By David Hargreaves
Gross domestic product (GDP) increased 0.7% in the March 2016 quarter, following an increase of 0.9% in the December 2015 quarter, Statistics New Zealand said today.
The result for the quarter is a touch better than the 0.6% consensus of economists’ forecasts. The Reserve Bank had also picked 0.6%. The Kiwi dollar, already strong after the US Federal Reserve left American interest rates unchanged, jumped nearly half an American cent on the news and was worth US70.8c a short time ago.
Economists saw the latest GDP outcome as possibly reducing the chances of the Reserve Bank cutting interest rates again at its next review in August, but upcoming inflation figures are seen as likely having a bigger impact on the RBNZ’s decision.
The latest growth was driven by the construction and health industries, but partly offset by decreases in the primary industries and manufacturing.
“The main driver behind the GDP growth was construction, which rose 4.9%. This was the strongest quarterly growth for the industry since March 2014,” national accounts senior manager Gary Dunnet said.
The increase in construction also reflected higher construction-related investment. Investment in other construction (infrastructure such as roading and telecommunications) was up 12% – the highest quarterly growth since June 2014. Investment in residential building rose 4.2%, driven by strong increases in Auckland and Waikato, but eased in Canterbury.
Rising demand saw service industries grow 0.8% this quarter. The health and retail trade industries led the overall increase.
“We saw a larger population reflected in the rise in health care and consumer spending. When the rising population is taken into account, our GDP per capita rose 0.1% on the previous quarter,” Mr Dunnet said.
Strong tourist arrivals also supported the growth in service industries, reflecting a 4.9% rise in tourist spending.
Annual GDP growth for the year ended March 2016 edged down to 2.4% from 2.5% in December, while the size of the economy in current prices was $249 billion.
Real growth in national disposable income per capital, which takes into account population growth and changes in the purchasing power of income, was up 1.6% in the March 2016 quarter, following a revised 0.2% decrease in the December 2015 quarter and a 0.2% decrease in the September quarter.
Stats NZ said over the March 2016 year, RGNDI per capita increased 0.3% compared with the December 2015 year. This shows that New Zealand’s real purchasing power increased more than New Zealand’s population.
This is what ANZ senior economist Philip Borkin thought:
A LITTLE SOMETHING FOR EVERYONE
· The economy expanded by 0.7% over the first three months of the year, which was a little stronger than consensus expectations (0.5% q/q). Annual growth accelerated to 2.8% y/y.
· Despite the upside surprise, the data confirms a modest softening in momentum relative to the strong pace of growth seen over the second half of last year, where growth averaged close to a 0.9% quarterly pace. It is also a reasonably soft result in per capita terms, with the economy barely treading water over the quarter (+0.1% q/q).
· Twelve of 16 production-based industries recorded growth over the quarter, with the construction sector leading the way (as expected), rising 4.9% q/q. Primary sector activity dipped 0.4% q/q, while services sector activity rose 0.8% q/q – with a similar pace of growth now seen for three consecutive quarters. The latter was led by health care and social assistance, and is a function of strong population growth. Retail trade and accommodation rose 1.3% q/q, in part due to strong tourist spending.
· Expenditure GDP rose by a modestly softer 0.5%, led by fixed asset investment (again construction-related). Household consumption was on the softer side, rising just 0.4% q/q. Net exports were a modest drag on growth (-0.4%pts), as were inventories. Stronger terms of trade resulted in a decent bounce in real gross national disposable income (+2.2% q/q).
· In many ways, there is something for everyone in this data. In the first instance, there was of course an upside surprise in headline growth, which is nice. Income growth rebounded. But per capita growth was soft and household consumption somewhat lukewarm. Plant & machinery investment (0.6% q/q) was also a little disappointing in the context of a fall in Q4. There were also some modest downward historical revisions.
· When all is said and done, we view the figures as a respectable result following a strong pace of growth over the second half of 2015. There are risks to the outlook (global scene, dairy cash flow, elevated NZD etc), but when we consider the following, our base case is that reasonable rates of growth will continue (volatility aside) over the next year or so:
− Indicators for Q2 are generally providing a decent signal. Primary activity should bounce and business and consumer confidence remain at decent levels.
− Despite the elevated NZD, financial conditions remain supportive. The effective mortgage rate continues to fall. Tailwinds from migration and the construction sector pipeline persist.
− Credit growth remains strong, supporting spending, although this does admittedly raise some medium-term sustainability questions.
· Today’s result was a little above the RBNZ’s June MPS pick (0.6% q/q) and so at the margin should reduce the odds of an August rate cut. However, the upcoming CPI and labour market data should carry far more weight in that regard. The odds still favour an August cut (on currency strength and global wobbles alone), but it is not a conviction view.
And this was the reaction of ASB’s chief economist Nick Tuffley:
GDP was stronger than ourselves and the market expected, and slightly stronger than the RBNZ forecast at the March MPS. However, from the RBNZs perspective, this small upward surprise will be offset by minor downward revisions over 2015. Overall, annual average growth is close to the RBNZs expectation and we continue to expect the RBNZ to cut the OCR to 2% at the August meeting. While we continue to expect a further cut to 1.75% later this year, there is more uncertainty around a second cut given the RBNZs concerns around financial stability. The GDP outcome doesn’t add to the case for cutting below 2%.
As expected, growth was led by a broad-based increase in construction activity in Q1. Strong international visitor arrivals was also an area of support, with tourist spending increasing 4.9% in Q1.
There was stronger-than-expected growth in retail, transport, telecommunications, financial services and health care. These lifts all likely reflect increased demand for goods and services resulting from high tourist numbers and strong population growth.
Meanwhile, manufacturing and wholesale trade activity held up better than indicators suggested.
From an expenditure basis, investment increased strongly (led by construction-related investment) while consumption increased more modestly. Exports of goods contracted due to lower dairy, meat and oil exports. However, exports of services lifted strongly due to growth in tourist spending.
Downward revisions: Production GDP was revised down by 0.2 percentage points over 2015 (0.1ppt in each of Q1 and Q3). Expenditure GDP was revised down by 0.5 percentage points. These revisions help somewhat to close the gap that has been growing between Expenditure and Production estimates of GDP growth. However there remains a large divergence between the two measures, with expenditure annual average growth at 3.1% vs 2.4% on a production basis.
Overall, the NZ economy is recording respectable growth due to strong population growth and tourism. These factors are helping offset the dampening impact of weak dairy incomes. However, from a per-capita basis, growth remains reasonably low. We expect to see a pick-up in momentum over the coming year with additional support from low interest rates.