Expect a soggy GDP reading for the September quarter

Monday 17th December 2018

September quarter gross domestic product data due for release on Thursday is expected to reflect an economy running out of puff after the very strong June quarter performance.

Economists are expecting the figures to show the economy grew 0.5-0.6 percent in the September quarter, a touch weaker than the Reserve Bank's 0.7 percent forecast and down from the 1 percent growth in the June quarter.

“It's going to look weak following such a strong figure in June that was such a bumper result which was so far ahead of expectations,” says Mark Lister, the head of wealth research at Craigs Investment Partners.

However, the annual growth rate is likely to be little changed from the 2.8 percent pace reported for the year ended June.

Jane Turner, an economist at ASB Bank, is forecasting a 0.5 percent outturn for the quarter. She says there was reasonable momentum in the first half of the year after a modest second half of 2017.

“But this recent momentum appears to have fizzled out and we believe the pace of growth slowed again over the second half of 2018,” Turner says.

“The sharp increase in petrol prices squeezed household budgets and appears to have directly impacted broader economic activity,” she says.

“Meanwhile, weak business confidence continues to linger, potentially undermining the relatively strong fundamentals which remain in place, including high terms of trade, strong population growth and low interest rates.”

The latest ANZ survey of business opinion will be released on Tuesday afternoon.

The last survey put the net rate of pessimism at 37.1 points while expectations for firms' own activity was still in positive territory with a net 7.6 percent expecting a better outlook.

Miles Workman, an economist at ANZ, says other temporary factors that boosted growth in the June quarter but which dissipated in the September quarter included a weather-related recovery in milk production. Livestock slaughtering had also been boosted by Mycoplasma bovis eradication efforts and hydro lake levels had been above-average.

“That said, relatively stable underlying momentum in the economy should put a floor under third-quarter deceleration,” Workman says.

“This includes respectable household financial positions, supported by the tight labour market, the Families Package and low interest rates, elevated terms of trade and still-strong, albeit shrinking, net migration inflows,” he says.

If GDP comes in at the 0.5 percent rate he is expecting, per capita growth will have been broadly flat.

“Migration-led population growth has been flattering headline growth this entire cycle, contributing around two-thirds of the economic expansion in recent years.”

Westpac economist Michael Gordon, who is also expecting a 0,5 percent increase, says the degree of uncertainty is greater than usual because it's unclear how much of a rebound we will see in the mining sector after the sharp drop in the June quarter.

“The second reason is that this quarter will include the regular annual revisions to the GDP data which can alter our understanding of how the economy has performed in recent times,” Gordon says.

He expects the Reserve Bank will be disappointed if September quarter growth does come in at 0.5 percent.

"What will be of more concern to the Reserve Bank is that the New Zealand dollar has risen sharply in recent weeks with little data to support it," he says.

“We're still of the view that GDP growth will pick up next year, supported by a stronger housing market and government spending, but we suspect that financial markets are getting overly bullish about the economy's starting point.”

The major set piece globally this week will be the Federal Reserve's latest decisions on monetary policy which will be released Thursday morning ahead of the GDP release.

Lister says the market is pricing in an almost 70 percent chance of another 25 basis point hike in US rates, the fourth such increase this year.

“Of more interest will be the revised economic projections, as well as the 'dot plot' which details where Fed members see interest rates going over the coming period,” he says.

“They had three (rate hikes) pencilled in for next year back in September. My suspicion is that they'll pare that back to two.”

The Fed won't want to spook the market too much by paring its forecasts back further, although some people may be expecting them to do just that, Lister says.

(BusinessDesk)

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