GDP Figures: It Was Worth The Wait For Such Good News

14 July 2011

New Zealand was recovering around the turn of the year. Today’s GDP report shows the pick-up was stronger than expected. GDP rose by 0.8% in Q1 and 1.5% y-o-y. Dairy exports were a key contributor, although the recovery was fairly broad-based across industries. All in all, the report supports our view that although the Canterbury quake was devastating for that region, strength in the rest of the economy will more than offset the quake's effect. With inflation expectations already high, we think RBNZ will reverse emergency settings this year, with Q4 our central case, though the risk is for an earlier move.

Facts
- GDP rose by 0.8% in Q1, stronger than both consensus and HSBC, which had 0.3% in mind. Over the year, GDP rose by 1.5%, supported by upward revisions to Q4 from 0.2% to 0.5%.
- Across industries, growth was supported by manufacturing (3.6%), real estate and business services (1.0%) and wholesale trade (1.5%).
- The expenditure measure of GDP rose by 0.6% in Q1 and 1.8% y-o-y. The key contributor to growth on the expenditure side was dairy exports (9.8%), though household consumption and government spending also rose solidly.

Implications
It was worth the wait for such good news! While the GDP numbers were delayed a couple of times, as the earthquake caused headaches for the statistician, in the end, StatsNZ tells us the quality of these estimates is ‘sound’ and, even better, they looked quite strong.

It seems that the recovery that was apparent in business liaison (as reported by RBNZ), the business surveys, and also in the employment statistics, has genuinely been reflected in strong GDP numbers both for Q4 2010 and Q1 2011. The Q4 numbers were revised up to 0.5% and the Q1 numbers were the strongest we have seen since Q4 2009 showing a rise of 0.8%.

Across the components, growth appears to be broad-based. Of the 11 industries, 7 showed a rise in growth in Q1 and 8 of them showed a rise y-o-y. The manufacturing industry appears to have pulled itself out of a funk, posting two solid quarterly increases in Q4 and Q1, and rising by 1.7% over the year.

Across the expenditure components, household consumption posted another modest rise in the quarter, and while investment fell, the traded side of the accounts looked positively resplendent: much as you might expect given the very high level of dairy and meat prices. Volumes of dairy product exports rose by 9.8% in Q1, providing strong support for GDP growth.

We expect the momentum in growth to have continued into Q2 – although we will probably still see some effects of the quake – and for growth in the second half to be strong on the back of high dairy and meat prices, the Rugby World Cup and rebuilding in Canterbury.

All in all, activity looks as though it is recovering and inflation is elevated, which will start to put some pressure on the RBNZ to reverse its emergency interest rate settings. Headline inflation, albeit boosted by tax changes last year, has been above the RBNZ’s comfort zone for a while now and surveys of inflation expectations show that they are around the top of the RBNZ band. The GDP deflator reported today is running at 3.6% over the year, its fastest pace since Q4 2008.

Bottom line
Today’s GDP numbers confirm that a recovery is in swing in New Zealand.

We expect the RBNZ to reverse its emergency rates settings soon, with Q4 our central case, though the risk is for an earlier move.

Paul Bloxham, Chief Economist (Australia and New Zealand)
HSBC Global Research
Economics - Data Reactions
14 July 2011

ENDS

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