NZ Recovery To Continue: Quake Temporarily Held Back Q2 GDP

22 September 2011

The earthquake held back the New Zealand economy more than expected in Q2, with growth of only 0.1% (market and HSBC expected 0.5%). But don't despair, upward revisions to history meant the y-o-y rate was still a solid 1.5% (against an expected 1.7%). Besides, the weaker Q2 result was largely due to supply constraints caused by the late-February earthquake, not weak demand. The accounts tell us that Q111 and Q410 were even stronger than first thought. Looking forward, H2 still looks like it will be strong and a bounce back from supply-constrained Q2 will add further impetus to growth.

Facts
- GDP rose by 0.1% in Q2 (market and HSBC expected 0.5%). Over the year, GDP rose by 1.5% (the market and HSBC expected 1.7% y-o-y). Upward revisions to Q410 and Q111 of 0.1pp each, helped to support the year-ended rate.
- Across industries, the results were mixed. In the quarter, production fell in 7 of 11 industries. Over the year, the numbers looked a bit more encouraging, with solid growth across most industries. Two sectors that registered noticeable falls were the fishing, forestry and mining industries and the construction industry, with both falling by over 10% y-o-y.
- The expenditure measure showed solid growth in household consumption and modest increase in business investment. Weakness was fairly concentrated in housing construction and exports also showed a modest fall in the quarter. Over the year, growth in expenditure has recovered solidly across most of the components, with the weakness very much concentrated in residential building.
- In a recent speech to a Euro money forum the Governor suggested that while the global risks may mean the RBNZ could be on hold for longer, rates would still need to rise, given elevated inflation and the economic recovery that is in swing.

Implications
After an upside surprise on GDP growth last quarter, which confirmed that New Zealand was on the path to a solid recovery around the turn of the year, today's number was a modest downside surprise.

But don't despair. The weaker growth is expected to be temporary and largely due to the effect of the Canterbury earthquake. This makes sense given the Canterbury earthquake struck in late February and its biggest effect was to limit productive capacity subsequently, rather than weaken demand in Q1. While growth was held back a bit more than we expected in Q2, the momentum in the economy prior to the earthquake was stronger than previously estimated (growth over the year to Q1 was revised up from 1.5% to 1.7%).

Looking forward, there are a number of reasons to be fairly optimistic about the growth outlook. These include: the Rugby World Cup, which will boost spending in Q3; the rebuilding of Canterbury which is just getting under way; the high level of dairy and meat prices, which will keep boosting income; plus, today's weaker result for Q2 will also probably mean a stronger bounce back in Q3, as the supply side of the economy rebounded to meet continued demand.

The key downside risk is, of course, global developments. In a speech overnight the Governor suggested that while he expected that rates would need to rise from their current levels, the downside risks to world growth may keep them on hold for longer.

Bottom line
While growth was weaker than expected in Q2, new estimates suggest the momentum before the earthquake was even stronger than previously estimated.

We still expect a strong H2 as the supply side of the economy bounces back after the quake and the economy is supported by the Rugby World Cup, elevated commodity prices and rebuilding in Canterbury.

ENDS

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