NZ GDP growth probably slowed in second quarter, reviving in second half of 2011

Monday 19th September 2011

New Zealand’s economy probably slowed from its surprisingly robust first-quarter pace in the second three months of 2011 as construction stayed weak and manufacturing continued to tread water. Economists say the rebuild of Christchurch and the Rugby World Cup will underpin growth in the second half of the year.

Gross domestic product expanded 0.5% in the second quarter, after growing 0.8% three months earlier, according to a Reuters survey of 15 economists. Annual growth held at 1.5%.

Among a clutch of weak second-quarter data, the volume of building work put in place fell to a decade-low as construction of new housing sank, while wholesale trade weakened.

Manufacturing has slowed for three months, based on the Performance of Manufacturing Index survey, while retail spending, which rose 0.9% in the second quarter, and consumer confidence have held up better. The global backdrop is one of uncertainty, though the tradable sector has continued at an elevated level.

"Growth has been stronger than anticipated and is expected to step up a gear in [the second half of the year] with the Rugby World Cup and in 2012 on Christchurch earthquake reconstruction work," UBS economist Robin Clements said.

"If domestic growth is ongoing, and the impact from abroad is judged to be only mild, then the RBNZ will have little option but to respond to the inflation threat," said Clements, who expects the Reserve Bank to lift the official cash rate by 25 basis points to 2.75% at the Dec. 8 monetary policy statement.

Reserve Bank Governor Alan Bollard this month held off on lifting the OCR as expected and was more vague about when he would remove 50 basis points of emergency support he engineered after the Feb. 22 earthquake, saying it would likely come off "over the coming year or so."

The Sept. 15 MPS forecasts second-quarter GDP of 0.6%, a basis point higher than the market consensus.

The GDP figures on Sept. 22 are the second leg of this week's major data releases, with the balance of payments out on Sept. 21 and expected to show a shrinking annual current-account deficit of $7.98 billion, or 4% of GDP, from $8.3 billion, or 4.3% three months earlier.

The quarterly current-account gap probably widened to $690 million from $100 million in the second quarter, according to a Reuters survey.

Bollard said at the release of the MPS that he was evaluating global developments before deciding when to lift the OCR. The nation's lenders would do some of the work for him in tightening credit because the U.S. credit rating cut and Europe’s ongoing sovereign debt crisis had dented market sentiment and would likely drive up bank funding costs.

Recent weakness in construction, manufacturing and wholesale trade "highlights that the underlying pace of recovery may be more modest", ASB economists Nick Tuffley and Jane Turner said in a report. That "reduces some of the urgency for OCR increases" and allows the RBNZ "to take more time to assess the impacts of the Eurozone debt crisis and slowing global growth on the NZ economy".

The New Zealand dollar has subsided from its early August high above 75 on a trade-weighted basis, when the U.S. edged close to default and suffered a credit rating cut. The TWI was recently at 73.36, which is still 8% higher than 12 months ago.

Against the greenback, the kiwi was recently at 83.41 cents, down from its Aug. 1 peak above 88 cents and up from 73.32 cents a year ago.

The nation's terms of trade rose to its highest level in 37 years in the second quarter, driven by gains in export prices of dairy products, petrol products, meat and wool. Economists are now trying to pick the peak of the cycle, with signs global commodity prices are descending from their recent highs.

Bollard said this month that the strong kiwi was "having a dampening influence on some parts of the tradable sector and on imported inflation.”

He was more upbeat about the domestic economy, saying activity surprised on the upside and capacity usage looked to have increased.

Traders expect Bollard to lift the OCR by 50 basis points in the next 12 months, based on the Overnight Interest Swap curve. That's down from more than 100 basis points of easing that was being anticipated in July.

(BusinessDesk)

BusinessDesk.co.nz

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