NZ economy grows 0.3% in Dec qtr from Sept vs economist and RBNZ expectations of 0.6% growth; Strength in financial services & agriculture offset by manufacturing & govt falls

By Alex Tarrant

New Zealand’s economy expanded by 0.3% in the December quarter from the September quarter, as growth in the financial services and agriculture sectors offset falls in manufacturing and government administration.

A Reuters poll of economists had given a median expectation of 0.6% growth for the quarter. The Reserve Bank of New Zealand also forecast a 0.6% rise in its March quarter Monetary Policy Statement. Economists' forecasts ranged from 0.3% to 0.8%.

The New Zealand dollar immediately fell to 81.1 USc from 81.5 USc shortly before the release of the data. However by 2:30pm on Thursday, the New Zealand dollar had returned back to its pre-announcement level against the US dollar.

The lower-than-expected growth will support expectations the Reserve Bank will be able to leave the Official Cash Rate on hold until December this year at least, and may push more economists to start picking rate hikes starting in 2013, as inflation expectations fall due to lower-than-forecast economic activity.

Following the release from Statistics New Zealand, Westpac economists said the figures were a slight downward surprise, but did not change their overall impression of the economy. ASB economists held their pick for a December 2012 OCR hike. ANZ economists said they continued to look for a December 2012 start to the tightening cycle, but this was conditional on economic momentum in the NZ economy picking up in the second half of 2012.

Figures released by Statistics New Zealand on Thursday morning also showed growth in the September quarter was revised down slightly, from 0.8% growth to 0.7%.

Economic activity in the year ended December 2011 was 1.4% higher than in the year to December 2010. The 1.4% annual expansion in the year to December 2011 was highest annual growth for any year since the year to September 2008.

December year growth was up from 1.2% annual growth in the year to September 2011.

Main movements

Of the largest contributors to economic growth in the December quarter, finance, insurance and business services rose 1.3% from September. This was the fifth quarterly increase in activity in this sector, Stats NZ said.

Activity in the agriculture sector rose 3.5% during the quarter, as good growing conditions led to increased milk production in the dairy industry. This followed a 2% fall in the September quarter.

Retail, accommodation and restaurant activity rose 2.2% during the quarter. Activity from spectators and participants of the Rugby World Cup, including accommodation services and the purchase of merchandise and souvenirs, was included in this industry, Stats NZ said.

Meanwhile, manufacturing activity led the declines, down 2.5% from the September quarter. Food, beverage, and tobacco manufacturing was the largest contributor to the decline, Stats NZ said.

Government administration and defence activity fell 2.3%. This was the largest fall in government administration and defence activity since a 3% decrease in the December 1998 quarter, Stats NZ said.

What we spent it on

Looking at the expenditure measure of GDP (as opposed to the production measure which shows less volatility and is Stats NZ’s preferred measure), expenditure on GDP rose 0.5% over the December quarter, following an increase of 1% in the September quarter.

Household final consumption expenditure, which measures the volume of spending on goods and services by New Zealand households, rose 0.8% in the December quarter. This was the eleventh consecutive quarter in which household expenditure rose, Stats NZ said.

“The volume of durable goods purchased by New Zealand households increased 4% in the December 2011 quarter, following an increase of 1.1% in the September 2011 quarter. The latest rise is the largest since a 4.7% increase in the March 2007 quarter, and results from increased spending on furniture and major appliances,” Stats NZ said.

“This increase is consistent with the increase in retail trade activity as measured in the production measure of GDP. Partly offsetting this increase was a decrease in spending on recreational vehicles,” Stats NZ said.

Gross fixed capital formation, which measures business investment plus residential building investment, rose 1.7% in the December quarter, Stats NZ said.

“Investment in residential buildings increased 4.2% in the December 2011 quarter, following a 0.5% decrease in the September 2011 quarter, when investment in residential buildings was at its lowest level since the June 1993 quarter,” Stats NZ said.

