Drought is a drag, but we expect strong domestic demand

HSBC Global Research

New Zealand Q2 GDP Preview: Drought is a drag, but we expect strong domestic demand

- Partial indicators published in recent days suggest the headline Q2 GDP number could be weak, particularly given the expected drought effect on exports and production

- However, this supply-driven shock is not the key story, as it has few implications for domestic demand – which is expected to be strong – and for the expected rise in inflation

- We lower our Q2 GDP forecast to +2.3% y-o-y (from +2.8%), but we expect a strong bounce back in H2 2013

Temporary pause expected

The drought in New Zealand earlier in the year is likely to have put a temporary brake on GDP growth in Q2 (to be published on 19 September). Dry conditions saw agricultural production drop sharply, weighing on agricultural export volumes in Q2 – with net exports set to be a drag on headline GDP.

While the drought is likely to have taken a substantial chunk out of the growth in the quarter, the implications for broader economic momentum and monetary policy are, however, less significant. The RBNZ seem to agree, having pulled forward its expectations of its own cash rate hikes in yesterday’s quarterly official statement.

The drop in production and exports largely reflects a supply-side shock and, as such, has limited disinflationary impact on the economy. The fall in supply has also been somewhat offset by a sharp rise in export prices, which is expected to have cushioned the blow to rural sector incomes.

Other partial data, published in recent days, also suggest that the Q2 number could be on the weak side, with some signs of a temporary pause. After a Canterbury rebuild-led surge over the previous year, dwelling construction looks likely to have fallen, though forward indicators suggest this weakness should only be temporary.

Despite the drought effect and pause in construction, we nonetheless expect domestic demand remained strong in the quarter, given a sharp rise in retail sales (+4.2% y-o-y). We forecast domestic demand to have risen by +3.7% y-o-y in Q2.

All up, the drought and weaker recent partials have led us to lower our GDP forecast for Q2. We now expect y-o-y growth of +2.3% (previously +2.8%) and +0.2% q-o-q. The drought effect is, however, expected to have been temporary. We expect a strong bounce back in H2 2013, given strong forward-looking partial indicators.
ends

© Scoop Media