Slow GDP growth expected

This week we should get confirmation of the slowdown in growth in the second half of 2018 with the release of December quarter GDP data. Our view is that this slowdown will prove temporary, with momentum set to improve in 2019, supported by high government spending, a strong pipeline of construction work, and a lift in labour incomes. On balance, data released last week tended to support that view.

We expect this week's report will show that GDP grew just 0.3% in the December quarter, after an equally modest gain in September. Our forecast is at the lower end of market expectations, and is significantly below the 0.8% GDP growth the RBNZ forecast in its February Monetary Policy Statement. If we're right that would see annual GDP growth fall to 2.7%, down from 3.1% in 2017 and 3.9% in 2016.

Some of the softness in growth in the December quarter is genuine. Importantly, the December Quarterly Employment Survey indicated less activity was taking place in the business and personal services sectors. But this weakness was also exacerbated by some temporary disruptions in the energy sector. Output from the Pohokura gas field was again interrupted this quarter (which will have a flow-on effect on methanol production). Meanwhile low hydro lake levels will directly weigh on electricity production with flowon effects of a subsequent lift in electricity prices to reduce demand from manufacturers.

Brighter spots in this week's GDP data are likely to include a strong lift in retail spending (after a subdued September quarter), a pickup in residential and commercial construction activity and increased spending on government services.

The big question is whether the late-2018 loss of momentum will continue into 2019. We think not. We expect GDP growth to recover.

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