Tepid fourth-quarter growth adds to view rate hikes a long way off

New Zealand's economy expanded less than expected in the fourth quarter, firming up the view that the central bank is likely to keep interest rates on hold for some time to come.

Gross domestic product expanded 0.4% in the three months ended December 31, following a revised 0.8% increase in the September quarter. Economists had earlier tipped quarterly growth of 0.75% and the central bank had forecast growth of 1% on quarter. The economy grew 2.7% from the same period a year earlier.

The New Zealand dollar fell to 70 US cents from 70.37 cents immediately before the data release and recently traded at 70.08 cents.

For the Reserve Bank the data will come "as a low blow heading into next week's OCR review," says Kiwibank chief economist Zoe Wallis. "Following today's data we remain comfortable with our view that there is no rush to raise the OCR anytime soon," she says. Economists are widely expecting the central bank to keep rates on hold next week with most not expecting any rate increases until late 2018.

In February the central bank kept the official cash rate at 1.75% and signalled increases from mid-2019.

Today's data "means a softer starting point for activity and less pressure on capacity (and thereby domestic-led inflation pressure) than assumed in the February monetary policy statement. This reaffirms our view that the Reserve Bank will keep the OCR on hold for a prolonged period," says Westpac Banking Corp economist Sarah Drought.

However, while growth was softer-than-expected "some temporary weather-related influences had a clear impact so we need to be cautious about extrapolating trends. The underlying pace of growth is better than these figures suggest," says ANZ Bank New Zealand senior economist Philip Borkin.

ASB Bank chief economist Nick Tuffley says the figures paint a picture of a milder finish to 2016 than he had thought. 

"We have to bear in mind that the Kaikoura earthquakes came through right in the middle of that and that does seem to have had a bit of a disrupting impact. It's particularly contributed to weakness in the transport sector and in the government administraiton sector as well," he says.

Statistics New Zealand national accounts senior manager Gary Dunnet says growth in service industries was partly offset by weaker activity in primary industries also flowing through into manufacturing. The services sector expanded 0.7% while activity in the primary industries fell 1%. Agricultural activity fell 0.6%, due to lower milk production while forestry and logging activity decreased 5.1% and mining activity fell 2.3% in the December quarter.

Activity in goods producing industries fell 0.3% on the quarter, with manufacturing down 1.6% due to decreased food, beverage and tobacco product manufacturing. Meat manufacturing and dairy product manufacturing also fell.

Construction activity, however, continued to increase, rising 1.8% in the December quarter. Residential and non-residential building were both up, which was also reflected in an increase in construction trade services.

Services, however, was the main driver of growth in the quarter, with business services activity rising 1.7% and arts, recreation and other services lifting 3.8%. Activity in the service industries makes up about 70% of GDP, while activity in the primary industries makes up about 10%.

Borkin notes wet spring weather conditions are likely to be the key reason for contractions in both agricultural and manufacturing production. Given that, he is expecting a "reasonable bounce" in first quarter growth.

Kate Hickie, Australia and New Zealand economist for Capital Economics, also says "the slowdown appears to have been driven by temporary factors and so should prove short-lived." She points to the November earthquake in Kaikoura and adverse weather conditions as dragging on growth.

Meanwhile, tailwinds from record high net migration and a booming construction and tourism sector are likely to persist. "This is why we expect GDP growth to accelerate from 3.1 percent last year to around 3.5 percent this year," she says.

Per capita GDP growth, meanwhile, remained anaemic, falling 0.2% in the December quarter after a revised 0.3% increase in September. It was up 0.9% in the year ended December 31.

Real gross national disposable income per capita, which measures the purchasing power of New Zealand's disposable income, was up 2.3% in the December quarter following a revised 0.4% gain in the September quarter. Over the year, it rose 2%.

On an expenditure measure, GDP rose 0.2% in the December quarter, following a revised 0.9% increase in the September quarter.


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