“Investment in residential buildings has increased for the first time following five consecutive quarterly decreases. For the year ended December 2011, residential building investment decreased 12%,” Stats NZ said.

Business investment in fixed assets increased 1.1% over the quarter. The main contributors to the increase were:

Transport equipment, up 46.3%, including investment in trains and aircraft. This increase was due to one-off imports of aircraft this quarter (including military helicopters), Stats NZ said.

Investment in non-residential buildings rose 7.6%, while investment in intangibles – exploration and software – rose 4.5%.

Offsetting these increases was a 7.8% decrease in plant, machinery, and equipment. This decrease was consistent with a decrease in imports of these types of goods, Stats NZ said.

Exports of goods and services rose 2.8% over the December quarter, and imports of goods and services fell 2.9%.

Exports of goods increased 4.3%, the largest rise since a 4.8% rise in the June 2009 quarter.

Finance Minister Bill English:

Economist reaction

Westpac chief economist Dominick Stephens:

• The headline number, growth in production GDP, was weaker than expected. FX markets reacted strongly, sending the NZD half a cent lower. However, interest rate markets were less impressed, sending the 2-year swap rate only 1 basis point lower.

• The detail of the report was broadly as we expected. Building investment was up very strongly, consumption was respectable, exports were very strong, and imports were down. However, government consumption was very weak, and there was a huge negative contribution from stockbuilding, of 2.8 percentage points.

• Expenditure GDP rose up 0.5%, roughly in line with expectations.

• At first blush, we regard this as a slight downside surprise, but it doesn't alter our overall impression of the economy.

• Evidence on the Christchurch rebuild was mixed. Investment in buildings, both residential and non-residential, was up sharply. However, it seems much of this investment went into service categories. On the production accounts, hard construction activity was up only 1.5%, less than expected.

• As usual, there were mysteries. The biggest of these is the yawning gap between the production measure of GDP, and the expenditure measure. Expenditure GDP has grown faster for years, meaning that the two measures are now 4.5 percentage points apart. According to expenditure GDP the economy has long-since surpassed its 2007 peak, while according to production GDP the economy is about the same size now as it was in 2007.

• The communications sector shrank another 1.5% - we suspect this is being mismeasured, and do not believe New Zealanders are communicating with each other less.

ASB economist Christina Leung:

GDP increased 0.3% in Q4, below both our and market expectations. Weaker than expected activity was seen across a broad range of sectors, although the picture of a gradual recovery in underlying activity remains in place.

Manufacturing activity was weaker than expected, partly reflecting a greater than expected decline in the food and beverage sector. This is likely due to a sharper drop in livestock slaughter numbers during Q4. This is largely a technical correction in the seasonal adjustment process, which had seen a strong increase in the previous quarter. Excluding food and beverages, core manufacturing was also weaker than expected. However, the latest Business NZ PMI survey of manufacturing confidence has registered a surge in sentiment, which bodes well for a recovery in core manufacturing activity over 2012.

In line with the retail trade survey, there was a rebound in retail sales volumes. This partly reflected the direct boost from the Rugby World Cup. However, weaker than expected wholesale trade and transport activity indicate the flow-on indirect effects from the Rugby World Cup was not as great as we had expected.

On an expenditure basis, the 0.5% increase was broadly in line with our expectations. While export volumes of goods and services were not as strong as expected, this was largely offset by a sharper than expected decline in import volumes. Plant and machinery investment fell 7.8%, suggesting that businesses remained cautious late last year.

Meanwhile, the 0.8% increase in private consumption was broadly in line with our expectations and points to a recovery in the household sector taking place. There are also tentative signs residential building activity is picking up, and we expect this to continue over 2012.

Implications:

The picture of a gradual recovery in underlying activity remains in place. In particular, the household sector is showing some encouraging signs of improvement, although the latest consumer confidence survey suggests a degree of caution remains. Despite the weaker than expected Q4 result, we continue to expect sharper growth over March quarter 2012 of around 0.8%.

