NZ economy expanded at fastest rate in two years

New Zealand economy expanded at fastest rate in two years

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The New Zealand economy expanded at a healthy clip of 0.8%q/q in 4Q (J.P. Morgan: 0.6%, consensus: 0.8%), nearly three times the increase recorded in 3Q, which was revised up from 0.2% to 0.3%. Annual economic growth printed at 0.4%oya, marking the first positive result since the second quarter of 2008.

The upside surprise for us stemmed from inventories, which were not the drag on growth we expected. In fact, inventories were built up by NZ$172 million in 4Q, following three quarters of run downs. The other drivers of economic growth were largely as expected. Private consumption was up strongly, government spending was firm, investment was weak, and net exports were down

The belated 4Q GDP data has few implications for the near-term monetary policy outlook, however. That said, we believe the 1Q GDP report will. Governor Bollard appears to want hard evidence that the recovery is sustainable so, in our view, will sit on the policy sidelines until after the late-June release of the 1Q GDP report, which we forecast will show the economy expanded a solid 0.8%q/q in the opening three months of the year. We, therefore, maintain our forecast for the first move to be a 50bp hike in July.

Private consumption grew 0.9%q/q, the same rate as in 3Q, thanks to increased spending on durable and non-durable goods. This solid result was anticipated after data showing retail sales volumes spiked 1.0%q/q in 4Q. In recent quarters, household spending has been underpinned by record-low interest rates, strong net immigration flows, and strong house price growth, but the tide now is turning. The recent pull-back in housing activity, in particular, will weigh on consumption in early 2010, against a backdrop of high unemployment and subdued wage growth.

As expected, net exports subtracted significantly from economic growth in 4Q. Import volumes surged 6.0%q/q, buoyed by elevated NZD, while export volumes dropped 0.9%, due to fewer shipments of dairy products. Indeed, the most recent policy statement from the RBNZ was a little more dovish with respect to growth in the nation’s trading partners, which Dr. Bollard described as being “more muted.” In New Zealand’s major trading partners in Asia, however, growth had recovered “a little faster than expected.” We suspect that net exports will add to economic growth in coming quarters, with economic growth in Asia and Australia, in particular, maintaining solid momentum.

Government spending grew 0.9%q/q in 4Q, marking the fastest rate of growth for 2009, though this was offset by the 0.9% drop in gross fixed capital formation. Investment in residential building shot up 4.8%q/q, but non-residential building declined 3.8%.

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