A little less glossy

Recent developments signal a little less momentum in the economy than we had previous been expecting. The pace of growth appears to have slowed in late 2016, partly due to temporary factors. There’s also been some less favourable developments in the dairy and building sectors in early 2017. Nevertheless, the underlying picture for the economy still looks solid, although it is heavily influenced by population growth.

Recent indicators suggest that the economy rounded out 2016 in decent shape, but that growth eased back late in the year. After the heady 1.1% pace of growth in September, we expect December’s GDP figures (out this Thursday) will show that quarterly growth slowed to 0.5%. That’s a bit weaker than we’d been expecting previously, and would be lower than the 1% gain the RBNZ forecast at the time of its last policy statement in February. Market pricing for rate hikes has already been pared back a fair bit over the past month; a softer growth outturn might see markets further discount the possibility of rate hikes within the next year.

Two key areas that have weighed on GDP growth are primary production and manufacturing. Damp spring conditions hampered milk production, while a very slow start to the slaughter season restrained food manufacturing. On top of this, forestry production eased back a bit after surging in September, while a fall in oil extraction is likely to see mining GDP continue on its recent downtrend.

On the plus side of the economy, we expect construction will again be one of the main contributors to growth, with a 1.9% gain in building levels in December. Increased demand stemming from strong population growth is expected also to show through in a range of service sectors.

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