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NZ economy probably accelerated in 4Q on inventory rebuild, manufacturing

Monday 22nd March 2010

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New Zealand’s economy probably accelerated in the fourth quarter as firms began building up stock levels depleted through the recession, helping fuel a revival in manufacturing.

Gross domestic product expanded 0.8% in the final three months of 2009, the fastest pace in two years, according to a Reuters survey. The range was 0.5% to 1.8%.  Annual average growth may have improved to -1.5% from -2.2% in the third quarter.

The fourth quarter may have marked the first period of stronger growth after six months of tepid recovery from recession.  While economic indicators have improved, they are a mixed bag, as may be expected during a rebuilding phase. Unemployment reached a decade-high 7.3%, while New Zealand business confidence has since surged to a 10-year high.

“The main takeaway we are anticipating from the Q4 data is a step-up to a more robust pace of growth,” said Robin Clements, senior economist at UBS New Zealand, who is predicting fourth-quarter growth of 1%. While that pace may not be sustained, it does reinforce “the likelihood of further recovery over the course of 2010.”

The Reserve Bank forecast 0.6% GDP growth in its Monetary Policy Statement this month, speeding to 1.1% in the three months ending June 30, by about when it expects to begin hiking the official cash rate from a record low 2.5%.

Manufacturing expanded 1.9% in the fourth quarter, having contracted 16.4% in the preceding six quarters, according to economists at Westpac Banking Corp.

Chief economist Brendan O’Donovan predicts fourth-quarter GDP grew 0.7%, “which is actually a fairly disappointing performance in the context of the global recovery.”

He said housing probably remained a drag on growth through the final three months of 2009, according to a March 19 note.

Among indicators of consumer activity, figures this month showed spending debit and credit cards fell 0.4% in February, while January core retail sales were weaker than expected.

Reserve Bank Governor Alan Bollard continued to characterise the recovery as “relatively sluggish” in the MPS on March 11. Households were “still cautious,” and business spending remained weak “despite much improved confidence.”

Inflation is likely to remain tame through the bank’s forecasting horizon, he said.

Since then, some economists have pushed back the timing of interest rate hikes.

Goldman Sachs JBWere analyst Philip Borkin now expects Bollard won’t act until the third quarter and even then won’t rush, because momentum is slowing in the housing market, and “potential changes to the regulatory and tax backdrop should also finally provide the RBNZ with a helping hand."

The process of restocking probably jumped in the first quarter of 2010 and “the inventory rebuilding phase” will be a feature of the near-term outlook, according to ASB chief economist Nick Tuffley.

Destocking in the wake of recession “has now slowed and the restocking phase will provide will provide a significant boost to activity,” he said.

Before the GDP data on Thursday, Statistics New Zealand is scheduled to release the balance of payments for the fourth-quarter, which may show the annual current account deficit shrank to $3.62 billion, from $5.7 billion. As a percentage of GDP, the current account probably fell to 1.9% from 3.1%. 


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