MNI ANALYSIS: New Zealand GDP Poses Risks for RBNZ Outlook

--Q2 GDP Rises As Expected But Construction Disappoints

--Consumption Not Keeping Pace With Terms of Trade Increase

By Sophia Rodrigues

     SYDNEY (MNI) - New Zealand's GDP accelerated in the second quarter as a

strong contribution from the services industries and faster growth in

manufacturing were only partly offset by a decline in mining and construction.

     Data published by Statistics New Zealand Thursday showed GDP rose 0.8% q/q

and 2.5% y/y in Q2, in line with MNI median forecast but blow of the Reserve

Bank of New Zealand's forecast of +0.9% q/q.  There was an upward revision in Q1

GDP to +0.6% q/q from +0.5% originally reported.

     Growth was mainly supported by a rise in tourism activity, with part this

spending due to the multi-sport World Masters Games in April, and the British

and Irish Lions Rugby tour to New Zealand in the June and September quarters.

     Construction surprised with a 1.1% q/q fall in Q2, with the y/y rate also

falling to -0.1%. The decline was bigger than expected and suggests that

resource constraints in the construction sector may be hurting activity.

     Activity in the construction sector has important implications for the

Reserve Bank of New Zealand's monetary policy because construction cost

inflation is expected to support non-tradable inflation.

     In its August Monetary Policy Statement, the RBNZ said capacity pressure in

the construction sector appeared to be increasing, and there had been some

tightening in lending standards for residential property development over the

past year. 

     "Uncertainty remains as to the degree to which availability of land, labor,

capital, and finance could constrain construction activity. If constraints

become more binding than assumed, construction activity could be lower. The

implications for inflation could vary, depending on the interaction of these

constraints," the RBNZ said.

     GDP on an expenditure basis accelerated sharply and at +1.1% q/q in Q2 was

more than double the +0.5% q/q growth in Q1. That matched the +1.1% q/q growth

reported in Q1 of 2016.

     The strong growth using the expenditure measure came from net exports, as

exports rose 5.2% q/q while imports grew just 0.6%.

     Private consumption slowed in Q2, rising 0.9% q/q compared with +1.2% in

Q1, with household final consumption expenditures rising 0.9% vs 1.2% in Q1.

     The RBNZ expected consumption growth to remain high because of its

accommodative monetary policy and the elevated terms of trade. The data,

however, show consumption hasn't kept pace with rising terms of trade, and that

could pose a risk to the consumption outlook given the slowing in house price

inflation so far this year.

     If house price inflation continues to slow and net migration eases, it may

affect the demand outlook for the economy, especially if construction activity

also continues to ease. That would mean the RBNZ's 1.75% official cash rate may

stay for a prolonged period.

     In a speech last month, RBNZ Governor Graeme Wheeler cited a sharp decline

in net migration as a main domestic risk.

     "Our forecasts assume net immigration of 140,000 people over the next three

years - a further 3.5% boost to the working age population. A much sharper

reduction in arrivals or increase in departures, absent an increase in global

growth, would slow domestic economic growth by reducing employment and demand

growth," Wheeler said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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