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NZ's GDP growth probably slowed in 3rd qtr as dairy decline offset buoyant construction

Friday 15th December 2017

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The New Zealand economy probably expanded at a slower pace in the third quarter as a bounce in construction was offset by declines in dairy production and housing-related spending.

Gross domestic product grew 0.6 percent in the three months ended Sept. 30 and 2.4 percent from a year earlier, according to the median in a Bloomberg poll of 15 economists. The Reserve Bank projects quarterly growth of 0.7 percent in the third quarter, while the Treasury yesterday lowered its forecast to 0.6 percent from 0.9 percent in the pre-election fiscal update given in August. 

New Zealand’s economy grew 0.8 percent in the second quarter and annual growth was 2.5 percent. 

ANZ Bank New Zealand senior economic Phil Borkin said he expects GDP to expand a quarterly 0.4 percent, bringing annual growth to 2.2 percent as the primary industries account for the majority of the softness. Milk production contracted due to wet weather at the start of the season and forestry production is expected to unwind some of its recent gains, he said. 

ASB Bank chief economic Nick Tuffley said construction activities looks to have recovered in the September quarter after unexpectedly falling over the previous two. "Capacity constraints are biting in the construction sector and output has not kept up with demand," said Tuffley.  However, a weak quarter for dairy production and a fall in livestock slaughter volumes held back gains, retail spending growth will likely be below trend and "very low house sales over the quarter will weigh on housing sector activity," he said. 

New Zealand's overheated housing market - considered a risk to financial stability - has slowed over the past year as Reserve Bank restrictions on more highly-leveraged mortgage lending and tighter credit criteria being demanded by banks made it more difficult for borrowers.

Looking ahead ANZ's Borkin said the economy will continue to navigate some headwinds, including the softer housing market, political change as well as slowing growth in drivers such as construction and migration. The construction sector is grappling with "capacity, costs and capital constraints" while migrant inflows have begun to ease, he said. 

"While we do expect other strong growth drivers to emerge eventually, such transitions can cause some wobbles," he said.

Westpac Banking Corp, which is also tipping 0.4 percent growth in the third quarter, said a decline in accommodation and hospitality may also weigh on GDP, after being boosted by sporting events in the prior period. Separately, it warned there are some worrying signs for growth going into early 2018, such as the heightened risk of drought.

Overall the bank's economists still expect the economy to grow at a "modest underlying pace," something echoed by the Treasury at yesterday's half-economic and fiscal update. 

Official forecasts now show annual average GDP growth slowing to 2.9 percent in 2018 from the previous estimate of 3.2 percent. "Compared to the pre-election update, underlying momentum is a little weaker across the second half of 2017. Economic growth appears to have slowed in the 2017 September quarter with wet weather hampering agricultural production, continued weakness in the housing market and slower growth in private consumption," the Treasury said. 

However, growth is forecast to be 3.6 percent in 2019 from the previously forecast 3.7 percent and will lift to 3 percent in the year to June 2020 versus a prior forecast of 2.8 percent. In the following year, the government's financial adviser expects the economy to expand 2.6 percent versus a prior forecast of 2.3 percent.

Overall, the Treasury expects growth to expand at an average rate of 2.9 percent annually for the next five years. 

Economists, however, are sceptical. UBS economist Robin Clements said the Treasury's downside scenario modelling persistent weakness in a number of through the forecast period is more realistic. "Growth averages 2.5 percent over the next five years in this scenario ie closer to what we would consider more plausible," he said. 


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