UPDATE: Stronger than expected growth sees traders dial back rate cut chance

Thursday 20th September 2018

New Zealand's stronger-than-expected economic growth pared any chance of a rate cut but downside risks - particularly flagging business confidence - remain.

Gross domestic product expanded 1 percent in the June quarter, accelerating from a 0.5 percent rise in March, and was up 2.8 percent on the year, Statistics New Zealand said. Economists had expected quarterly growth of 0.8 percent and 2.5 percent annual growth, according to the median in a Bloomberg poll. The central bank was forecasting growth of 0.5 percent.

The GDP data attracted particular attention as the central bank had indicated it could cut rates if the economy failed to fire. Prior to the data, money markets had been pricing a 40 percent chance of a rate cut by May 2019. That fell to 20 percent after today's release.

The New Zealand dollar jumped following the release, reaching 66.52 US cents, its highest level this month. It was at 66.12 cents immediately before the announcement and recently traded at 66.44 cents.

While today's result doesn't guarantee the economy is on an accelerating path, "it does argue against the case for official cash rate cuts in the near future," said Michael Gordon, senior economist at Westpac Banking Corp.

"Not only was the overall result stronger than expected, the details were more encouraging for the economy’s growth prospects going forward," he said.

Growth was shared widely across the economy, and the one-off spikes in areas such as electricity, transport and government services "weren’t as big as we expected, which means there’s less risk of an unwind in the next quarter," he said.

Gordon also pointed out that growth would have been even higher in the second quarter but for outages at the Marsden Point oil refinery and Pohokura gas field.

"With both operators back in action, these will add to the growth rate in the September quarter," he said.

Still, ANZ Bank New Zealand senior economist Liz Kendall said the data provide some reassurance the central bank will not be "complacent about downside risks."

"The economy is grappling with headwinds, recent drivers of growth are waning, and there is a risk that downbeat business expectations become self-fulfilling – with employment and investment having turned negative," she said.

Tumbling business confidence - which is hovering near a 10-year low - has preyed on the central bank as it frets about slowing business investment.

Today's data reinforced that - one of the few weak points was a dip in investment spending.

Residential investment increased 0.5 percent while business investment, which is all investment less residential construction, shrank 0.2 percent in the June quarter after expanding 0.3 percent in the prior quarter. Several components, however, such as investment in transport equipment and other construction were positive.

"It remains to be seen whether investment will be affected by downbeat business intentions into the second half of the year," said Kendall.

Overall, today's print will give the RBNZ some breathing room to continue to “watch, worry and wait”.

She expects the central bank to reiterate a willingness to do what it takes to support the economy, restating that the next move in the cash rate could be “up or down" at next week's review.

(BusinessDesk)

Comments from our readers

No comments yet