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UPDATE: Tepid fourth-quarter growth adds to view rate hikes a long way off

Thursday 16th March 2017

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(Recasts lede, adds comment from economists) 

New Zealand’s economy expanded less than expected in the fourth quarter, firming up the view that the central bank is likely to keep interest rates on hold for some time to come. 

Gross domestic product expanded 0.4 percent in the three months ended Dec. 31, following a revised 0.8 percent increase in the September quarter, Statistics New Zealand said. Economists had tipped growth quarterly growth of 0.75 percent in a BusinessDesk poll and the central bank had forecast growth of 1 percent on quarter. The economy grew 2.7 percent from the same period a year earlier.   

The New Zealand dollar fell to 70 US cents from 70.37 cents immediately before the data release and recently traded at 70.08 cents.  

For the Reserve Bank the data will come "as a low blow heading into next week's OCR review," said Kiwibank chief economist Zoe Wallis. "Following today's data we remain comfortable with our view that there is no rush to raise the OCR anytime soon," she said. Economists are widely expecting the central bank to keep rates on hold next week with most not expecting any rate increases until late 2018. 

In February the central bank kept the official cash rate at 1.75 percent and signalled increases from mid-2019.

Today's data "means a softer starting point for activity and less pressure on capacity (and thereby domestic-led inflation pressure) than assumed in the February monetary policy statement. This reaffirms our view that the Reserve Bank will keep the OCR on hold for a prolonged period," said Westpac Banking Corp economist Sarah Drought. 

However, while growth was softer-than-expected "some temporary weather-related influences had a clear impact so we need to be cautious about extrapolating trends. The underlying pace of growth is better than these figures suggest," said ANZ Bank New Zealand senior economist Philip Borkin. 

“Growth in service industries was partly offset by weaker activity in primary industries also flowing through into manufacturing,” Statistics New Zealand national accounts senior manager Gary Dunnet said. The services sector expanded 0.7 percent while activity in the primary industries fell 1 percent.

Agricultural activity fell 0.6 percent, due to lower milk production while forestry and logging activity decreased 5.1 percent and mining activity fell 2.3 percent in the December quarter.

Activity in goods producing industries fell 0.3 percent on the quarter, with manufacturing down 1.6 percent due to decreased food, beverage and tobacco product manufacturing, the statistics agency said. Meat manufacturing and dairy product manufacturing also fell.

Construction activity, however, continued to increase, rising 1.8 percent in the December quarter. Residential and non-residential building were both up, which was also reflected in an increase in construction trade services.

Services, however, was the main driver of growth in the quarter, with business services activity rising 1.7 percent and arts, recreation and other services lifting 3.8 percent.  

Activity in the service industries makes up about 70 percent of GDP, while activity in the primary industries makes up about 10 percent.

Borkin noted wet spring weather conditions are likely to be the key reason for contractions in both agricultural and manufacturing production. Given that, he is expecting a "reasonable bounce" in first quarter growth. 

Kate Hickie, Australia and New Zealand economist for Capital Economics, also said "the slowdown appears to have been driven by temporary factors and so should prove short-lived." She points to the November earthquake in Kaikoura and adverse weather conditions as dragging on growth.

Meanwhile, tailwinds from record high net migration and a booming construction and tourism sector are likely to persist. "This is why we expect GDP growth to accelerate from 3.1 percent last year to around 3.5 percent this year," she said. 

Per capita GDP growth, meanwhile, remained anaemic, falling 0.2 percent in the December quarter after a revised 0.3 percent increase in September. It was up 0.9 percent in the year ended Dec. 31.  

Real gross national disposable income per capita, which measures the purchasing power of New Zealand’s disposable income, was up 2.3 percent in the December quarter following a revised 0.4 percent gain in the September quarter. Over the year, it rose 2 percent.

On an expenditure measure, GDP rose 0.2 percent in the December quarter, following a revised 0.9 percent increase in the September quarter.

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