Fuseworks Media

ASB Bank: NZ Q3 GDP dips

– The NZ economy shrunk by 0.3% in the September quarter, substantially softer than all and sundry were anticipating.

– June quarter growth estimates were also revised down by nearly half, meaning that in aggregate, there is considerably less activity taking place than we thought.

– On a per capita basis, GDP fell as much as 0.9%.

2023 Q3 NZ Real GDP (Production-based measure)

Actual

Market

ASB

RBNZ

Quarterly %

-0.3

0.2

0.2

0.3

Annual %

-0.6

0.5

0.5

0.6

Details

Real production-based GDP fell -0.3% qoq in the September quarter, substantially weaker than the +0.2-0.3% range the RBNZ and most forecasters – including us – had anticipated.

Last quarter’s growth estimate – previously estimated by Stats NZ at around +0.9% – was also cut nearly in half, with Stats now estimating growth at around +0.5%. Taking this quarter and the revisions in aggregate, the economy was about 1.6% smaller than we anticipated during the quarter. There is less activity taking place than we thought.

A considerably weaker outturn for the goods-producing sectors of the economy underpinned the soggy performance. That narrative isn’t surprising, but the magnitude of the deceleration was greater than we anticipated. Manufacturing fell -3.4% (ASB: -2.6%) and construction activity fell 1.7% (ASB: -1.1%), with electricity, gas water and waste services also falling 2.5%. All up, that meant goods producing industries fell 2.6%.

Primary industries and the services sector eked out small gains, but not enough to offset that deceleration elsewhere. A +0.8% qoq lift in agricultural output helped drive the primary sector to a +0.6% expansion, though that comes after the sector has shrunk for seven of the last eight quarters so the baseline is pretty weak.

Services sector activity also wasn’t nearly as supportive as we’d hoped to see, lifting a modest +0.4%. There were decent lifts across a number of categories, with arts and recreation etc. up +1.8% qoq, telecommunications etc. up +1.5% qoq, rental & hiring up +1% and health care & social assistance up +2.3% (though the latter was a bit weaker than we’d expected based on last week’s services survey). But services activity was dragged down by a whopper 4.5% fall in transport, postal & warehousing activity, and a pretty anaemic performance for the retail (-0.2% qoq) and wholesale sector (-1.9% qoq).

The sizable change to last quarter’s estimates look to have been driven by downward revisions to services sector activity, which is still proving difficult to measure. In particular, last quarter’s +1.5% rise in transport/warehousing activity has been cut to +0.9%, a +2.1% lift in professional/technical services has been cut to +1.1%, and a +0.4% lift in Information/telecommunications services has been cut to a -0.2% fall.

On a real expenditure basis, GDP also fell over this quarter and with last quarter’s estimate revised lower. The economy shrunk -0.7% on an expenditure basis, while the +1.3% lift that Stats had previously estimated for Q2 has been downwardly revised to +0.9%. The headwinds facing the economy are crimping activity right across the board: household consumption fell -0.6%, government expenditure fell by -1.8% and gross fixed capital formation fell -3.4%. As yesterday’s current account data highlighted, a weaker external sector didn’t help, with exports down 2.6% versus a smaller 0.3% decline in imports. This weaker performance weighed on real gross national disposable income, which fell 0.3% over the quarter.

As we’ve previously highlighted, economic activity is decelerating at a time that NZ net migration figures continue to prove strong. That means that on a per-capita basis, the shrinkage is much more marked. On a per-capita basis, GDP fell as much as 0.9% over the quarter. Excluding the COVID lockdowns, that is the economy’s joint weakest performance since March 2009. On a per-capita basis, real gross national disposable income fell by the same magnitude.

The upshot

The potential for recent GDP estimates to jump around quite a bit is a good reason to be cautious in trying to interpret the data. Nonetheless, this is a sizable miss over the last two quarters relative to both RBNZ and consensus expectations, suggesting there is far less activity taking place than we would have thought. The risk is that the economy continues to decelerate from here as the tightening already in the pipeline continues to work through the economy via a higher effective mortgage rate and net migration normalises.

Should that weaker growth outlook translate into a swifter reduction in inflationary pressures, OCR cuts could come earlier than the early 2025 timeframe we’ve been anticipating up until now. However, we caution that the weak growth over the past year has still coincided with relatively high inflation. The economy’s non-inflationary speed limit may also be lower than otherwise thought, still meaning a grind to get inflation back down. We are still sticking for the time being with our forecast for the first OCR cut to occur in February 2025.

 

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