NZ 2Q GDP seen slowing to 0.3 percent

Monday 17th September 2012

The New Zealand economy's pace probably slowed in the second quarter from the first, though forecasts range from a small contraction to a modest 0.7 percent rise as economists ponder the impact of a strong kiwi dollar on manufacturing and the timing of Christchurch's rebuild.

A Reuters survey of 13 economists predicts gross domestic product grew 0.3 percent in the second quarter, slowing from the first quarter's 1.1 percent pace. That's slower than the 0.6 percent pace forecast in the Reserve Bank of New Zealand's monetary policy statement, issued last week, in which it revised growth predictions down sharply from its previous estimate.

Economists are leaving an unusually large 'wiggle zone' around the numbers because Statistics New Zealand has been overhauling its measures of GDP, in a staged change.

Westpac Banking Corp gives the biggest percentage weighting of drivers of GDP in the second quarter to "unallocated/balancing item" which would take away about 0.25 percentage points from growth. The government statistician could also make the adjustment by revising down first-quarter growth.

"Weaker GDP growth follows a puzzlingly large rise in the previous quarter," Westpac senior economist Michael Gordon said in a preview of this week's data.

Westpac is picking 0.4 percent growth, with the strongest contribution coming from food manufacturing and agriculture, following a bumper season for dairy production. Non-food manufacturing is expected to be weaker.

Manufacturers are weathering a New Zealand dollar that has proved more resilient than the Reserve Bank and many in the market had anticipated. That's compounded fears of weak global growth, with economies in Europe and the US anaemic, China's pace slowing and Australia likely to be buffeted by weakening prices for core exports such as iron ore and coal.

The central bank last week raised its forecast for the trade-weighted index through to its forecasting horizon of March 2015. The TWI was last at 73.23, meaning it would need to ease back over the next few months to meet the bank's forecast for an average level of 71.1 for the third quarter.

The high kiwi has sparked calls for the central bank's tool kit to be widened to allow it to attempt to drive down the currency and ease pressure on exporting manufacturers.

"The Reserve Bank assumes that the NZD starts drifting lower from about now," Bank of New Zealand head of research Stephen Toplis said in a note last week. "We, on the other hand, see the potential for further strength. If we are right then this will also weigh more towards a dovish bent."

Economists have pushed back their expectations of when the Reserve Bank may raise interest rates from a record low. Based on the Overnight Index Swap curve, the RBNZ may cut the official cash rate by 7 percentage points over the next 12 months.

Toplis expects the economy shrank 0.1 percent in the second quarter, the gloomiest forecast in the survey, and predicts the RBNZ won't hike the OCR until December next year.

According to Westpac, retailing and the finance sector also contributed to growth in the second quarter. What's less certain is the extent to which reconstruction work in Christchurch is acting as a fillip to the national economy, especially with work slowed by insurance claims and the process of re-zoning Christchurch land and getting residents to agree to compensation.

Second-quarter GDP is due for release on Thursday. The previous day, the balance of payments for the second quarter is released. That's expected to show the current-account deficit widened to $1.64 billion in the second quarter, for an annual deficit of $10.56 billion of 5.2 percent of GDP.

BusinessDesk.co.nz

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