Strong June qtr GDP growth should quell rate cut risk

Friday 14th September 2018

Strong economic growth should calm expectations for a possible rate cut this year.

Second quarter gross domestic product grew 0.8 percent for an annual gain of 2.5 percent, according to a Bloomberg survey of 16 economists. The Reserve Bank forecast 0.5 percent quarterly growth.

ASB Bank senior economist Jane Turner says expected quarterly growth of 0.9 percent would be a significant surprise for the RBNZ but is unlikely to shift the track for the official cash rate.

"The average pace of growth over the first half of 2018 was hardly spectacular, particularly given of all the supports underpinning the economy such as low-interest rates, high terms of trade and high rates of population growth," she said.

At the August rate review, the central bank kept the OCR at 1.75 percent and pushed out the timing of the first rate hike, citing weak growth as a concern. Governor Adrian Orr reiterated that “the direction of our next OCR move could be up or down.”

Turner said the economy looks to have "sparkled" over the second quarter. Still, indicators suggest momentum may have "fizzled out" in the current quarter.

She expects third-quarter growth of 0.6 percent growth. "The key area of concern is the continued slide in business confidence in the ANZ monthly survey and the slump in business employment and investment intentions."

Business confidence has plunged since the Labour-led government was elected last year and pursued a series of policies that have impacted business. These include lifting the minimum wage, changing immigration settings, implementing fuel taxes and proposing changes to employment law.

ANZ Bank New Zealand senior economist Liz Kendall said the economy likely grew 0.7 percent in the second quarter, boosted by temporary factors such as a weather-related recovery in milk production, livestock slaughtering lifted by Mycoplasma bovis, and recent population growth.

However, annual growth continues to slow from the 4.5 percent pace of mid-2016 and "there are concerns about the degree of economic momentum." She particularly noted the subdued read coming from business confidence surveys and the fact that the RBNZ has expressed concern about the outlook for activity.

In that environment, getting core inflation back to the central bank's 2 percent midpoint target will be a struggle, "which means the official cash rate looks set to be on hold for some time yet," she said.

(BusinessDesk)

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