Economic growth and industry

• Gross Domestic Product: Updated 29 January 2010
• RBNZ forecasts: Updated 29 January 2010
• NZIER forecasts: Updated 5 March 2010
• Infometrics forecasts: Updated 29 January 2010
• Net Migration: Updated 5 March 2010

Economy showing tentative signs of recovery, but remains vulnerable to tight financial conditions and weakness in the construction industry.

Production-based gross domestic product (GDP) increased 0.2 percent in the September 2009 quarter, following a 0.2 increase in the June 2009 quarter (revised up from the 0.1 increase reported in the June 2009 release). The growth in GDP over the two quarters follows five consecutive quarters of contraction. While GDP was 1.3 percent lower in the year to September 2009 compared with a decline of 0.7 percent in the year to September 2008, the trend has been improving following year-end contractions of 2.1 percent for June 2009, and 3.0 percent for March 2009.

The construction industry has contracted for six out of the past seven quarters, with output falling by 4.4 percent in the September 2009 quarter. On a year-end basis, construction industry output continues to deteriorate, down by 10.3 percent in the year to September 2009, compared with a 7.3 percent decline in the June 2009 year, and a 7.8 percent decline in the September 2008 year.

The decline in construction activity continues to be driven by weakness in the residential building sector. Gross fixed capital formation in residential building has contracted for nine consecutive quarters, falling by 5.0 percent in the September 2009 quarter, following a 2.3 percent fall in the June 2009 quarter. Residential building investment is 20.3 percent lower in the year to September 2009 slightly worse than the 19.6 percent decline in the year to September 2008.

The outlook for non-residential construction remains uncertain despite an increase in investment of 0.5 percent in the September 2009 quarter, down 8.7 percent compared to September 2008. Growth in non-building related (“other”) construction had been robust throughout the downturn, however it fell 9.3 percent in September 2009, to be 3.9 percent lower than September 2008.

In its December 2009 Monetary Policy Statement (MPS), the Reserve Bank cited an improvement in the global outlook, gains in trading partner activity, higher commodity prices and business sector confidence, as reasons for raising their projections for GDP growth. They have revised their forecast up for GDP in 2010 from a 0.7 percent contraction in their September 2009 MPS to 0.7 percent growth. However, they do not see a need to raise the overnight cash rate in the near term due to tight financial conditions, the appreciating New Zealand dollar, a subdued outlook for inflation, and continuing uncertainty.

Based on data released since the June MPS, the Reserve Bank revised their forecast for real residential investment in 2009 down slightly from -22.9 percent to -23.2 percent. For 2010, they revised their forecast up from -14.3 percent to -7.6 percent.

The NZIER expect the recovery to be subdued and uneven according to their March 2010 Quarterly Predictions. They forecast economic growth of 2.7 percent in 2010 and 1.4 percent in 2011 with pent-up demand for consumption being the main driver. Expectations of an increase in the rate of GST later this year could also provide a boost to spending on consumer durables. They expect residential construction to recover at a slower pace due to the recent increase in mortgage rates.

Infometrics revised their forecast for economic growth up to 3.3 percent for 2010/11 in their November 2009 forecasts, based on stronger expectations for a pick-up in household consumption. A recovery in the housing market, together with lower interest rates, steady petrol prices and greater external demand within the Asia-Pacific region are expected to accelerate growth further to 4.2 percent by March 2012. They also expect the stronger dollar to further benefit households by keeping the cost of imported goods down.

Figure 1: Aggregate and Construction Industry Growth (to September 2009)

^{_{Source: Reserve Bank and Statistics New Zealand}}

Migration to New Zealand continued to climb steadily with a net inflow of 22,588 people in the year to January 2010, almost five times higher than the 4,538 recorded for January 2009, and currently stands at levels similar to mid-2004. The increase was largely due to a reduction in numbers leaving New Zealand (falling 20.5 percent compared with a year ago). Immigration had been stable in recent months, but fell by 4.1 percent for the year to January 2010.

 

Figure 2: Net Migration (to January 2010)

^{_{Source: Reserve Bank and Statistics New Zealand}}