Nonetheless, the decline in plant and machinery investment highlights the continued caution in the business sector. The recovery in activity remains patchy in some areas, and while overall business confidence has improved caution towards expansion of operations remains.

Today’s result points to little urgency for the RBNZ to raise the OCR. As such, we continue to expect it will remain on hold until December.

ANZ economists:

• Q4 GDP growth was lower than market expectations and the RBNZ’s forecast, coming in at 0.3 percent. There were also small downward revisions to historical GDP data, with the level of activity in Q3 2011 revised down by 0.2 percent.
• The NZD and interest rates fell moderately in response to the data.
• As expected there were considerable sector divergences.  Largely as a result of good climatic conditions, agricultural and primary production was strong, despite lower mining activity. The goods sector was a mixed bag, with the rundown in manufacturing inventories, lower livestock slaughtering, and a fall in electricity value added outweighing a lift in construction activity. The Rugby World Cup boost to retail and strengthening housing market activity supported the services sector.
• Looking ahead, we expect mixed a continued scratchy economic performance as cyclical and structural forces collide.  We are wary of the risk of a post Rugby World Cup lull early this year, though the Canterbury reconstruction work will provide impetus.
• The RBNZ is in no hurry to lift the OCR. We continue to look for a December 2012 start to the tightening cycle, but this is conditional on economic momentum in the NZ economy picking up in the second half of 2012.

HSBC economist Paul Bloxham:

The quarterly numbers are messy for Q4, as can often be the case with quarterly numbers. 

But the bottom line is that: while the Rugby World Cup did boost the economy, manufacturing production weakened more than expected, particularly due to meat production. 

Growth was +0.3% in Q4, which is lower than the +0.6% expected. The components moved in the directions expected, but the magnitudes were weaker than expected overall. 

On the production side, services were strong in Q4, as were retail, accommodation and restaurants – all consistent with the Rugby World Cup support. But manufacturing was very weak, as livestock slaughtering was down. The public sector also continued to withdraw from the economy, as the government cut back to improve its budget position. 

The expenditure side was also directionally consistent, though magnitudes surprised on the weaker side. The Rugby World Cup (which straddled Q3 and Q4) supported services exports and household consumption in Q4. Investment remained only modest, as the Canterbury rebuild has not really started in earnest yet. In the quarter, a large inventory subtraction was the main surprise. This reflected a rundown in dairy stocks that more than offset the boost to exports. 

Recent timely indicators of conditions have shown improvement in the manufacturing industry, which should support positive modest growth in the first quarter of 2012. 

For the 2011 year as whole, growth was a bit below what had been generally expected in our post-quake March 2011 set of forecasts. Growth was 1.4% in 2011, versus our post-quake forecast of 1.7%. 

This seems to mostly reflect that the reconstruction of Canterbury has taken longer to get started. 

This continues to be the key theme moving into 2012. The reconstruction is yet to ramp up, due to delays caused by aftershocks, coordination and insurance issues. We expect the big ramp up to be later this year.     

Bottom line 
Growth was weaker than expected, despite a significant boost from the Rugby World Cup, as manufacturing production fell, particularly meat. 

The next big support for growth comes from the Canterbury reconstruction, which we expect to ramp up in H2 this year. 

We still expect that the RBNZ’s next move is up, and expect hikes in H2. 

First NZ's Chris Green

On the monetary policy front, given that the latest GDP outturn was below RBNZ expectations, this suggests more spare capacity and less potential inflationary pressure than the RBNZ had previously anticipated. As such the RBNZ is likely to be increasingly comfortable with the maintenance of stimulatory interest rate settings, with expectations likely to slip from their current December 2012 tightening timing out into the first quarter of 2013. 

Reflecting the disappointing GDP outturn, the recent presentation from the RBNZ of a more gradual interest rate tightening profile in their March 2012 MPS and set against a potential backdrop of easier global interest rate settings, we retain our expectation that the RBNZ is likely wait until the March 2013 MPS before raising the OCR by 25bps to 2.75%.

(Updates with ASB, Westpac, ANZ, HSBC, two videos)