NZ economy probably recorded fifth straight quarter of growth as tourists trumped farmers

Friday 16th December 2016

New Zealand's economy may have extended its steady rate of growth for a fifth straight quarter with buoyant retailing lifting the services sector and construction on a tear, making up for a weaker primary sector.

Gross domestic product grew 0.9 percent in the third quarter, based on a Reuters survey and the Reserve Bank's November forecast. That's also the average of the past five quarters of growth. Annual growth is expected to accelerate to 3.7 percent from 3.6 percent.

The Reserve Bank expects quarterly growth to accelerate to 1 percent in the last quarter of 2016, when it has forecast inflation will return to its target band. Economists don't expect the GDP figures or the balance of payments being released at the same time on Dec. 22 to alter the bank's assessment of monetary conditions, with last month's quarter-point cut to the official cash rate seen as the last, while there have been calls for the first hike in late 2017.

"Indicators over the past few months have painted a positive picture for economic growth," said Sarah Drought, economist at Westpac Banking Corp, in a note. "While the largest contributions are expected to come from manufacturing, retail and professional services, growth looks relatively broad-based across the economy, with agriculture a notable exception."

The country's construction industry can't keep pace with demand, while migration inflows are at record levels, as are tourist numbers. Dairy farmers, in the doldrums after an extended bout of weak prices, now have more economic returns. Sectors such as horticulture are reporting strong demand.

The growth data comes after the Treasury upgraded its growth forecast to average 3 percent a year over the next five years, stoking tax revenue and strengthening the Crown accounts and the government's spending plans. It may herald a period where fiscal stimulus comes to the fore after the Federal Reserve acknowledged there were uncertainties about the impact of Donald Trump's presidency, which has caused bond yields to surge in the US and has contributed to a spike in New Zealand rates.

Economists at ASB Bank expect the primary sector was the only negative contributor to production GDP in the third quarter. "Continued strong performances in retail spending and construction activity remain the backbone of NZ’s economic growth," said economists Jane Turner and Nick Tuffley, in a note.

"Looking ahead, we expect growth over the next year to remain above trend. Tourism, strong population growth and low interest rates will remain key drivers for stronger economic growth. Furthermore, dairy regions will become less of a drag with expectations of improved cash flows."

The Reserve Bank and the Treasury have been singing from the same song sheet this month. Reserve Bank governor Graeme Wheeler said in a speech last week that the prospects were good for "continued strong growth" in the New Zealand economy in the next 18 months, with monetary policy accommodative enough to ensure inflation picks up after holding at unusually low levels for two years. In the absence of major unanticipated shocks, economic growth was likely to be "driven by construction spending, continued migration, tourist flows, and accommodative monetary policy," he said.

The current account deficit is expected to have been steady at 2.9 percent of GDP.

BusinessDesk.co.nz

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