NZ economic growth keeps rate hike track intact
New Zealand's pace of growth in the final three months of the year, underpinned by a booming manufacturing sector, won't derail the Reserve Bank's path to higher interest rates this year.
Gross domestic product grew 0.9 percent to a seasonally adjusted $38.3 billion in the three months ended Dec. 31, from a revised pace of 1.2 percent in the September quarter, according to Statistics New Zealand. That was in line with market expectations and slightly ahead of the Reserve Bank's forecast of 0.8 percent growth in the quarter. Annual growth was 2.7 percent, and GDP was 3.1 percent higher than the same quarter a year earlier. (See graph below)
The pace of growth underpins signs the local economy is gathering momentum, which Reserve Bank governor Graeme Wheeler says is creating inflationary pressures that require a monetary policy response. He kicked off a tightening cycle this month, lifting the official cash rate a quarter-point to 2.75 percent and anticipates raising the OCR another 2 percentage points over the next two years.
"Most people continue to think we've got at least two more rate hikes ahead of us in April and June," said Darren Gibbs, chief economist at Deutsche Bank in Auckland. "July is a bit more debatable and depends how the data pans out."
The Reserve Bank's forecast track for the 90-day bank bill rate, often seen as a proxy for the OCR, projects the rate rising to 4 percent by the end of 2014 and 5.3 percent by March 2017. Traders have priced in 119 basis points of rate hikes over the coming 12 months, and give a 92 percent chance of an increase at the April meeting, according to the Overnight Index Swap curve.
The kiwi dollar fell to 85.37 US cents from 85.61 cents immediately before the figures were released, and recently traded at 85.38 cents.
Deutsche Bank's Gibbs said given the GDP number was largely what people were expecting, the steeper forecast track for US interest rates by the Federal Reserve will be weighing more heavily on traders.
Westpac Banking Corp chief economist Dominick Stephens and senior economist Michael Gordon said in a note the central bank will have to gradually raise interest rates this year as the economy gathers momentum on the strength of the Canterbury rebuild, house building activity in Auckland, and 40-year high terms of trade.
"As interest rates rise, we suspect that the housing market will slow, consumer buoyancy will gradually diminish, and eventually, GDP growth will slow. But this is a process that could take years," they said.
Today's figures show manufacturing grew 2.1 percent to $5.15 billion in the quarter, its highest level since March 2006, and accelerating from 1.6 percent expansion in the September quarter. The BNZ-BusinessNZ performance of manufacturing index has shown activity has been expanding for the 18 months through to February.
Dairy production fell in the quarter as inventories were run down $18 million in the period, though other food, beverage and tobacco manufacturing made up for the shortfall. Transport equipment, machinery and equipment manufacturing grew 6.2 percent in the period.
Wholesale trade grew 3.2 percent to a seasonally adjusted $2.13 billion with machinery and equipment wholesaling the major contributor to the gain.
New Zealand's primary industries grew 0.3 percent led by a 9.5 percent expansion in mining driven by exploration activity, while agriculture shrank 1.6 percent, forestry contracted 0.6 percent and fishing declined 0.7 percent.
Business services shrank 2.1 percent in the quarter, driven by slowing architectural and engineering, which has been at elevated levels in recent quarters to help prepare the $40 billion rebuild of Christchurch.
Other sectors to shrink in the quarter were information, media and telecommunications services, down 0.6 percent, and arts, recreation and other services, which fell 0.9 percent. All service industries grew 0.3 percent in the quarter.
Construction activity grew 0.4 percent in the quarter as investment in infrastructure made up for largely flat spending on residential housing and a decline in non-residential work. Investment in residential housing increased 0.1 percent to $1.75 billion in the quarter, while non-residential building fell 4.6 percent $853 million. Investment in other construction grew 8.8 percent to $1.08 billion.
Business investment, which strips out spending on residential property, grew 0.9 percent to $8.33 billion. Gross fixed capital formation rose 0.4 percent to $9.79 billion.
The expenditure measure of GDP grew 0.6 percent, lagging the 0.8 percent growth forecast in a Reuters survey of economists. The annual measure of GDP expenditure grew 2.5 percent. Household spending underpinned the quarterly gain, up 1.3 percent, led by expenditure on durable goods. Central government expenditure shrank 0.6 percent in the quarter.
Real gross national disposable income rose a seasonally adjusted 3.3 percent in the quarter.