New Zealand: New Zealand economy slowed unexpectedly in Q4
March 16, 2017
The fast growing New Zealand economy hit the brakes in Q4. Economic growth slowed from a revised 0.8% seasonally-adjusted quarter-on-quarter expansion observed in Q3 (previously reported: +0.7% qoq) to a 0.4% increase. The soft expansion surprised analysts who expected a stronger 0.7% increase. The unexpected deceleration can be attributed to weakening domestic demand and a poor performance by the external sector.
A softer expansion in the tertiary sector and a contraction in the primary and secondary sectors are the main reasons behind Q4’s deceleration. The service sector expanded 0.7%, supported by strong net migration into the country. Growth, however, was dragged down from Q3’s 1.1% by a contraction in wholesale and transportation. The secondary sector swung to contraction as manufacturing activity nosedived to an almost four-year low on the back of lower output for beverage and food products. The only bright spot was the construction sector, which expanded healthily in Q4 and grew at a double-digit rate in 2016. The primary sector performed poorly, weighed down by a contraction in both components of the sector. The agriculture, forestry and fishing sub-component was affected by adverse weather conditions in spring, which affected the dairy sector in particular. The mining sector contracted partly due to the shutdown of the Maari oil platform in November.
On an expenditure basis, GDP growth slowed down from a revised 0.9% quarter-on-quarter expansion in Q3 (previously reported: +.14% qoq) to an anemic 0.2% increase in Q4. The disappointing print came on the back of a slowdown in the domestic economy and an abysmal performance in the external sector. Private consumption plunged from a 1.4% expansion to 0.4% growth despite strong consumer confidence readings, cheap credit, low inflation and strong net migration. Fixed investment expanded 0.7%, supported by investment in telecommunications and non-residential building. The external sector, however, was the main culprit behind the quarterly deceleration. A strong currency and drops in the production of primary and manufactured goods caused exports to plunge 3.8% in Q4, a multi-year low. Imports, on the other hand, expanded 1.9%. As imports expanded and exports declined, the contribution of the external sector to growth deteriorated markedly in Q4 from minus 0.9 percentage points in Q3 to minus 1.8 percentage points.
New Zealand should continue growing at a broadly stable pace in the coming quarters. Demand for New Zealand goods is expected to improve in 2017 and the outlook in the dairy industry is promising. The primary sector, which was affected by inclement weather in Q4, should rebound in Q1 on improving weather conditions and feed into stronger growth in food manufacturing. Growth in tourism and net migration into the country will remain solid and provide further impetus to the economy. The unexpectedly slow expansion should discourage the Reserve Bank of New Zealand from increasing rates anytime soon, suggesting that monetary conditions will continue to be accommodative and supportive of growth.