Neither good nor bad

Last week we received GDP data for the December quarter, which showed that the New Zealand economy grew by only 0.4% in the final quarter of 2016. Smoothing through the quarterly volatility highlights an economy that continues to grow at a moderate pace, but doesn’t look at risk of overheating. Against this backdrop, we expect the Reserve Bank to hold the OCR at 1.75% at Thursday’s review and to maintain a neutral outlook for the policy rate.

The New Zealand economy hit a bit of a soft patch in late 2016. GDP rose only 0.4% in the December quarter – close to what we had forecast, but below what many were expecting, including the Reserve Bank. A downward revision to growth in the September quarter added to the soft tone of the GDP report.

While we certainly wouldn’t gloss over the soft December outturn, at the same time we’d caution against taking too gloomy a view of it. Much of the drag on growth came from specific issues in the primary sector. Milk and meat production were hampered by poor spring weather conditions, forestry production pared back earlier strong gains, and oil output fell due to a temporary shutdown at one of the major fields in Taranaki. None of these things have much to do with the economy’s productive capacity, and there’s good reason to expect them to be firmly on the positive side of the growth ledger in the March quarter. Indeed, plentiful summer rainfall has resulted in very favourable pasture conditions, leading to a recovery in milk and meat production, while the Maari oil field came back on line in early January which should have led to a recovery in oil output.

But looking past these factors, the underlying picture of the economy is still a moderate one. Growth in calendar ’16 came in at 3.1%, an improvement from 2015, but hardly a screaming result when population growth is running in excess of 2%. As a result, annual growth in per-capita terms continue to linger at a subdued pace below 1%.

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