Bubbly services sector seen keeping growth afloat in June

Bubbly services sector seen keeping growth afloat in June quarter

By Rebecca Howard

Sept. 16 (BusinessDesk) - Service sector output may have kept the economy ticking over in the June quarter, but economists say the sluggish backdrop points to at least one more interest rate cut before December.

The median in a Bloomberg poll predicts gross domestic product expanded 0.4 percent in the three months ended June 30, slowing from a 0.6 percent pace of growth in the March quarter, and below the Reserve Bank's forecast 0.5 percent. The economy is expected to have expanded 2 percent from a year earlier, slowing from the 2.5 percent pace in March.

ANZ Bank economist Miles Workman expects growth was 0.4 percent, driven by a 0.7 percent rebound in services output after a 0.2 percent lift in the prior quarter.

Output from the services sector makes up about two-thirds of New Zealand’s economy.

On the flip side, he expects goods production contracted 0.9 on the quarter and noted activity in both manufacturing and construction probably shrank.

Workman said there are signs economic momentum has been “running out of puff for a while now.”

He doesn’t, however, expect growth to stall given monetary conditions are – and will remain – accommodative.

The central bank cut the official cash rate by 50 basis points last month to a record low 1 percent - citing weak domestic growth as one factor - and is widely expected to deliver more cuts.

Workman expects the central bank to use all of its “conventional” ammunition, cutting the OCR to 0.25 percent by May 2020.

Westpac’s economist Michael Gordon expects a 0.6 percent lift in second-quarter GDP. He also expects that growth was powered by service sector activity, while construction, mining and food manufacturing were likely to have eased back. He expects the agricultural sector expanded, led by a 4 percent rise in dairy production.

However, Gordon noted retail spending was soft, with the volume of spending up just 0.2 percent in the quarter, and is not so upbeat about the future.

“While GDP growth appears to have held up in the June quarter, stepping back and taking a longer term look at economic activity, it’s clear that the wind has come out of New Zealand’s sails,” he said.

Against the backdrop, the RBNZ is likely to cut the cash rate again later this year in order to boost demand, he said.

ASB Bank expects quarterly growth was 0.5 percent. “NZ GDP growth has slowed below its full potential pace and requires policy support to prevent growth slowing further and (to) limit the risk that a recession forms,” said ASB economist Jane Turner.

Turner also expects another rate cut this year but said it is more likely to happen in November rather than September, given the aggressive reduction in August had pre-empted a certain amount of “bad” economic news, including muted GDP growth over the second quarter.

Bank of New Zealand economist Craig Ebert is more pessimistic. He expects second-quarter GDP growth was 0.3 percent largely due to “shaky” manufacturing data. The volume of total manufacturing sales fell 2.7 percent on quarter in the June quarter while the value was down 0.7 percent.

Even if the economy managed to hold up in the second quarter, "questions will linger about 3Q," he said. There are signs consumer spending might be struggling, manufacturing activity contracted in July and August and "tourism is something to watch closely in the context of the slowing global economy."

(BusinessDesk)

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