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IN DEPTH: NZ growth pick-up reflects 'humungous' inventory build-up

Thursday 22nd December 2011

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New Zealand’s economy expanded faster-than-expected in the third quarter though a record build-up in inventories suggests production has been running ahead of demand and could well reverse in coming quarters.

Gross domestic product rose 0.8 percent in the three months ended Sept. 30, accelerating from a 0.1 percent pace three months earlier, according to Statistics New Zealand. Growth of 0.6 percent was expected, according to a Reuters survey and the Reserve Bank.

While growth is at a level not seen since the final quarter of 2009, the government statistician revised down its measure of GDP in the December 2010 and March 2011 quarters by a total of 0.5 percentage points, meaning the economy has been on a weaker track than previously thought.

Manufacturing made the biggest contribution to quarterly GDP, while construction provided the greatest drag. “The level of GDP looks much weaker than we had previously thought – the recovery just looks dismal,” said Shamubeel Eaqub, principal economist at NZIER.

“If the big inventory buildup unwinds then that’s going to depress growth next year. The level we’re talking about is humungous. ”The kiwi dollar initially rose against the greenback after the figures were released, before easing back to trade at 76.87 US cents from 76.99 cents immediately prior.

The trade-weighted index was recently at 68.81 from 68.88 before the release.

Manufacturing activity rose 2.3 percent in the latest quarter, led by production of meat, dairy , wood and paper products. Retail, accommodation and restaurants rose 2.5 percent in the third quarter, the biggest gain since the March 2007 quarter, and the government statistician said this partly reflected the Rugby World Cup.

Finance, insurance and business services grew 0.6 percent, the fourth straight quarterly increase.On the expenditure side, total inventories climbed by $1.1 billion, driven by manufacturing and distribution stocks, the biggest increase since the series began in June 1987. That tallies with the Economic Survey of Manufacturing report for the third quarter.

The Bank of New Zealand Performance of Manufacturing Index for November showed the sector in contraction, with production falling to 43.6 on a scale where 50 marks the cut off between growth and shrinkage, while inventories grew with a reading of 51.2.

While some of the inventory build-up reflects timing issues in the agricultural sector, “it also raises the possibility that final demand, particularly from key trading partners, is weakening,” said Philip Borkin, economist at Goldman Sachs New Zealand.

Construction fell 2.2 percent to its weakest quarterly level since June 2002, creating the biggest drag on growth in the latest quarter. Building firms have already flagged the downturn. Fletcher Building, the nation’s biggest construction company, warned in October that first-half profit would drop 10 percent and full-year earnings growth would stall in the face of weak housing construction in Australia and New Zealand.

BusinessDesk.co.nz



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