New Zealand’s economy will fall under the spotlight when GDP growth numbers for the second quarter are published on Thursday (Wednesday, 22:45 GMT). After slowing to a more than one-year low of 0.5% quarter-on-quarter in the first three months, some pick-up is expected in the June quarter. However, the sustainability of any rebound remains in question as business pessimism has clouded the outlook. The New Zealand dollar is at risk of a sell-off if the data suggests growth was boosted by one-off factors.
Economic growth in New Zealand has been decelerating since the middle of 2016 even before the general election of September 2017 that brought a Labour-led government into power. GDP is expected to have expanded by 0.7% q/q in the second quarter, which, if confirmed, would make it the fastest pace in a year. However, on a 12-month basis, growth is forecast to slow to 2.5% from 2.7% in the prior quarter. Stronger exports and higher agricultural output likely contributed to the expected bounce in growth.
But even if the short-term economic picture improves, subdued business sentiment remains a concern as it has yet to recover from the inconclusive election outcome of last year that resulted in the formation of a coalition government, consisting of the centre-left Labour party and the populist New Zealand First party. Although the new government’s policies haven’t been as market unfriendly as feared, the poor survey readings suggest businesses have little faith in the Labour-led coalition’s ability to manage the economy.
The closely-watched ANZ business confidence index fell to a 10-year low of -50.3% in August, indicating businesses remain gloomy about the outlook. If business sentiment fails to recover, it’s almost certain the continued weakness will lead to companies cutting back on their investment and hiring plans, and this would weigh on future growth.
The Reserve Bank of New Zealand has already factored this risk in its outlook and recently adapted its stance to say that the next move in its official cash rate could be up or down. A worse-than-expected reading on Thursday would strengthen expectations of a rate cut, whereas an in-line or better-than-expected data could see the RBNZ toning down talk of a rate reduction, with the kiwi moving accordingly.
After managing to recover to a 2-week high of $0.6614 on Wednesday, kiwi/dollar could reverse lower should the GDP numbers disappoint. The first major support to watch for in case of a downside move is the area around 0.6540, which has been frequently tested over the past couple of months. A drop below this support barrier would open the way towards September’s 2½-year low of 0.6499. A breach of this trough would increase the downside pressure and bring the 0.6430 level into focus.
On the other hand, an upbeat set of growth figures could help kiwi/dollar extend its rebound to above the 200-period moving average, currently at 0.6617. A break above this mark could accelerate the gains and lead the pair towards the August peak of 0.6726, though it would first have to overcome resistance in the 0.6655 region.
