Data Flash (New Zealand) - GDP - Q4 1999
Key Facts
* GDP (production based) rose 2.2% (s.a., qoq) in Q4/1999 - double the average market expectation. The RBNZ had expected
just 1% when finalising their March MPS inflation forecasts. Activity in the quarter was 5.9% higher than the same
quarter a year earlier.
* Growth was spread across various production sectors. Manufacturing rose 4.9%, making the largest contribution to
growth. Other significant positive contributions were made by transport and communications (3.8%), agriculture (2.8%),
construction (4.4%), wholesale (2.9%) and retail (1.9%).
* In terms of demand components, strong growth was recorded in exports (1.8%). Private consumption (1.1%), house
building (1.1%) and business investment (4.0%) also showed strong growth. An increase in stocks contributed 0.4
percentage points to growth in the quarter.
* Import growth remained robust, offsetting these positive contributions to some extent. Excluding the impact of the
Government's frigate purchase, volumes rose 1%.
Commentary
* While we had picked Q4 growth to print at the top end of market expectations (which spanned 0.8% to 1.6%), we were
surprised by the strength of today's outturn. More significantly, growth was more than 1% stronger than expected by the
RBNZ. The Bank made a similar error in its forecast of growth in Q3. The implications for monetary policy of today's
data is discussed further below.
* The economy appears to be growing across a broad sectoral base. Manufacturing output is beginning to benefit
significantly from a period of stimulatory monetary conditions; agriculture is reaping the benefits of very favourable
climatic conditions; high levels of tourism growth is reflected in strong growth in transport activity; and consumer
spending is buoyant.
* Q4 growth may have received a temporary boost to some extent due to activity related to the America's Cup and Pre-Y2K
preparations. However, we don't think that too much significance should be attached to these factors.
* A very strong contribution to growth from dairy exports (up 14% in the quarter) is not expected to be repeated in
Q1/2000. Rather, we expect dairy production to consolidate at around the higher level achieved in Q4. Furthermore, early
indicators suggest a sharp fall in residential building activity in the first half of 2000. Therefore we don't expect to
see the very high growth rates recorded over the second half of 1999 to persist. At this stage we are picking Q1/2000
growth of around 0.5-0.8%, sufficient to maintain the positive output gap at around its current level.
* The GDP deflator rose by just 0.3% in Q4. However, the GNE deflator, which includes import prices and excludes export
prices (and is thus a better measure of domestic inflation pressures) increased by 0.8%.
Implications for monetary policy
* The RBNZ noted in its March MPS that surplus capacity in the economy had been largely exhausted. Based on a forecast
of the economy growing only slight above trend, a moderate positive output gap (0.8% of potential GDP) was expected to
build up over the three- year forecast period.
* Today's data suggests that the positive output gap in late 1999 already exceeds the level projected by the Bank for
2002/03. This suggests that excess demand pressures are likely to build more quickly than envisaged by the Bank in
March. This continues the run of unpleasant surprises received by the Bank since it finalised its March MPS forecasts -
in particular, the Bank's apparent under- estimation of import prices in Q4 and the continued underperformance of NZD.
* The March MPS noted that even after the latest 50bps increase in the OCR, overall monetary conditions remain on the
easy side of neutral. There is now no doubt that the economy is growing strongly - indeed, it appears that the economy
is growing at an unsustainable pace. Thus, using Governor Brash's familiar analogy, the time has arrived to not only
ease off the accelerator, but to begin to gently apply the brake.
* Consequently, today's data reinforces our view that the RBNZ will soon conclude that it has under-estimated the extent
of inflation pressures building through the economy. We expect the RBNZ to raise the OCR by 25bps at the 19 April OCR
review and by a further 50bps at the 17 May MPS.
GDP (production) - % change
GDP (Production):::::::: Sep99q-:::: Dec98q-:::: Dec98yr-
% change:::::::::::::::: Dec99q:::: Dec99q:::: Dec99yr
Agriculture:::::::::::::::: 2.8:::::::: 1.2:::::::: 6.3
Fishing, Hunting, etc.:::: -1.5:::::::: 5.3:::::::: 1.2
Manufacturing:::::::::::: 4.9:::::::: 2.3:::::::: 8.5
Electricity, Gas & Water -1.1::::::::-2.2::::::::-2.2
Construction::::::::::::::::4.4:::::::: 3.2::::::::11.8
Wholesale Trade:::::::::::: 2.9:::::::: 7.5::::::::10.9
Retail Trade::::::::::::::::1.9:::::::: 4.2:::::::: 6.1
Restaurants & Hotels:::: -4.0:::::::: 4.6:::::::: 3.6
Transp., Communications:::: 3.8::::::::10.0::::::::12.2
Finance:::::::::::::::::::: 0.5:::::::: 0.1:::::::: 0.0
Personal Services:::::::: 1.2:::::::: 0.4:::::::: 1.4
Owner Occ. Dwellings::::::::0.6:::::::: 1.6:::::::: 1.8
General Govt. Services:::: 1.0:::::::: 0.6:::::::: 1.6
Gross Domestic Product:::: 2.2:::::::: 3.5:::::::: 5.8
Source: DB Global Markets Research
GDP (expenditure) - % change
GDP (Expend.):::::::: Sep99- :::% pt contrib:::Dec98q-:: Dec98yr-
% change::::::::::::::::Dec99q:::to qtr chge::Dec99q ::Dec99yr
Priv. Consumption::::::::1.1::::::::0.7:::::::: 2.5:::: 4.0
Gov't Consumpt.:::::::: 15.0::::::::2.3:::::::: 8.5:::: 19.4
Res. Buldings::::::::::::1.1::::::::0.1::::::::12.9:::: 24.3
Other Fixed Assets:::: 4.0::::::::0.7:::::::: 7.5:::: 6.7
Increase in Stocks:::: --:::::::: 0.4:::::::: --:::: --
GNE:::::::::::::::::::: 4.1::::::::4.2:::::::: 5.8:::: 9.3
Exports:::::::::::::::: 1.8::::::::0.6:::::::: 6.3:::: 5.9
Imports:::::::::::::::: 7.1:::: -2.7::::::::11.8:::: 15.6
Expenditure GDP:::::::: 2.2::::::::2.2:::::::: 3.9:::: 5.9
Source: DB Global Markets Research
Darren Gibbs, Senior Economist, New Zealand
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