Economic growth probably slowed to 0.9% pace in 4Q while current account gap shrank

Michael Gordon, senior economist at Westpac

New Zealand's economic growth probably slowed in the fourth quarter, after a dairy sector-driven spike three months earlier, while the continued growth in primary exports helped shrink the nation's current account deficit.

Gross domestic product rose 0.9 percent in the final three months of 2013, based on a Reuters survey of 11 economists. The current account gap narrowed to $1.4 billion for an annual deficit of $7.4 billion, or 3.3 percent of GDP, a separate survey showed.

The fourth quarter rounded off a lumpy 2013 for economic growth, driven largely by the impact of drought at the start of the year and subsequent rebound. GDP was 1.4 percent in the third quarter, surprising economists and the Reserve Bank, which sits just below the consensus forecast for GDP in the fourth quarter at 0.8 percent.

The fourth-quarter data is likely to support the central bank's view in its monetary policy statement last week that growth in the economy is becoming more broad-based. Business and consumer confidence has been rising, net immigration is spurring demand for housing and the country continues to get a boost from the rebuilding activity in Canterbury.

Meantime, demand in China has underpinned exports in a global economy where America is showing signs of improvement while Europe is seen taking more time to recover.

Westpac Banking Corp senior economists Michael Gordon has food manufacturing as the biggest contribution to growth in the fourth quarter, followed by wholesale trade, while agriculture actually detracts from growth.

"Our forecast of a 0.9 percent rise in GDP reflects steady gains across a broad range of sectors, and suggests that ex-agricultural GDP growth gradually expanded over the course of 2013," Gordon said in a note.

If fourth-quarter GDP comes in as the market expects it will mark the second successive period in which growth has exceeded the central bank's forecast.

Governor Graeme Wheeler noted in the MPS that rising demand is using up spare capacity in the economy, meaning there's more scope for inflation to flare, especially in the non-tradables sector. Yet the central bank's forecast track for annual inflation barely breaks above the mid-point of its 1 percent to 3 percent target band over its forecast horizon to March 2017.

UBS economist Robin Clements says that suggests "an incredibly fast-acting policy impact and a remarkably stable inflation outcome" probably helped by three quarters of mortgage borrowers having to fix their loans again within a year.

Traders are betting there's a 92 percent chance that the Reserve Bank will hike the official cash rate again at its April 24 review, after Wheeler lifted the OCR a quarter point to 2.75 percent last week.

Westpac's Gordon says a drop in the current account deficit to 3.3 percent of GDP from 4.1 percent three months earlier would be the biggest ever improvement outside of a recession and was likely driven by a jump in export volumes of dairy products, meat and manufactured goods.

The improvement in the goods trade balance may be "offset to a small degree" by growth in the investment income deficit as foreign-owned companies continue to enjoy better profits from their local units, Gordon said.

(BusinessDesk)

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