GDP posts solid gain in 1Q, above RBNZ expectation

GDP posts a solid 1.0%q/q gain in 1Q, above RBNZ expectations

The New Zealand economy posted a strong 1.0%q/q gain in growth in 1Q (JPMorgan and consensus 1.0%), up from 0.8%q/q in 4Q, on the back of solid growth in consumption and investment. GDP growth is now running at 2.5%oya, up from 2.1% in 4Q. Domestic demand fell in line with expectations, posting a 1.2%q/q gain, driven by a 2.2% spike in household consumption and a 3.9% rebound in gross fixed capital formation. Today's GDP report was above RBNZ's forecast of 0.8%q/q, and some commentators may take this to mean the central bank has little choice but to tighten again. It is important to note that, however, that this belated data release in for the first three months of the year, and prior to the last three RBNZ policy tightenings.

The strong bounce in consumption growth over the quarter was met by a spike in consumption goods imports and a sizable run-down in retail inventories. The spike in retail spending over the first quarter is unlikely to continue into 2Q, however, as three RBNZ interest rate rises, rising global yields and higher petrol prices squash momentum. In fact, the 2Q retail data to date has been soft (including expending on credit cards), consumer confidence has fallen and anecdotes from retailers have suggested weak results. The only positive anecdotes were around spending post the Fonterra payout announcement, and the increase in tractor and car sales.

Export volumes rebounded with a vengeance over the quarter (up 2%q/q), as nine-tenths of the increase was squeezed out of the dairy sector. Export volumes look set to grind higher throughout the remainder of 2007 and into 2008 as the rise of dairy prices more than offsets the gains in NZD. Prices of meat and lumber are also set to rise further as the impact of culling livestock due to the Australian drought comes to an end, and higher taxes in Russia push timber prices higher. Import volumes, however, swamped exports over the quarter as consumption goods imports surged 4.7%q/q; this spike is likely to be reversed in 2Q.

From the RBNZ's viewpoint, today's data supports their decision to tighten policy 75bp to 8% over the last three meetings. When looking at the higher base set in Q1, however, their 2Q projection of 0.8% looks overdone, especially given the weak data and anecdotes on consumption growth over the quarter. Today's numbers alone are not enough to push the RBNZ into tightening policy again in July. There are four remaining hurdles that need to be cleared before the RBNZ's next meeting in July: house prices (July 8); NZIER business opinion (July 10); retail sales (July 13); and, most importantly, non-tradeables inflation (July 16).

On house prices, days to sell and trading activity have weakened in recent months, but prices continue to soar. Further deterioration in activity and days to sell will provide evidence that growth in house prices is set to slow. The next major data release is the NZIER Quarterly Survey of Business Opinion, which provides useful indicators of capacity usage and any shortage of workers. The NZIER survey is likely to decline in 2Q and measures of resource constraints are likely to have eased, albeit slightly. Retail sales should show another weak month on the back of higher interest rates and elevated petrol prices.

The most important indicator, however, is non-tradeables inflation in 2Q. Non-tradeables inflation ticked above the psychological 4% level in 1Q, and will need to drop back below 4% for the RBNZ for have confidence that inflationary pressures are beginning to abate. JPMorgan forecasts non-tradeables inflation to post an annual rate of growth of 3.9%. A material upside surprise would leave a tightening squarely on the table. JPMorgan forecasts the RBNZ to remain on hold in July.

ENDS

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