Strategist

BNZ Strategist

Craig Ebert -
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We are not down in the mouth about today’s reported 0.5% expansion in March quarter GDP (2.5% y/y). Yes, it under-clubbed market expectations of a 0.7% gain and was even further below the Reserve Bank expectation of a 0.9% lift. That being said, we expected Q1 GDP to be this slow, largely on technical/timing issues. More to the point, we still think the economy is fundamentally pressing on, but as its room to expand is diminishing, because of capacity constraints. At the same time, we have today finalised the extent of extra demand impetus through our GDP forecasts (which was still a work in progress at the last Strategist). Much of this stems from the 25 May Budget. This has mainly meant for more sustained growth in private consumption expenditure, with a particular push in calendar 2018. All considered, we now forecast real GDP growth of 3.1% for 2018 and 2.4% for 2019. Pre the Budget (of 25 May) these were 2.5% and 1.8% respectively.

BNZ Strategist

BNZ Research -
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There is a strong income pulse brewing in the New Zealand economy, courtesy of rising export prices and relatively subdued import prices.

BNZ Strategist

Craig Ebert -
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New Zealand’s real GDP story still has many moving parts to contemplate. Construction could take a technical dip in Q1, for instance. On the other hand, dairy production is primed to rebound over the coming season. This will limit the 2017/18 milk price (we are sticking with our forecast of $6.00, with Fonterra scheduled to make its first forecast within days). Still, it represents one of many commodity income impetuses coming through. This was evident in the Q1 producer price (PPI) data, with its 4.1% y/y pace. The PPI also highlighted ongoing heat in construction inflation. In this vein, the RBNZ seems to require housing-related inflation to be/stay strong, in order to achieve its 2% CPI target. The Q1 OTI report (1 June) will likely show the terms of trade pushing 44-year highs. The Budget (25 May) will be full of stimulus but afforded by surpluses – to the extent that debt ratios keep falling. The RBNZ Financial Stability Report (31 May) will no doubt devote a lot attention to housing market excesses, especially with dairy industry vulnerabilities abated.

BNZ Strategist

Craig Ebert -
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The New Zealand economy continues to perform well and we anticipate reasonable growth ahead. High immigration is playing a role but momentum is broad-based. Still, we believe the growth phase is broadly maturing/peaking. We forecast annual NZ GDP growth to slow to 2.7% this year and 2.5% in 2018. This is after posting a creditable 3.1% expansion in 2016. Activity was modestly disrupted by the 14 November Kaikoura earthquake but, ultimately, this will add to (re)building activity. In addition to immigration, economic momentum is coming from a robust labour market and investment cycle, commodity income (including a decent recovery in dairy income), soaring tourism, and improving global growth. Generally speaking, consumer confidence is robust and business expectations strong. Indeed, they suggest we might yet be too conservative with our GDP forecasts for the coming period.

BNZ Strategist

Doug Steel -
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For a good while, we’ve been talking about a higher inflation pulse showing its hand, as soon as now. Today’s Q1 CPI backed up our view. Its key message was that core inflation is rising, indeed has poked above 2% on some annual measures. That is more important than the fact headline inflation jumped to 2.2% y/y, from 1.3% in Q4 (and 0.4% back in Q3). That said, higher headline CPI inflation is likely to bolster inflation expectations (and wage negotiations). The bigger question is whether CPI inflation will hold this firmly (even go up further?) or sag anew. The RBNZ seems to think the latter. We plump for the former. We believe the key data reports over the coming fortnight – the 28 April ANZ business survey and the 3 May Q1 labour market reports – will back up our view, that CPI inflation is firming from a fundamental perspective, rather than being once-off in nature. This entails growing pressure on the economy’s resources.

BNZ Strategist

Craig Ebert -
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In focusing on near-term GDP outcomes, it’s easy to lose sight of how the economy is doing from other perspectives. Like in terms of productivity and regional GDP – which we’ve received news on since the last Strategist – and institutional balance sheets, which we’ll get updates on tomorrow. Such supplementary information is useful, although in New Zealand’s case it has measurement issues. Yet, it’s all relevant to thinking about how fast activity can expand, for how long, before it adds pressure on resources – real and financial.