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UPDATE: Economists unimpressed as GDP growth comes in as expected

Thursday 21st September 2017

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Economists were unimpressed by news that the economy grew in the second quarter, warning much of the growth was due to one-offs and won't spur the central bank to lift interest rates any time soon. 

Gross domestic product expanded 0.8 percent in the three months to June 30, up from a revised 0.6 percent expansion in the March quarter and was 2.5 percent higher on the year, Statistics New Zealand said. The median in a Bloomberg poll of 12 economists’ forecasts was for GDP to expand 0.8 percent in the three months ended June 30 and 2.5 percent on the year.

Eleven of the 16 industries increased in the June quarter with retail trade and accommodation expanding at the fastest pace in the quarter, Stats NZ said. Retail trade and accommodation, which is supported by strong tourism, got a particular lift from the World Masters Games and the British and Irish Lions tour, gaining 2.8 percent on the quarter and 6.6 percent on the year. 

However, the quarterly growth was a "fairly subdued outturn given that it benefited from one-offs and rebound factors," said Westpac Banking Corp economist Michael Gordon. "We expected the June quarter to mark the high point for growth this year, given the one-off boost from tourism and a rebound in agriculture and transport from previous weak quarters. In that light, a 0.8 percent quarterly rise is not that impressive," he said. 

Transport activity rose 3.5 percent in June after a 1.6 percent slide in March, said Gordon. Wildfires around Christchurch in February had disrupted rail activity in particular, "but this effect has now unwound," he said. 

ANZ Bank New Zealand also dubbed it a "middling’ result" and noted growth is effectively only back at trend in annualised terms. "A case could have been made for expecting a larger bounce given the temporary factors (weather and earthquake disruption) that weighed on activity over the prior six months," said chief economist Cameron Bagrie.

According to Bagrie, "it is clear that the economy is not quite firing on all cylinders as it grapples with some meaningful headwinds including late-cycle capacity pressures, a turn in the credit cycle and housing market weakness."

Today's figures show activity was weighed on by a construction, which contracted 1.1 percent following the 2.1 percent decline in the March quarter. The fall reflected lower construction-related investment, including investment in non-residential and residential buildings and infrastructure. Construction contracted 0.1 percent on the year.

ASB Bank economists said the slide in construction was a surprise and noted the fall in aggregate activity comes despite the boost from the Kaikoura rail link and SH1 reconstruction activity. "Potentially, capacity constraints are biting on all types of construction activity," they said. GDP growth has been "underwhelming in the past year" and in light of this the second-quarter result is "relatively muted." 

It continues to expect the central bank to keep interest rates on hold at 1.75 percent until 2019 as "economic growth needs to pick up on a sustained basis in order for the RBNZ to be confident domestic inflation pressures will return to target.

ANZ's Bagrie said the June result "poses a challenge for the RBNZ" as growth "barely at trend is hardly going to lift core inflation in a meaningful way," and that "it all reinforces the likelihood that the official cash rate is not heading higher any time soon."


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