NZ Q1 GDP expands in line with market expectations; growth likely to accelerate over next year, says Westpac Research

The New Zealand economy expanded by 0.6 percent in the March quarter, which was in line with market forecasts. There were some small upward revisions to the previous two quarters, which lifted the annual growth rate to a slightly stronger than expected 2.5 percent.

However, the pace of growth has slowed from its peaks in the last couple of years, owing mostly to domestic factors: the unwinding of the Canterbury rebuild, the cooling in the housing market, and more recently, low confidence weighing on firms’ hiring and investment plans. The latter in particular will not be alleviated quickly.

The Reserve Bank had already braced itself for some near-term softness in GDP, forecasting a 0.4 percent quarterly increase in its May Monetary Policy Statement. Today’s result should give the RBNZ some comfort about the state of the economy, though it will be tempered by the fact that June quarter indicators have so far been subdued, according to the latest report from Westpac Research.

The result was slightly flattered by a 9.6 percent jump in the mining sector. While there was a lift in oil and gas extraction over the quarter, much of this gain likely reflects exploratory drilling at the Kohatukai field, which has since ended without success. Consequently, this will be a drag on growth in the next quarter.

Construction activity rose by 3.7 percent, with strong gains in both residential (+2.7 percent) and non-residential building (+9.9 percent). Building consents are clearly pointing to a strong pipeline of building work for the next year, though it was surprising to see how much of it came through in the March quarter.

"However, we do expect growth to accelerate over the next year or so. Interest rates are low, government spending is ramping up, and there is a substantial amount of building work in the pipeline," the report added in its comments.

The expenditure measure of GDP was a little more positive, rising by 0.8 percent in the March quarter. While this measure is considered less reliable on a quarterly basis, its recent trends perhaps provide a clearer demonstration of what has driven the slowdown in growth.

On the plus side, household spending has continued to growth at a modest pace but is down from the peaks of a few years ago, matching the slowdown in house prices and the subsequent effect on housing wealth.

Meanwhile, government spending has also been providing support, though it has tended to fall behind what was planned. Housing construction, while already operating at a high level, has found some fresh legs in the past year.