Coming up short again

The New Zealand economy grew by 0.5% in the March quarter, which was softer than market and RBNZ forecasts. This is the second consecutive quarter that GDP has underwhelmed, following December quarter growth of 0.4%. Although this growth profile seems lacklustre, we expect this softness to be temporary. Looking ahead, we expect solid growth over the next few years but with a change in composition of the key drivers, as the growth phase we have experienced over the past few years matures.

The main drivers of growth in the March quarter were largely as expected. Agricultural production rose by 4.3%, underpinned by a 7.5% pickup in dairy production. This will pass through to firmer conditions rural regions in terms of improved spending and labour demand. In addition, the rebound in milk volumes also provided a lift to food manufacturing and is set to boost exports in the next quarter. In other areas, retail spending rose by 1.9% which was interesting given the recent evidence of the slowing housing market.

On the downside, the March quarter saw sharp declines in construction and transport services, both of which were down around 2%. We think these movements were largely transitory, so we’re inclined to bump up our forecast for June quarter growth. The large pipeline of planned work nationwide will sustain the construction industry for many years, and the fact that employment in the sector rose strongly over the last two quarters doesn’t suggest the sector is slowing. Similarly, on transport services, we expect that the decline will not be sustained, but we aren’t as confident about the timing of a rebound.

Quarterly GDP is inherently volatile, and strongly influenced by short-term movements in particular sectors. But even if we smooth through the quarterly surprises, the broader picture remains that, outside of population growth, the economy is growing at a very muted pace. Indeed, per capita GDP growth has remained subdued for some time, and is not expected to accelerate significantly at this point in the cycle.

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