- The Kiwi economy bounced back strongly. Economic output expanded 1.7%, well above our forecast of 1.1% and market consensus of 1.0%.
- The spike in tourism over the quarter (with changing seasonal patterns) saw big gains in transport, accommodation, eating out, and sports and recreational activities.
- The RBNZ remains on an inflation fighting path. The headline GDP print came in close to the RBNZ’s forecast of 1.8%. And we expect the RBNZ to deliver its fifth successive 50bps hike at the monetary policy review in October. We see the cash rate reaching 4% by the end of the year.
Following a 0.2% contraction over the Omicron-riddled March quarter, the Kiwi economy bounced back strongly. Economic output expanded 1.7%, well above our forecast of 1.1% and market consensus of 1.0%. Restrictions were relaxed with the move to the orange traffic light setting, Kiwi recovered and returned to work, and the border restrictions were further eased. The spike in tourism over the quarter (with changing seasonal patterns) saw big gains in transport, accommodation, eating out, and sports and recreational activities. The level of economic activity now sits 0.4% above last year’s, and around 6% above levels prior to the pandemic.
The rebound in economic activity was most pronounced in the services industry, particularly transport. Total services, which represents two thirds of the economy, rose 2.7% on the quarter. And driving the rebound was transport activity (air transport in particular), up almost 20% in the quarter alone. The return of tourists has had an outsized impact (albeit off a very low base). According to StatsNZ “International visitor expenditure grew in the June 2022 quarter as border restrictions eased”. Growth in the transport industry was the largest contributor to overall GDP, adding 0.7%pts. Also impacted by the return of travel was business services, lifting 1.9% by a rise in travel agency related services.
The primary and goods-producing industries performed largely as expected. Primary industries rebounded, though the gain was modest. And activity across goods-producing industries fell a collective 3.8%. The closure of the Marsden Point oil refinery led to a reshuffling of business activity classification, and a 40% drop in petroleum manufacturing.
There was a lot of noise in this quarter’s checkpoint of the Kiwi economy. The border reopening and reclassification of business distorting the view. But the concerning part of the report was the drop in household spending.
Expenditure GDP rose a solid 2.1%. Mirroring the large contribution from tourism activity, services exports jumped a massive 60%+ - off a very low base. The domestic spending picture was far less rosy, however. Private consumption fell 3.2% as consumers pulled back spending on durable goods. Households are battling higher interest rates, falling house prices and an erosion of their purchasing power. The appetite for consumption is waning. Investment spending was reined in too. However, it was difficult to discern from today’s data if we are seeing a general pull-back in spending or ongoing disrupted supply. It’s most likely a bit of both. The impact of weakening demand will become clearer in coming quarters.
The noise in the data won’t matter for the RBNZ. Though the headline came in a smidge weaker than they had forecast, the RBNZ is on an inflation fighting path. The end goal is an inflation rate back at target. Doing so requires domestic demand to ease back, restoring balance in the economy. Between weak confidence and deteriorating firm investment intentions, signs of slowing domestic demand are already emerging. But the RBNZ has signalled that further increases in the cash rate are needed. We expect the RBNZ to deliver its fifth successive 50bps hike at the monetary policy review in October. And we see the cash rate reaching 4% by the end of the year.
Transport drives the recovery
The rebound in activity was most pronounced in the services industry. Across the industry – which makes up around two-thirds of the economy – activity rose 2.7% in the June quarter, a solid bounce back following flat growth in Q1. The rebound was fuelled by the reopening of our border to Australia and other visa-waiver countries. Activity in the transport industry bounced back a massive 19.7% in the June quarter alone, and was the largest contributor to overall GDP growth (0.7%pts). The rebound was strong enough to push transport activity levels to 4% above June 2019 quarter. Continued growth is expected in the September quarter, as August marked the full reopening of our border.
Most vulnerable to changes in restrictions, retail trade and accommodation posted a punchy rebound. Activity bounced 5.9%, following a 2% contraction in Q1. Arts and recreational services posted 9% quarterly growth, adding 0.3%pts to overall GDP.
Primary industries broke a four-quarter streak of negative growth. However, the rebound was only a modest 0.3% gain.
Agriculture output rose 1.1% - a decent print given activity continues to battle unfavourable weather conditions. The rise, 
however, was offset by a further contraction in mining activity, down 8% over the June quarter.
Going the other way, the goods-producing industry contracted further over the June quarter, down 3.8%, due largely to a reclassification of activity. As noted by Stats NZ, petroleum refining activity in New Zealand ended with the closure of the Marsden Point oil refinery in April. Some businesses were reclassified, and the now importation of fuel means a shift of this activity from manufacturing to the basic wholesaling industry. The change explains the rather sizeable 5.9% decline in manufacturing activity over the June quarter. Petroleum and related manufacturing activity declined 40%.
Spending propelled by exports
A solid rebound in expenditure GDP was led by a massive jump in exports in the June quarter. The expenditure measure lifted 2.1%, well above expectation. The partial reopening of NZ’s border over the quarter was enough to see a 60%+ jump in export services. The tourism sector was buoyed by the return of trans-Tasman visitors as well as vaccinated arrivals from a whole 
host of countries from May. While the jump in services exports looks impressive, it was from a very low base (see chart below). Exports of goods and service are still 12.7% below pre-covid levels – driven by services. And we will likely see another decent jump in export services in the September quarter. The border was fully reopened by the start of the September quarter, and some foreign students would have returned.
In contrast to the large upward contribution to growth from net exports, domestic spending contracted in the quarter. Gross national expenditure fell 1% in Q2 led by a 3.1% drop in private consumption. On the surface the drop in consumption is concerning. However, it’s difficult to discern a general pull-back in spending from ongoing disrupted supply – there was elevated worker absenteeism in the quarter. The impact on consumption demand will become clearer in coming quarters. Nevertheless, faced with higher mortgage rates, near record low confidence, and a correction in the housing market, spending on durable goods fell almost 9%. Some of fall in spending on goods was likely directed toward services in the quarter. Relaxed border-restrictions didn’t just lead to more visitors to Aotearoa but made it easier for Kiwi to travel offshore too. Travel agents were far busier in over the period according to StatsNZ, for instance.
Another concerning development was a fall in investment expenditure in the quarter. Overall investment activity fell 3.3% in the quarter – but was still up 1.6% on the June quarter last year. The same uncertainty surrounding supply-side and demand-side factors seen in private consumption, applies to investment activity too. There was a big fall in transport equipment spending that drove general business investment down. Despite modest gains in residential and commercial construction activity, civil and infrastructure-related construction worked in the other direction. Given the current solid pipeline of construction work across the board, we would expect to see a rebound in Q3.
Unfazed
The solid 1.7% print is basically in line with the RBNZ’s forecast of 1.8% over the quarter. The RBNZ is unlikely to be fazed. And like their peers, the RBNZ is firmly fixated on returning inflation to target. Though tradable inflation is forecast to fall quickly, domestic inflation pressures persist and risk elevated inflation becoming embedded. To ensure inflation returns to the 1-3% target band and the economy is better balanced, domestic demand needs to ease back. Indeed, the RBNZ expects (wants) to see weaker economic growth in the short-term led by a slowdown in domestic demand. We are already seeing signs of weaker demand emerging. Consumer confidence is subdued, business investment intentions are deteriorating, and the housing market remains in a downtrend. But the RBNZ have unambiguously signalled further increases to the cash rate. We expect the RBNZ to deliver its fifth successive 50bps hike at the monetary policy review in October. And we see the cash rate reaching 4% by the end of the year.