Growth should lift over 2019, but dark clouds are out there and may rain on what could be a strong year for the NZ economy.
Key Points
- The NZ economy had a respectable end to 2018, expanding 0.6%qoq. The annual rate may have cooled to 2.3%, but will bounce back soon enough.
- Once again, the service sectors carried the economy, particularly retail and accommodation. Construction was also a key driver of growth, with non-residential construction bouncing.
- The primary sector was weak across the board. Mining contracted, by less than expected. And we recorded the weakest per capita result in a while.
- We expect growth to lift over 2019. The fiscal impulse is key. And per capita outcomes are likely to improve with easing migration flows.
Summary
2018 finished on a decent note, as far as the economy was concerned, with NZ GDP expanding 0.6%qoq. The service sectors carried the economy, with retail and accommodation doing well. Non-residential construction also stepped up last quarter. The drags came mining, due to shutdowns, and broad-brushed weakness in the primary sectors. The annual rate eased, however, to 2.3% from 2.6% last quarter. There were very slight revisions, but the rate of growth looks to have kept momentum into 2019. Our view is the rate of growth will pick up from here on, thanks mainly to some large fiscal stimulus.
Optically, our economy dipped below “trend” last quarter, with the annual rate of growth easing to 2.3%yoy. Our goldilocks (trend) rate of growth is around 2.5-2.75%yoy. The annual average growth rate of 2018 was 2.8%. We lost a bit of momentum in the second half of the year, and there were some slight downward revisions to first half of last year. We don’t see the annual rate of 2.3%yoy persisting into 2019.
There are several supporting factors that we expect to help lift economic growth above trend as we move through 2019. Local incomes look set to rise thanks to an elevated terms-of-trade (dairy prices are rising once again), planned chunky minimum wage hikes, and strong demand from firms for labour. Government investment activity has come on much slower than we had anticipated, but this will happen in time. Finally, mortgage rates are at near record lows, helping to support a housing market that is currently consolidating.
But dark clouds are certainly out there and may rain on what could be a strong year for the NZ economy. Local firms still lack confidence, even if activity is holding up. Firms are concerned about uncertainty of Government policy and the uncertainty in offshore markets. And the cold winds of populism have the potential to blow in the storm clouds from offshore. The US and China continue to negotiate a trade deal, but these talks are fraught with difficulty. Brexit has hamstrung the UK economy, and isn’t painless for the Eurozone either. Closer to home, the Aussie housing market has taken a tumble, that may spill over to us – but we don’t think is likely for NZ with our supply constrained market.
Services carry the economy once again.
The services sectors once again came to the rescue of the economy at the end of 2018 – then they do make up around 66% of the whole economy. The services sectors expanded 0.9%qoq led by a surge in retail and accommodation activity. We know the tourism industry continues to glow from record visitor numbers, but locals also contributed to the spend up in Q4 – there was plenty of eating out over the quarter. Looking at expenditure GDP (which was 0.5%qoq higher) private consumption jumped 1.3% qoq and follows a decent 1.0% qoq rise in the previous quarter. Also contributing to services sector growth was a rise in transport, and rental and hiring services. 
The industries that make and grow stuff disappointed over the December quarter. Primary industries, including agriculture and mining contracted 0.8%qoq. Agriculture, forestry and fishing activity fell across the board. Mining dropped 1.7% in the quarter, due to further disruption to the Pohokura gas field. We had expected a larger fall to mining as the filed – which supplies a big chunk of the gas used in NZ’s electricity generation – was offline for a number of days over the quarter. There has been further disruption to the Pohokura field in the opening months of 2019, so expect this to feature in GDP numbers over H1 2019.
The goods producing industries were a mixed bag. Production from these industries was a meek 0.2%qoq. Manufacturing activity was lower due to weaker wood and paper, petroleum and food manufacturing. Forward indicators of manufacturing activity, such as the BusinessNZ PMI, has recovered in recent months to more average-like levels. This is a sign that the Q4 fall in manufacturing activity is unlikely to be sustained. In contrast to manufacturing, construction activity rebounded in the quarter, thanks to non-residential construction.
Underlying Investment Rebounds
Household spending was a primary contributor to the 0.5%qoq rise in the expenditure measure of GDP. What was also encouraging was a 1.4%qoq rise in underlying investment sending. This followed back-to-back quarters of falling spending on fixed assets. Yes, construction played a part in the December quarter with a rise in investment in buildings. But investment in assets such as research and development and exploration also made a handsome contribution – spending that help to boost the economic holy grail of productivity. While underlying investment rebounded, headline investment activity dragged on growth due to a smaller rise in inventories. Net exports made a strong contribution to growth thanks to a 1.1%qoq rise in exports, while imports were 0.7%qoq lower.
Per capita Growth Slows
As the NZ economy has absorbed the massive migration-led boost to our population over the last five years, we have seen GDP growth per capita remain modest. In the December quarter per capita GDP edged 0.1% qoq higher. This led to per capita growth over the entire 2018 coming in at 0.9% yoy the lowest rate of growth since 2011. However, we do expect per capita growth will rise. Population growth is slowing, and as the past rise in net migration is integrated into the economy, should help support higher per capita GDP growth.
Per capita growth in real gross national disposable income (effectively a measure of the good and services Kiwis have command over) has also been relatively meek for a few years now. This is likely to change. NZ’s terms of trade, or our purchasing power with the rest of the world, is strengthening. Rising dairy prices and lower oil prices compared to a year ago will provide a boost to national income. Also, we expect labour income growth to pick-up over the coming few years as the result of strong demand for workers and some very chunky planned hikes to the minimum wage.
Market Reaction
The Kiwi markets enjoyed the report. There’s been a lot of doom and gloom offshore, so a pleasant surprise pushed the Kiwi dollar higher. The Kiwi flyer is above 69c, a high since January. The Kiwi/Aussie cross has catapulted through 97c. Kiwi interest rates had been pulled down by the US Fed announcement earlier this morning. The GDP report saw Kiwi yields bounce back. Kiwi interest rates are up 1-3bps, at time of writing.
It’s been an incredibly difficult time for market participants. The global economy has lost momentum. The Fed has gone from being staunch (world leading) policy tighteners, to all of a sudden, incredibly patient. The Brexit saga is on-going, and the US-China trade deal is still forthcoming. The outlook for interest rate markets has gone from rate hikes to rate cuts. And closer to home, Australia’s housing market is correcting. The outlook for Australian consumption is weaker as a result. With all these risks, the market is convinced the next move here will be a rate cut, sometime in the next year. And today, we’ve seen a lot to help complicate this picture.
There has been plenty for market punters to digest this morning. Prior to the Kiwi GDP report, the US Federal Reserve (Fed) left the funds rate at 2.25-2.5%, and hosed down the market by taking rate hikes off the table this year. Fed officials downgraded their expectations for growth, inflation and of course, interest rates. The famous dot plots had implied 3 more hikes to a mid-point of 3.1% in 2020. The dot plots suggest just 1 more now. The market is reading the change in the Fed’s stance as meaning, no more hikes in this cycle (next move is cuts). US Treasury yields collapsed with the 7-10 year part of the curve down 9-10bps.
And if that’s not enough, we have the Aussie employment number at 1:30 this avo.