Strong second-quarter GDP growth lessens case for RBNZ rate cut

New Zealand's economic growth lifted 1 per cent in the June quarer. Photo / NZME

The New Zealand economy grew at its fastest pace in two years over the June quarter, well in excess of most forecasts and flying in the face of business confidence surveys that had pointed to a slowdown.

By itself the 1 per cent quarterly gain in GDP, for a June year gain of 2.7 per cent, was not expected shift the Reserve Bank's "dovish" views on inflation.

However, it was enough to lessen market expectations that the bank's move would be a cut, which in turn helped drive the New Zealand dollar up by just under half a US cent to US66.4c.

Economists expect the Reserve Bank, which is due to review its official cash rate next Thursday, to "look through" today's number, but they said the central bank would nevertheless be reassured by the economy's apparent underlying strength.

The GDP outcome compares with a Reserve Bank forecast of a 0.5 per cent gain over the June quarter, and market expectations of a 0.8 per cent increase.

Business confidence surveys have consistently pointed to a decline in sentiment throughout much of the year.

Reserve Bank Governor Adrian Orr, in last month's monetary policy statement, said the bank expected to keep its official cash rate steady at 1.75 per cent through 2019 and into 2020 - longer than it had projected in May.

Phil Borkin, senior macro strategist at ANZ, said the market had changed its expectations about a future rate cut from the Reserve Bank following the GDP release.

"You have seen the market pare back expectations of rate cuts and the currency has maintained a bit of strength on the back of that," he said.

The interest rate markets were pricing in a 20 per cent chance of the Reserve Bank's next move being a cut, down from a 40 per cent change previously, on the back of the release.

"There is still plenty for them to think about regarding the growth outlook from here, but at least the starting point shows that the economy has decent momentum," Borkin said.

Economists said growth is still some way off the peaks seen in 2015-16, when the economy regularly grew 1 per cent or more each quarter.

"But the latest figures will help to soothe any concerns that the economy is heading into a slump," Westpac senior economist Michael Gordon said in a commentary.

Gordon noted growth was spread over a wide range of industries, with one-off gains playing a less of a role.

"This bodes well for the sustainability of GDP growth over the second half of the year," he said.

"Today's result doesn't take OCR cuts off the table completely – June quarter figures are arguably a little dated, and more recent data suggests an economy that is trundling along rather than accelerating," he said.

"Nevertheless, with a much stronger starting point for the economy than the RBNZ expected, the case for an OCR cut in the near future has diminished."

Stats NZ said the growth was across 15 of the 16 industries contributed to the largest quarter-on-quarter increase in two years.

It said the 1.0 per cent growth in the service industries was broad-based in the quarter, with all 11 of the service industries growing.

Growth in the retail trade and accommodation, wholesale trade, and transport industries was helped by a combination of increased household spending and strong international spending.

Favourable weather boosted milk production, which led to a 4.1 per cent increase in agriculture, forestry, and fishing in the June 2018 quarter.

Growth in agriculture, forestry, and fishing was further supported by increases in sheep and beef cattle farming, reflected in higher meat exports for the quarter.

Meat prices rose 3.6 per cent to reach historically high levels. Horticulture and fruit growing, and forestry were also up in the quarter.

The strong growth in agriculture, forestry, and fishing was offset by a 20 per cent drop in mining in the quarter, Stats NZ said.