Result: GDP rose 1.1% qoq in Q1 (in line with market expectations) and was 4.0% higher than the same quarter a year
earlier (compared to expectations of 3.8% yoy, reflecting minor upward revisions to earlier data).
Implication for markets: The Q1 outcome was marginally stronger than RBNZ expectations. We expect the RBNZ to hike 25bp
next week, but think that the chance of no move is 40%.
Commentary
Today's GDP outcome simply confirms that the economy performed well in Q1, with the aggregate outcome and breakdown
according neatly with our expectations. For the second quarter in a row, consumer spending grew strongly. However,
investment spending fell, with both residential investment and plant and machinery investment recording a sharp decline
after strong growth in Q4. Contrary to most economist commentary on the screens, final domestic demand was actually
quite weak this quarter - gross national expenditure grew by 0.7% qoq, and that included a 1.0pp contribution from an
increase in inventories (largely in the wholesale sector). However, this follows three quarters of very strong growth.
Exports rebounded in Q1 following two weak quarters, with a 5.4% qoq rise in dairy exports contributing to a 2.0% qoq
rise in goods exports. A strong rebound in tourist numbers and spending drove an 8.5% qoq rise in exports of services.
However, as we have noted on numerous occasions, in thinking about the future we are loath to simply extrapolate
historical data, more so with data that represents a period 3 to 6 months ago. We do think that GDP has posted a further
solid rise (a little under 1% qoq) in the current quarter. But as suggested by today's NBNZ business survey, we think
that the medium-term outlook is for a period of more modest growth which, given our expectation of further monetary
tightening, may well fall a little short of the economy's growth potential. Our expectation of a gradual reduction in
migrant flows - reinforcing a decline in activity in the housing market - and a huge drop in rural sector incomes helps
to underpin our view.
Today's GDP release is the last major local indicator before next week's 3 July OCR review. The outcome was only
marginally stronger than the RBNZ's expectations (as per the 15 May Statement) and, in any case, we think the Bank was
anticipating some upside risk. There is little doubt that the Bank was anticipating a 25bps hike on 3 July when it
published its 15 May statement - and maybe the possibility of a 50bp hike. Since then, the NZD has appreciated much more
rapidly than the Bank's expectations and business confidence has declined. While the most recent consensus forecasts of
trading partner growth were revised up marginally, given recent global economic and financial events, we would not be
surprised to see some downward revision over coming months. Finally, Finance Minister Cullen has raised fundamental
questions about the Bank's interpretation of the Policy Targets Agreement (questions that we think are entirely
legitimate).
Looking ahead to next week, we still expect a 25bp rate hike, taking the cash rate to 5.75%. Given the current strength
of the domestic economy, that inflation remains much nearer the top of the target range than the bottom, and that the
cash rate would, at 5.75%, still remain no tighter than neutral, on balance, we think this move can be justified.
However, for the reasons listed above, it is clear to us that the overall degree of tightening factored into the Bank's
May projections is no longer required with, in our view, a peak cash rate of 6.25% sufficient to deliver sustained
inflation outcomes within the target range. If the Bank agrees with our analysis, monetary conditions are no longer far
too easy relative to what is required at the peak of the cycle, and the urgency to hike rates is consequently reduced.
This gives the Bank latitude to skip next week's meeting if it so wishes. Certainly, skipping next week's meeting would
help to diffuse some of the recent criticism, which would reach a crescendo if the RBA - which meets later that day -
declines to raise rates (not our central call, but a definite possibility). We think there is a 40% chance that the Bank
leaves rates unchanged next week.
Key Points
GDP (production measure) rose 1.1% qoq in Q1, following growth of 0.7% qoq in Q1. The median market expectation had been
for a quarterly rise of 1.1% qoq. The RBNZ forecast growth of 1% qoq in its May Monetary Policy Statement - a forecast
that the Bank felt was subject to upside risk. GDP in Q4 was 4.0% higher than the same quarter a year earlier while the
annual average increase over the calendar year was 3.3%.
The less widely followed expenditure-based measure of GDP rose 1.4% qoq. The composition of growth on both a production
and expenditure basis is set out in the tables overleaf.
The GDP deflator rose 0.4% qoq in Q1, taking the annual rate of inflation to 2.1% from 3.5% previously. The GNE deflator
- which best reflects the prices of goods and services purchased in New Zealand - rose 0.2% qoq and 1.9% yoy.
Darren Gibbs, Senior Economist, New Zealand