Growth stronger than was expected

New Zealand’s economic growth in the year ended September was stronger than expected, lifting to 3.5% even though the positive surprise was offset by a downgrade revision of history.

Quarterly growth in September rose 1.1%, catching economists off-guard. Most had forecast growth to come in at 0.8% for the three months. The Reserve Bank had forecast 0.9% quarterly growth.

New Finance Minister Steven Joyce said New Zealand’s economic growth in the quarter was the fifth strongest in the OECD ahead of Australia (1.8%), the United States (1.6%), Canada (1.3%) and the euro zone (1.7%).

"We are starting to see the benefits of a clear and stable focus on economic fundamentals coupled with a determination to build a competitive environment from which Kiwi companies can succeed on the world stage."

Growth in the quarter was strong across 13 of 16 industries, he said. Highlights included: business services, up 2%; transport, postal and warehousing 3.7%; construction 2.1%; and manufacturing 1.2%.

It was hard to overstate the importance of key service sector exports like tourism and education in New Zealand’s economic success in recent years, Mr Joyce said.

Those industries had taken up a lot of the shortfall as the dairy sector went through its downturn. Other food sectors and hi-tech exports had also contributed significantly, he said.

ASB chief economist Nick Tuffley said the main surprise for him was the "thumping" 3.78% increase in transport activity in the quarter, led by increased road and air transport.

Statistics NZ did not elaborate on the detail in the release so it was not known if it was due to increased freight or increased tourist activity. Either would be an encouraging sign of healthy growth in New Zealand activity.

According to Statistics NZ figures, spending by overseas tourists fell 3.4%, a figure Mr Tuffley was surprised by given tourist arrivals continued to lift over the quarter.

"This decline suggests the strength of the New Zealand dollar may have significantly eroded the purchasing power of the dollar. This would also suggest strong transport activity was due to domestic air travel and freight."

The other point of note was the strong lift in household spending,  led by services and non-durable spending on  such as  fuel and food.  Strong population growth over the past year could be a factor in increasing that spending.

"We do wonder how much of this could be due by tourist spending — this would be relatively tricky to split out to see if New Zealanders or tourists are behind spending growth in these sectors."

Consumer spending on durable items, which was  highly correlated with the housing investment, was more subdued, Mr Tuffley said.

As expected, the services sector was a key source of growth in the third quarter. Also, continued growth contributions came from manufacturing, construction and retail spending. Agricultural activity did not contract as expected. Instead, it remained flat.

Statistics NZ also released the balance of payments data yesterday, showing the annual current account deficit held steady at 2.9% of gross domestic product (GDP).

Mr Joyce said the deficit was well below the long-run average. New Zealand’s external debt was 58% of GDP compared with 83.8% of GDP before the global financial crisis in 2008.

The Treasury’s half-yearly financial update predicted growth to average 3% a year out to 2021 and a further 150,000 jobs  in the same period.

"The future is looking positive for New Zealand but these are, of course, just forecasts."

The world remained an uncertain place and it was important the Government, businesses and households collectively kept grounded and did not go crazy with the credit card, he said.

 

At a glance

• September quarter economic growth 1.1%.

• Annual economic growth of 3.5%.

• Current account deficit remained steady.

• The strong dollar played its part in the quarter.