quarter for a 4.3 percent annual move. Construction rose 2.5 percent in December, for a 2.4 percent increase from a year earlier.

Deutsche's Gibbs said the economy is largely relying on construction and the services sector, particularly tourism, which has benefited from a weaker kiwi dollar and cheap oil lowering the cost to travel to New Zealand.

"There's a general level of complacency in regards to inflation. Where's the pressure going to come on? It's going to be in the service sector," he said.

New Zealand's tourism sector lacks major infrastructure and is labour-intensive, meaning it could generate inflationary pressures when it starts to get stretched, Gibbs said.

The Reserve Bank last week cut the official cash rate to 2.25 percent and indicated another reduction would likely come this year as inflation remains below the bank's target band of 1-to-3 percent.

Record inbound migration and its spillover into the labour market have helped stifle inflation by reducing wage pressure and today's figures showed the population grew 0.6 percent in the December quarter, for an annual increase of 1.9 percent. That led to a 0.1 percent fall in real disposable income per capita, following on from a 0.1 percent contraction in September. On an annual basis, real gross national disposable income per capita shrank 0.4 percent.

ASB Bank economist Jane Turner and chief economist Nick Tuffley said in a note the weak per capita number highlighted the vulnerabilities to the economy, and while they expect the Reserve Bank will cut again at its June meeting, the risks are skewed to an earlier reduction.

Gibbs didn't think the bank needed to cut last week and today's GDP report hasn't changed his mind.

"I don't understand why we needed to take the financial stability risk we took last week considering the economy at this point is travelling at a pretty healthy clip, certainly above trend," Gibbs said."The tone of the data has been pretty good, things are moving in the right direction, and here we have the Reserve Bank trying to stomp harder on the accelerator."

The market's initial reaction to the GDP news was to take the kiwi dollar higher, though it's since shed those gains, recently trading at 67.13 US cents.

BusinessDesk.co.nz

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