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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:
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