BusinessDesk: Mild pick-up expected in next week’s economic growth numbers

By Jonathan Underhill

Most economists think the New Zealand economy grew a little faster in the third quarter, driven by spending related to the Rugby World Cup and a pick-up in manufacturing, though the latter may reflect a build-up in inventories rather than increasing demand.

According to a Reuters survey, economists expect gross domestic product to have risen 0.6 percent in the three months ended Sept.30, after slowing to just 0.1 percent three months earlier. GDP is expected to have risen 2.2 percent for the year to September, the survey shows.

The expectation is for a gradual recovery, excluding the Rugby World Cup, with disruptions from the Feb. 22 earthquake in Christchurch creating a drag on growth while aftershocks delay the impetus from the rebuilding process, which probably won’t show up until late 2012. Added to that, the prospect of slowing global growth as Europe grapples with its debt crisis suggests exporters will face headwinds in the next 12 months.

“Our forecast suggests a continuation of the modest pace of recovery over the last year, with no substantial boost from the Christchurch rebuild coming through just yet,” Westpac economists Dominick Stephens and Michael Gordon said in a note today.

“The Rugby World Cup is likely to have been a modest positive for GDP overall” with benefits concentrated in hospitality, transport and tourism, with the biggest impact on retail spending, they said.

Economists including those at Westpac, and Goldman Sachs New Zealand’s Philip Borkin, are tipping the biggest contribution to third-quarter GDP growth will come from manufacturing, even though the sector has been very weak based on the most recent surveys.

The Bank of New Zealand Performance Manufacturing Index for November fell to 45.7 from 46.6 in October on a scale where 50 marks the difference between contraction and expansion.

Production fell to 43.6 in the latest month while inventories grew, with a reading of 51.2.

The Economic Survey of Manufacturing for the third quarter showed a jump in inventories, especially for meat and dairy.

The manufacturing story “is largely about inventory build-up and that doesn’t bode to well for the fourth quarter,” Borkin said.

Construction is likely to be one of the biggest drags on growth in the latest quarter. Fletcher Building, the nation’s biggest construction company, warned 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.

Commercial construction is also subdued and has “been easing back since 2008 as businesses have pulled back on investment and expansion plans,” said ASB chief economist Nick Tuffley, in a note.

The market consensus for third-quarter GDP of 0.6 percent is also shared by the Reserve Bank though economists said Governor Alan Bollard may be less interested in the pace of growth three months ago, given the storm clouds looming from Europe.

“The prevailing market sentiment is largely negative, and dominated by the sovereign debt crisis in Europe and its knock-on effects for the rest of the world,” Westpac’s economists said.

That suggests stronger-than-expected growth may elicit only a mild lift in New Zealand interest rates and the kiwi dollar, while a weaker outcome would encourage bets that Bollard will cut the official cash rate from its current record low level of 2.5 percent.

(BusinessDesk)