NZ economy performing better than previously thought - ANZ

Phil Borkin, Senior Economist at ANZ, explains that the NZ economy expanded at a pace in line with consensus expectations in Q3, but meaningful upward historical revisions paint a picture of an economy that’s been performing better than previously thought (although still one that has seen growth slow over the past year). 

Key Quotes

“The question is; will views on potential growth be revised higher too? With broad-based inflation still MIA, we suspect they will be. We are therefore reluctant to immediately draw strong implications for the monetary policy outlook from these revisions.”

“Looking forward, we retain the view that while the medium-term picture should still be reasonable, the near-term picture could be a little mediocre as the economy navigates some headwinds.”

“Key Points

• The economy expanded by 0.6% q/q in Q3, which was in line with consensus expectations. However, on the back of some meaningful historical revisions, annual growth, at 2.7% y/y, was considerably stronger than expected. 
• A new annual benchmarking methodology by Statistics NZ and some other methodological changes have seen historical GDP revised up significantly. For example, in the years to March 2016 and 2017, the economy is now reported to have grown at 3.6% and 3.7%, from 2.4% and 2.9% respectively. This paints a vastly different picture with regards to the economy’s recent performance.
• In the quarter itself, 12 of the 16 production-based industries recorded growth. The main lift came from a broad-based recovery in construction, which bounced 3.6% q/q after falling over the prior two quarters. Led by professional, scientific and administrative services, health care services and arts and recreation services, services sector activity expanded 0.6% q/q. Conversely, primary production fell 0.4% q/q, led down by weaker agricultural production. 
• At face value, the stronger historical growth performance suggests the economy has absorbed more spare capacity, running with a larger positive output gap than previously thought. All else equal, that is obviously relevant for monetary policy. However, with broad-based inflation pressures still MIA, it is actually not clear-cut. There remain plenty of questions regarding the outlook for inflation from here, so we suspect the RBNZ will be somewhat cautious in interpreting these figures hawkishly. Rather, we suspect a good chunk of the upward revisions will feed straight into its estimates of the economy’s potential growth rate, rather than its estimate of the output gap.
• What is also interesting is that this latest data now shows the economy has been cooling over the past 12 months or so. Annual growth has fallen from over 4% in mid-2016 to less than 3% now. While we retain a generally positive view on medium-term prospects, given positives such as the terms of trade and the positive outlook for household incomes, we see the cooler picture persisting over the next few quarters. The economy is not only navigating headwinds from the softer housing market, but is also transitioning in terms of its growth drivers, in part due to capacity pressures. Throw in some unease regarding the new political direction, and more recently the dry weather potentially hampering agricultural production, and we see a reasonable chance of a growth wobble.”