New Zealand: Economy expands modestly in Q1
June 15, 2017
The latest data confirm that the economy of New Zealand has shifted into a lower gear. The economy expanded 0.5% on a seasonally adjusted quarter-on-quarter basis, slightly above Q4’s 0.4% expansion. The soft expansion surprised analysts, who expected a stronger 0.7% expansion, and marks the second consecutive quarter of subdued growth. The modest growth figure can be attributed to a drop in construction and transportation and is an indication that the country has entered a mature stage of the economic cycle.
Growth was constrained by a slowdown in the tertiary sector which more than offset a strong rebound in the primary sector and an expansion in manufacturing. Growth in the service sector halved from 0.8% in Q4 to 0.4% in Q1, owing to a contraction in transportation, postal, and warehousing and slower growth in key components. Transportation declined as the country is still reeling from disruption caused by last year’s Kaikoura earthquake and lower support services. Meanwhile, the financial and insurance services sub-sector was virtually stagnant in the first quarter of the year (Q4: +1.7% qoq; Q1: +0.1% qoq). In contrast, wholesale trade and retail trade and accommodation expanded solidly, boosted by cheap credit, high consumer confidence, low unemployment, a robust tourism industry and strong net migration. The manufacturing sector swung from a 0.4% contraction in the fourth quarter to a soft 0.2% expansion in Q1. Growth was underpinned by an expansion in manufacturing and electricity, gas, water and waste services. Nevertheless, a sharp 2.1% contraction in construction, the first drop since Q2 2015, due to a steep fall in non-residential investment, constrained growth in the sector. Lastly, the primary sector rebounded from a 1.0% contraction to a strong 2.2% increase, the fastest expansion since Q3 2014. The strong reading reflects a recovery in the dairy sector as weather conditions improved, which was also behind the growth in manufacturing.
On an expenditure basis, GDP growth inched up from an anemic 0.1% expansion in Q4 to 0.2%. The soft print came on the back of an abysmal performance from the external sector. Private consumption picked up steam and expanded 1.2% (Q4: +0.4% qoq). The strong acceleration reflected increased spending on durable goods and services. Likewise, fixed investment growth edged up from 0.8% to 1.2% on the back of greater investment in plants, machinery and equipment. The external sector performed poorly at the start of the year and deducted 0.6 percentage points from growth. Exports contracted 0.4% as dairy exports disappointed, while imports expanded 1.3% owing to solid demand for consumer goods and passenger cars.
New Zealand should continue growing at a broadly stable pace in the coming quarters. Growth in tourism and net migration into the country will remain solid and provide further impetus to the economy. However, with inflation forecast to remain fairly low, the Reserve Bank of New Zealand is unlikely to increase rates anytime soon, suggesting that monetary conditions will continue to be accommodative and supportive of growth.