By Bernard Hickey
Economic growth galloped along at a seven year high of well over 3% last year thanks to a surge in the housing market and the strongest tourism spending since the 2011 Rugby World Cup.
But the data wasn't strong enough to change the outlook for flat interest rates and showed implicit price deflation of 1.6% for the last six months.
Gross Domestic Product (GDP) grew 0.8% in the December quarter from the September quarter, driven by strong growth in retailing, tourism and real estate services, Statistics NZ reported.
The result was slightly below a revised 0.9% growth recorded in the September quarter, but was in line with economists' forecasts and lifted average GDP growth in the full 2014 calendar year to 3.3%, which was the highest annual growth rate since 2007. Growth in the quarter from the same quarter a year ago was 3.5%.
Financial markets did not move much on the result, given it did not change the outlook for interest rates. The New Zealand dollar is up almost 2 cents to 74.8 USc over the last 24 hours, but that was due to the Federal Reserve's dovish statement on rates dragging the US dollar down.
Housing and tourism key drivers
Retail spending and spending on accommodation rose 2.3% in the December quarter, helped by a 15% rise in tourist spending.
"This is the largest growth we've seen in retail and accommodation since the 2011 Rugby World Cup," national accounts manager Gary Dunnet said.
"While some of this growth comes from more spending by New Zealanders, overseas visitors had a bigger impact. Spending by Chinese, US, and UK visitors all increased in 2014, though Australians spent less," Dunnet said.
Rental, hiring, and real estate services also grew 1.2% in the December 2014 quarter.
"More house sales drove real estate services up more than 20%, after falls in recent quarters. Increased banking activity was reflected in a 1.1% rise in financial services this quarter, while housing investment rose 5.2%," Statistics NZ said.
Manufacturing production rose 1.0% in the quarter, driven mainly by oil processing. Meat exports rose 3.7% and dairy product exports rose 2.5%, while metal product and wood product manufacturing fell 2.5% and 5.2% respectively.
Real Gross National Disposable Income, which measures the purchasing power of disposable income after taking into account the effects of changes in the Terms of Trade, fell for the first time since the June quarter of 2012, but was still up 5.0% for the year.
The figures also showed another fall in the impicit price deflator for the quarter, which is another way of measuring inflation. It fell 0.7% for the quarter, having fallen 1.0% in the previous quarter. It is now down 1.6% over the last six months.
Finance Minister Bill English said the data showed New Zealand's economy was performing consistently well.
"The good news about New Zealand's economic growth is that it has proved to be consistent and sustainable, which is contributing to confidence about hiring and investment," English said.
"In 2014 we saw 80,000 new jobs created, a record high participation rate in the labour force of 69.7 per cent, and average weekly wages growing at 2.5 per cent compared with inflation of 0.8 per cent," he said.
"However, there are many risks around and no-one should take this consistent growth for granted. The effects of drought and lower dairy prices are likely to have an impact this year, and international risks – including declining growth prospects for some of our main trading partners – are ever-present."
ASB Senior Economist Jane Turner said the result was in line with expectations and did not change ASB's view that interest rates were on hold for the foreseeable future.
Quarterly growth was bang on the RBNZ’s March MPS forecast. The RBNZ will be encouraged by evidence of building momentum in underlying economic demand and reasonably broad-based growth. Growth over H1 2015 will likely slow, dragged by the decline in milk production but we expect domestic demand to remain buoyant and the RBNZ is largely focus on this momentum. We expect that inflation pressures will start to pick up over 2015, albeit from low levels.
We continue to expect the RBNZ will leave the OCR unchanged at 3.5% over the foreseeable future, although still maintain a bias of a near-term rate cut (25% chance) due to persistently weak CPI inflation pressures.
The NZD is up significantly this morning, but that reaction came in the wake of the FOMC meeting earlier today, rather than the GDP data. Likewise in the interest rate market – the dominant influence is the offshore rally post the FOMC – there has been no reaction to the GDP data.
ANZ Senior Economist Mark Smith said the result was in line with expectactions and the economy was in structurally better shape than at the time of the Global Financial Crisis.
A solid rate of expansion was registered in Q4, underpinned by a post-election rebound in the services sector, with mixed signs evident in the primary and goods sectors. The economy is poised to start 2015 with reasonable momentum and appears well placed to navigate various local and external headwinds. The economy is still running above trend on an annual basis but close to trend when we eye the quarterly data. With supply-side capacity close to 3%, the economy is putting marginally more pressure on capacity but insufficient to flow materially into inflation which continues to be capped by wider disinflationary forces.
Today’s data is historical, but it suggests the economy was in good nick heading into 2015. Our proprietary indicators continue to point to a strong domestic demand backdrop in the first half of the year, outside of a drought-related Q1 lull. Annual growth in nominal GDP (2% y/y) and real gross national disposable incomes (+5.0% y/y) is slowing, with the latter seeing its first quarterly decline since the June 2012 quarter.
Westpac's Senior Economist Michael Gordon said the data shows the economy growing at above-trend pace.
We’d take today’s figures as a fair representation of how the economy has been tracking: growth of 0.8% a quarter, or more than 3% annually, would be above anyone’s estimate of the economy’s long-run potential growth rate. A continuation of this pace of growth would eventually put a strain on the nation’s resources and, one could reasonably expect, lead to higher wage and price inflation.
Of course the picture won’t be quite so straightforward in the near term. The effects of dry weather will weigh on GDP growth over the first half of the year (though we’ve recently softened our estimate of the impact), while providing a boost to growth later in the year as farm output recovers. That dip in the pace of growth will probably have little bearing on the degree of inflation pressure in the economy. But a temporary run of soft data would encourage those in the market who are speculating on the Reserve Bank cutting the OCR.
BNZ Senior Economist Craig Ebert said the result was in line with market expectations and threw up few surprises, although the strength of tourist spending was notable.
Our overall view on Q1 GDP growth remains at 0.8% (and 0.6% for Q2, when the recent drought’s impacts exert their worst). As part of this, we still feel comfortable persevering with good gains in the likes of consumption, construction, wholesaling and the wider services sector in Q1 GDP, as none of these components were any stronger than we thought for Q4 creating hangover potential into the New Year. The only thing we’d watch in this regard is the slight build-up of stocks in Q4, which might weight on expenditure GDP computations for Q1.
As for the big tourism story for Q4, there is good chance this will strengthen into Q1 and Q2. We know visitor arrival numbers were still looking good in January. And February’s lot, due tomorrow, will have the double-benefit of Lunar New Year impacts (stimulating arrivals from China in particular) as well as the showings from the first month of the ICC (Cricket) World Cup, which New Zealand is co-hosting with Australia. The latter continues into March. Then there is the FIFA U-20 World Cup to consider for May/June, which NZ is sole hosting.
All the while, we’ll be keeping a close eye on leading indicators of economic growth. They currently validate the Reserve Bank’s March Monetary Policy Statement (MPS) view of GDP running at an annual pace of between 3.0 and 3.5% this year (and next). For more immediate reference, the March MPS expected GDP growth of 0.5% and 0.9% for Q1 and Q2 respectively.
(Updated with chart, reaction, English comment, more detail)