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GDP likely to validate RBNZ's weaker track for rates

Monday 20th September 2010

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New Zealand’s economy may have expanded less than the central bank forecast in the second quarter and is likely to undershoot in the third quarter, adding to evidence interest rates are on hold for now.

Gross domestic product grew 0.8% in the three months ended June 30, up from a 0.6% pace in the first quarter, according to a Reuters survey of 14 economists. That’s below the 0.9% expansion Reserve Bank Governor Alan Bollard forecast in the September 16 Monetary Policy Statement. The figures are released on September 23.

The economy may have lost some of its momentum in the current three months, after Canterbury’s earthquake sapped activity – a phenomena that will likely be reversed in coming quarters as the region’s reconstruction gets underway. That’s likely to benefit construction, the sector that drove growth in the second quarter.

“At the margin, a result weaker than the RBNZ’s 0.9% forecast would mildly reinforce expectations the RBNZ will remain on hold for the rest for the year,” said Nick Tuffley, ASB chief economist, in a report.

The “huge uncertainties” over the impact of the earthquake mean it would take a substantial surprise in the GDP data to have any meaningful impact on Bollard’s official cash rate decision next month, he said.

Economists expect construction will made the biggest contribution to second-quarter growth after the Building Work Put in Place survey showed a 10.8

Traders expect Bollard will raise the OCR by 66 basis points over the next 12 months, based on the Overnight Index Swap curve. Expectations for further rate hikes plummeted after the central bank’s July 29 decision to raise the OCR a quarter point to 3% while saying further increases would be more moderate than previously flagged.

Manufacturing slid back into contraction last month, with new orders at their lowest level in 15 months, according to the BNZ-Business NZ Performance of Manufacturing Index, which retreated to 49.3.

By contrast, the performance of Services Index, out today, showed a mild pick-up to 51.4, above the 50 level that separates contraction from expansion.

“We expect to see wildly divergent performances across sectors,” said Brendan O’Donovan, chief economist at Westpac banking Corp., in a note. Recent economic data has validated talk of a patchy recovery in the June quarter.

Bollard said this month that the outlook “has weakened since our June Statement” and the earthquake has “significantly disrupted economic activity and is likely to continue to do so for some time yet”.

On September 22, the government statistician is scheduled to release current-account data for the second quarter, which will show the deficit increased to 2.8% of GDP in the three months through June 30, according to a separate Reuters survey.

The current account gap shrank to a 21-year low 2.4% of GDP in the first quarter.

Westpac economists say while the trade balance probably improved of export prices, the investment income deficit probably grew as overseas companies returned to profit for their local investments.

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