GDP up on forecasts

By Brian Fallow

Strong, broad-based growth of 1.5 per cent may yet counter likely impact of drought

The Reserve Bank has factored in the effects of the drought on the economy. Photo / Brett Phibbs
The Reserve Bank has factored in the effects of the drought on the economy. Photo / Brett Phibbs

Stellar growth in the last three months of 2012 indicates the economy started this year with more momentum than expected - sufficiently more, perhaps, to counter the headwind of drought.

Gross domestic product rose 1.5 per cent in the December quarter, well ahead of economists' forecasts, which were clustered around 0.9 per cent.

It followed two weak quarters - September and June both recorded just 0.2 per cent growth - but even so economic output over the whole of 2012 was 2.5 per cent higher than in 2011, the strongest expansion for five years.

The growth was broad-based - all but one of the 16 industry groups expanded.

The exception was manufacturing, which contracted by 0.5 per cent. But even that was concentrated in the volatile petroleum and chemicals sector, which fell 8.7 per cent.

"Excluding this, non-food manufacturing grew by 1.7 per cent," Westpac economist Michael Gordon said, "and there was particularly strong growth in the service sectors, up 1.1 per cent, the biggest quarterly increase in six years."

Construction rose 1.8 per cent in the quarter, to be 11 per cent up on a year ago (but still 13 per cent lower than its peak five years ago). The two biggest contributors to growth were the primary sector, especially forestry, and retail trade.

Household consumption rose 1.6 per cent in the quarter.

ANZ economist Mark Smith said the uplift in the housing market was boosting consumer spending, but that looked difficult to sustain given the weakness of the labour market, the pending tightening of fiscal policy by the Government, which will subtract demand from the economy, and the prospect of the Reserve Bank using new regulatory tools to rein in the housing market.

The "consumer-centric" mix of growth was understandable, with low interest rates stimulating the housing market while a high dollar throttled exports, but it was the exact opposite of what was required from a structural standpoint, Smith said.

The December quarter's growth was 0.7 percentage points higher than the Reserve Bank had forecast.

That also happens to be the difference between the drought impact the bank has already factored into its outlook and the worst-case scenario it envisaged last week.

Gordon said the surprise to the Reserve Bank yesterday effectively cancelled out the likely drought impact on its next set of forecasts.

"We have long expected the Canterbury rebuild to promote a high rate of GDP growth, inflation pressures, and eventually interest rate hikes," Gordon said. "Today's figures must surely dispel any lingering doubts in the market about the first phase of this process. Our view remains that OCR increases will be earlier and more aggressive than the market is currently pricing."

Bank of New Zealand head of research Stephen Toplis said market prices implied about an 80 per cent chance of an official cash rate rise by next March. "That seems about right to us," he said.

The December GDP result made it much more difficult for the Reserve Bank to sit on its hands for as long as the interest rate projections in last week's monetary policy statement - which did not pencil in a rate hike until the middle of next year - had suggested.

"That is particularly so because there is a clear warning in this result that it is an expansion driven by domestic demand, and we know it will get more so, not less so, because the real push from the Christchurch rebuild is not in the numbers yet," Toplis said.

ASB economist Christina Leung expects the Reserve Bank to remain on hold until March next year.