New Zealand’s GDP rebounded by 1.7% in the June quarter, close to our forecast and the RBNZ’s expectation. Services grew strongly as tourists started to return.
- Quarterly change: +1.7% (last: -0.2%, Westpac f/c: +1.6%, market f/c: +1.0%)
- Annual change: +0.4% (Last +1.0%)
- Annual average change: +1.0% (Last: +5.0%)
New Zealand’s GDP rose by 1.7% in the June quarter, much in line with our 1.6% forecast, as well as the 1.8% rise that the Reserve Bank expected in its August Monetary Policy Statement. In contrast, the result beat the median market forecast for a 1% rise.
The bounce in the June quarter followed an (unrevised) 0.2% dip in the March quarter. Our assessment at the time was that this was due to disruptions to activity from the peak of the Omicron wave, and the absence of the usual uplift in tourist spending at that time of year. Both of those effects were reversed out in the June quarter; indeed, the border reopening led to a strong lift in tourists during what would normally have been the seasonal lull.
That was evident in the spectacular quarterly gains recorded in some sectors: 30% in accommodation and dining out, 20% in transport, 20% in arts and recreation, and 4.7% in administrative services (a group that includes travel agencies).
Even with the strong overall result, it’s important to note that there are parts of the economy that were in decline. Retail sales were down 3.7%, mining shrank by another 8%, non-food manufacturing (excluding petroleum, due to the Marsden Point refinery closure) fell by 1.3%, and construction saw a surprising 2.4% fall.
The overall picture is a normalisation of the economy as both New Zealand and the world have moved beyond Covid restrictions. Generally speaking, the parts of the economy that have been running hot in the last couple of years – when people switched their spending away from services and towards physical goods – now face a return to more sustainable levels of activity. At the same time, travel spending in particular – which was a sizeable net positive for New Zealand before the border closure – is just starting its recovery.
With today’s result very much in line with the RBNZ’s expectation, there are no obvious implications for the interest rate outlook. The heart of the issue is that the economy is running above its non-inflationary capacity. Higher interest rates will work to close that gap over time, but the challenge is in managing that process. Doing too little means that inflation could become stubbornly persistent; too much could mean an unnecessary period of weak activity and high unemployment. We agree with the RBNZ that a 4% peak in the Official Cash Rate would give the best chance of striking that balance.