Wednesday, June 23, 2010

New Zealand Economy: Onwards, and Slightly Upwards

New Zealand recorded its 4th quarter of positive GDP growth with 0.6% q/q for the March quarter of 2010. This matched consensus estimates, but was down slightly from the 0.9% recorded in the December quarter of last year; reflecting the somewhat subdued economic recovery, following one of the worst recessions in decades. On a year-over-year basis, growth accelerated to 1.9% from 0.5% in the previous quarter (rebounding from -3.1% in the March quarter of 2009).

The result shows the recovery (which follows a 5 quarter recession) becoming more entrenched, but some sectors are doing better than others. On a quarterly basis the winners were: Fishing, forestry, and mining - up 3.2%, Manufacturing - up 1.6%, and Wholesale trade - up 1.4%. The losers were: Electricity, gas, and water - down -2.2%, Retail, accommodation and restaurants - down -0.8%, and Government administration and defense - down -0.6%. On an annual basis construction continues to suffer, down -5.4%, while cutbacks on spending has put government administration and defense down -1.0%. The standout was fishing, forestry, and mining - up 10.4%, and manufacturing - up 4.3%.

The data follows the release of the current account balance yesterday. The data showed New Zealand holding a current account deficit to GDP ratio of -2.4%; the lowest in more than a decade. The key drivers were slightly improved GDP position, and more notably cyclical improvements in the current account deficit (i.e. lower investment earnings going offshore due to lower corporate profits, and a lower trade deficit (now a surplus!) due to falling imports driven by a drop in demand; but also by reasonably strong export performance), assisted by one-offs related to bank structured finance tax court cases. As previously noted, the likely outcome is for a return to larger current account deficits later this year as the cyclical factors begin to unwind.

So the key takeaway is that the New Zealand economy is in recovery mode; both in the traditional sense of the word, and in somewhat of a healing way, as some of the old bad habits of high spending, low saving, and over-investment in property come home to roost. The recovery will likely persist, but growth wont return to the sorts of levels seen before the crisis for some time yet, as consumers still need to undergo a period of de-leveraging, and getting the savings rate back into the black (from deep negatives).

So the path of monetary policy has also begun to turn, with the Reserve Bank of New Zealand increasing the OCR by 25bps to 2.75% in its June meeting. The outlook is for probably another 50-100bps this year, but due to the sluggish nature of the recovery the new neutral is probably going to be lower. But overall for the New Zealand economy the message is; onwards, and slightly upwards.

Econ Grapher Analytics
Statistics New Zealand

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