Last week was mostly about putting the final pieces together for June quarter GDP, to be released on Wednesday.
We estimate that GDP fell by 0.2% in Q2. Having said that, we think that the economy was probably expanding again by the end of the quarter, and given the usual error bands around these estimates, it’s possible that growth may have even been positive on a quarterly basis. Either way, leading indicators are increasingly pointing to growth in Q3.
The substantial interest rate cuts over the last year, expansionary fiscal policy, a strong increase in net migration, the housing market upturn and a lift in energy output have arrested the decline in overall activity.
The margin of error around our forecast is greater than usual this time. Highlevel gauges like consumer confidence, electronic transactions, production, new orders and capacity utilisation indicators from the many business surveys all point to Q2 GDP coming in at a touch negative to flat. In contrast, indicators on a sectorby- sector basis collectively suggest mildly positive growth. To make life even harder, there’s a technicality with unallocated and balancing items – normally a minor factor – which appear to have supported Q1 growth to the tune of around 0.4%.
We have assumed that this will reverse in Q2, but we don’t have a great deal of confidence about this.
Some of the detail of Q2 will look much like previous quarters of the recession, with declines in construction, manufacturing and wholesale trade.
In construction, the scary economic landscape of 6-12 months ago saw investment plans delayed or cancelled and a slump in building consents at the time.
Q2 will see the resulting drop in both residential and non-residential building activity. Manufacturing production is expected to post its fourth straight decline. Weaker domestic and foreign demand has seen producers cut back production and wholesale sales fall.
It appears that a rundown of existing inventories, particularly for milk powder, drove the sales that did take place.
The inventory run-down ties in with a strong contribution from net exports, as demonstrated in the recent terms of trade.
