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Economic note
Headline growth robust, but per-capita growth still muted.
Thursday, 17 December 2015

Key highlights

GDP increased 0.9% in Q3, stronger than the RBNZ expected and slightly stronger than the market and ASB expected.
Some encouraging signs of resilience – but once accounting for population growth, momentum is lacking.
We continue to expect two further OCR cuts next year, but RBNZ may take some time to swing toward our view.
 

Report prepared by:

Jane Turner, ASB Senior Economist
Phone: +64 9 301 5853
Email: jane.turner@asb.co.nz


GDP was slightly stronger than expected, but contained no major surprises from our perspective. We continue to expect that the RBNZ will cut the OCR a further 50bp from June 2016 to 2%, although we do think it will take some time for the RBNZ to swing towards our view.

The GDP outcome was higher than the 0.6% the RBNZ had expected. And in the near-term this is likely to reassure the Bank the 1% reduction in the OCR since June will be sufficient to simulate activity. However, the RBNZ may want to be mindful that despite peak annual growth of 3.7% over the past year, inflation pressures remain very muted.

But the key difference between our view and the RBNZs is we see tradables (imported) inflation being more muted. And the risk is the NZD itself remains firmer than the RBNZ has assumed. The much-anticipated Federal Reserve interest rate increase failed to weaken the NZD as the RBNZ has long hoped. In addition, we also expect a greater degree of labour market slack, bringing muted wage-related inflation pressure.

Comment
The strong result in Q3 is a bit of payback from a soft first half of the year. Nonetheless, there were some encouraging details, such as the ongoing strength in services and investment demand, which hints at more resilience in the economy than we had expected.

Investment was stronger than expected, of particular note was robust growth in plant and machinery, suggesting underlying investment demand remains robust. Exports of services continue to grow at an astounding pace, on the back of strong tourism activity.
As expected, retail, wholesale and manufacturing all increased strongly. Meanwhile, business services and transport delivered on the upside risks we saw ahead of the release, also surging in Q3.

Annual benchmarking revisions look to have had a moderate impact on history. Calendar 2014 growth is around 0.4 percentage points higher. Although the revisions make the more recent growth performance higher, they also highlight that the economy was able to grow that much more briskly without generating any material inflation pressure. Once again, it further reinforces our view that inflation pressures will remain modest.

Growth is likely to moderate back to its underlying rate of 0.6% per quarter over the next few quarters. We do expect growth to pick up over 2017, but this is contingent on further rate cuts next year. On a per capita basis, growth has been very subdued. If it were not for strong tourist activity the NZ economy would be in a vulnerable position as NZ heads into a dairy-sector downturn.
 

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