Whooshkaa! Our growth is better than you think

Whooshkaa! Our growth is better than you think. And Goldilocks is comfortable.

It’s not all economic doom and confidence gloom. Weak confidence has not (yet) translated into weakness.

Down risks prevail

• New Zealand’s economic engine recorded a whooping 1.0%qoq gain in 2Q, to be up 2.8% over the year. We’re bang on trend.
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• The report easily beat subdued RBNZ expectations of just 0.5%qoq (2.3%yoy), and our guess of 0.7%.
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• The report failed to justify the deterioration in business confidence (at least not yet).
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• We see strength in Q3 and Q4. And hopefully (business) heads will start to lift into year end.
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Summary

It’s nice to have a good economic news story - hopefully it lifts a few heads. Growth over the second quarter was very good. The economy expanded 1.0%, well above forecasts, and lifted annual growth to 2.8%yoy. The consensus of market economists was 0.8%qoq (2.5%yoy). Trend growth is around 2.75%, so we’re running at the “Goldilocks” growth rate. The Kiwi economy is running “just right”, not too hot, and far from cold. We do have some fiscal stimulus in the pipeline, that will microwave our run rate to 3.4% this time next year. So in the years’ time we expect to be running a “little hot”, but not “too hot”. We need the heat to generate inflation.

Business confidence has continued to deteriorate over Q3, and present downside risks, however. In return, our central bank Governor has expressed a desire to do whatever it takes (sorry Mario Draghi, it’s just such a great line), and push financial markets in a dovish direction to assist with our growth and inflation needs.

From a fiscal perspective, the size of our economy is larger than economists expected for the quarter, and now much larger than economist expectations one year ago. The Government’s budget emphasised the importance of the larger economy. As it showed an extra $3.4bn in projected revenue growth thanks to that larger base, or starting point. And we may well get another larger base (in upward revisions) to work off next budget. Our forecasts see a meaningful uplift in nominal growth over years to come. With the expected upshift in real growth, we expect a meaningful uplift in (wage) inflation .

Despite GDP growth coming in well above the RBNZ’s most recent forecast, the RBNZ is unlikely to materially alter their dovish stance for next week’s OCR announcement. The Bank is unlikely, in our opinion, to take any chances on inflation at the minute. Inflation has been too low for too long. Persistently weak business confidence is casting a shadow on future growth, and monetary policy is forward looking in nature. We expect the Bank will sit on its hands for some time to come. At next week’s OCR review the RBNZ will almost certainly keep the OCR unchanged at 1.75%. And we expect Governor Orr to maintain a similarly cautious tone that was presented at the August Monetary Policy Statement (MPS).

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