New Zealand’s GDP Lacklustre

22 March, 2012
For immediate release

New Zealand’s GDP Lacklustre
Rugby Up, Manufacturing Down

Paul Bloxham, HSBC Chief Economist (Australia and New Zealand)

GDP surprised on the downside. Over the year, growth was +1.8%, against an expected +2.2%. The Rugby World Cup supported services in H2, but this was partly offset by falling manufacturing, particularly meat. The story is similar on the expenditure side. Consumption and services exports were supported by the Rugby, but inventories subtracted in Q4, as dairy stocks were rundown. All in all, it’s weaker than expected, reminding us that New Zealand’s recovery is still only modest. The next big support for growth comes from Canterbury’s reconstruction, with a ramp up expected in H2 2012, along with RBNZ hikes.

Facts

- The production measure of GDP rose by +0.3% in Q4, below market expectations for a +0.6% rise and down on the +0.7% rise in Q3. In annual terms, GDP was up +1.8%, versus +2.2% expected.

- Across the sectors, solid contributions came from services (+0.7%) and primary industries (+2.7%), while goods production fell by -1.6%. In annual terms the primary sector was up +4.9%, followed by the services sector (+2.2%) which was partly offset by a -1.5% decline in the goods producing sectors.

- The impact of the Rugby World Cup was evident in the retail, accommodation and restaurants category, which was up +7.6% y-o-y. Strong commodity prices and better growing conditions helped lift agriculture by +7.5% y-o-y whereas finance, insurance, and business services rose by +4.2% for the same period. In contrast, while the construction sector rose by +1.5% in Q4, it remains -8.0% lower in y-o-y terms. The government’s austerity drive resulted in a -2.2% decline in the government sector y-o-y.

- The expenditure measure of activity rose by +0.5% in Q4 and 2.1% y-o-y. Domestic demand fell -1.4% with a -2.9% decline in imports during the quarter. The softer than expected GDP print was mostly due to a rundown in inventories in Q4, which cut -2.8ppts off Q4 GDP. Against this though, there was an encouraging pick-up in investment (+1.7%), mostly from a +4.2% rise in residential investment. However, in annual terms, investment remains weak (-2.2%).

- National disposable income rose by +1.9% in annual terms. This is above the increase in GDP for the same period (+1.4%) and was due to a positive contribution from the terms of trade during the year.

Implications
The quarterly numbers are messy for Q4, as can often be the case with quarterly numbers.

But the bottom line is that: while the Rugby World Cup did boost the economy, manufacturing production weakened more than expected, particularly due to meat production.

Growth was +0.3% in Q4, which is lower than the +0.6% expected. The components moved in the directions expected, but the magnitudes were weaker than expected overall.

On the production side, services were strong in Q4, as were retail, accommodation and restaurants – all consistent with the Rugby World Cup support. But manufacturing was very weak, as livestock slaughtering was down. The public sector also continued to withdraw from the economy, as the government cut back to improve its budget position.

The expenditure side was also directionally consistent, though magnitudes surprised on the weaker side. The Rugby World Cup (which straddled Q3 and Q4) supported services exports and household consumption in Q4. Investment remained only modest, as the Canterbury rebuild has not really started in earnest yet. In the quarter, a large inventory subtraction was the main surprise. This reflected a rundown in dairy stocks that more than offset the boost to exports.

Recent timely indicators of conditions have shown improvement in the manufacturing industry, which should support positive modest growth in the first quarter of 2012.

For the 2011 year as whole, growth was a bit below what had been generally expected in our post-quake March 2011 set of forecasts. Growth was 1.4% in 2011, versus our post-quake forecast of 1.7%.

This seems to mostly reflect that the reconstruction of Canterbury has taken longer to get started.

This continues to be the key theme moving into 2012. The reconstruction is yet to ramp up, due to delays caused by aftershocks, coordination and insurance issues. We expect the big ramp up to be later this year.

Bottom line
Growth was weaker than expected, despite a significant boost from the Rugby World Cup, as manufacturing production fell, particularly meat.

The next big support for growth comes from the Canterbury reconstruction, which we expect to ramp up in H2 this year.

We still expect that the RBNZ’s next move is up, and expect hikes in H2.

GDP_with_HSBC_comment_22_March_2012 pdf file

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