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Economy likely grew 0.6% in Q1 on construction, manufacturing

First-quarter growth "largely reflects the effects of the drought and Canterbury earthquake rebuilding".

Wed, 11 Jul 2018

New Zealand's economy probably grew at a slower pace in the first three months of the year, after expanding at the fastest clip in three years in the fourth quarter of 2012, led by construction and manufacturing.

Gross domestic product rose 0.6 percent in the first quarter for an annual rate of 2.5 percent, according to a Reuters survey of 10 economists. The figures are due at 10.45am on Thursday. The economy grew 1.5 percent in the fourth quarter last year.

Economic data points to a continued pick-up in construction activity driven by the rebuild of Christchurch and also more building work in the increasingly overheated Auckland property market.

At the same time, drought spurred farmers to send more livestock to be processed, stoking manufacturing, while the impact of reduced production may not show up until the second quarter.

Growth in the first quarter "would largely reflect the effects of the drought and Canterbury earthquake rebuilding," says Nick Tuffley, chief economist at ASB. "Increasingly dry weather over late February and March led farmers to bring forward livestock slaughter and reduce milk production, but for the net impact to boost output in Q1."

The Producers Price Index release for the first quarter noted higher sheep slaughter numbers because of the drought and surplus dairy and beef cattle may also have made their way into the production chain in the face of prolonged dry weather.

The Meat Industry Association said in early April that plants "throughout the country are running flat out to ensure that, where necessary, drought affected farmers can get stock off the farm and processed as quickly as possible".

The Economic Survey of Manufacturing, released on June 10, showed volumes fell 0.6 percent in the first quarter while the value rose a relatively modest 0.2 percent.

Yet the latest results from the BNZ-BusinessNZ performance of manufacturing index, out last Friday, show manufacturing rose in May to its highest level since June 2004, led by new orders and production.

Upside risk

The PMI "puts upside risk on our manufacturing and overall GDP forecasts over coming quarters," said BNZ economist Doug Steel said after Friday's figures. "The chances that New Zealand's economic growth this year is stronger than we currently forecast are increasing."

Meantime, the $40 billion reconstruction effort in Canterbury and an overheating property market in Auckland drove the fastest growth in building work since the third quarter of 2008, with residential construction recording its biggest gain in a decade.

The volume of building work put in place rose a seasonally adjusted 5.8 percent in the first quarter, underpinned by a 12 percent boost in residential activity. Building work in Canterbury rose 23 percent.

"The construction sector will be the star performer," say economists at Westpac Banking Corp, who are forecasting GDP of 0.5 percent.

First-quarter growth of 0.6 percent would be just above the Reserve Bank's forecast of 0.5 percent, published in the latest monetary policy statement on June 13, in which governor Graeme Wheeler indicated the official cash rate would stay at a record low 2.5 percent through the rest of 2013.

Traders see 36 basis points of rate hikes in the next 12 months, based on the Overnight Index Swap curve.

On Tuesday, the government statistician is scheduled to release balance of payments figures for the first quarter. They are expected to show a current account deficit narrowed to $600 million in the first quarter from a gap of $3.26 billion three months earlier, according to a Reuters survey.

The annual deficit narrowed to $10.06 billion, or 4.8 percent of GDP, from $10.51 billion, or 5 percent of GDP.


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Economy likely grew 0.6% in Q1 on construction, manufacturing