NZ economy may not be as slow as business confidence suggests - for now

Friday, 14 September 2018

Strong milk production late in the dairy season may have seen the New Zealand economy expand as a solid clip during the three months to June 30, figures out this week are expected to show.

A boost in farm production during autumn could have seen strong economic growth in the June quarter, but any disappointment could tip the scales towards an interest rate cut.

On Thursday, Statistics New Zealand will release figures on how quickly the New Zealand economy grew in the three months to June 30.

Despite months of headlines about weak business confidence and the risks it posed to the economy, bank economists appear to believe the economy picked up speed at least marginally compared to the first three months of the year, when gross domestic product grew by a disappointing 0.5 per cent.

Westpac chief economist Dominick Stephens said that due to certain 'one-off' drivers such, the economy could have grown by 0.9 per cent in the June quarter, which would see annual growth remain at 2.7 per cent.

Reserve Bank governor Adrian Orr said his outlook for the economy was little changed from August, despite recent figures showing the economy grew faster than expected in the June quarter.

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'The economy slowed during 2017 and over 2018 has been steadily growing at a slow pace,' Stephens said. 'That's a bit different to the picture you get from business confidence surveys or even anecdotes I get from around the country. If you listen to that stuff, you'd think that the economy was slowing sharply, but it's actually not.'

Stephens added however that the figures would be watched extra closely by the financial markets. The Reserve Bank indicated at the start of August that while it expected economic growth to pick up, there was a risk that business confidence could slow activity and if it did so it was prepared to slash interest rates to unprecedented levels.

The Reserve Bank's own forecasts have the economy growing at 0.5 per cent in the June quarter.

'If the economy underperforms the Reserve Bank's expectations they may well pull the trigger and lower interest rates.'

Economists at ANZ predict that Thursday's figures will show the economy grew at 0.7 per cent during the quarter. While the bank described the figure as 'solid', if it were correct, it would slow annual growth to 2.5 per cent, the lowest since the end of 2013. ANZ also indicated there were reasons to expect that the economy could continue to lose speed.

'There are concerns about the degree of economic momentum, particularly given the subdued read coming from business confidence surveys and the fact that the Reserve Bank has expressed concern about the outlook for activity,' ANZ economist Liz Kendall said.

'This is in the context of an economy where recent drivers of growth (including construction and immigration) have started to wane, and headwinds are at play from credit constraints, capacity pressure, margin squeeze, and policy uncertainty.'

ASB senior economist Jane Turner predicted the June quarter saw the economy grow by 0.9 per cent, as dairy production returned to normal levels after a slow start to the 2017/18 season, as well as a boost from electricity production and retail.

Turner said annual growth of 2.7 per cent was 'hardly spectacular, particularly given of all the supports underpinning the economy such as low interest rates', strong population growth and healthy exports.

'Furthermore, the continued deterioration in business confidence (in particular the change in business intentions over recent months) materially increases the risk that trend growth slows further over the second half of the year.'