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Weaker exports drag on New Zealand's economy in Q4, but not the current account

Published: 3/17/2017

Following an outstanding performance in the third quarter of 2016, New Zealand's year-on-year GDP growth slowed to 3.5% in the fourth quarter as merchandise exports dropped sharply. However, improvements in the primary and secondary income accounts overshadowed this decline, narrowing the current-account deficit.



IHS Markit perspective

Implications

Private and public consumption and investment spending continued their expansion in New Zealand in the fourth quarter of 2016, but at a slower pace. The main growth driver in the quarter was a massive build-up of inventories. A sharp drop in exports and an uptick in imports weighed down on growth.

Outlook

Strong net inward migration and the concurrent growth in the construction and services sectors continue to drive growth in the New Zealand economy, although growth in those areas slowed during the fourth quarter. The large drop in exports during the quarter can be attributed to a continuation of weak external demand for the country's products, as well as one-off production problems related to the Kaikoura earthquake of November 2016. Import demand is likely to remain strong in the near term as construction activity and consumption continue to grow. Based on the fourth-quarter results and revisions to the data for previous quarters, IHS expects to revise its 2017 real GDP growth forecast down to the lower end of 2%, compared with our previous forecast of growth in the mid-2% range.

According to Statistics New Zealand (SNZ), New Zealand's economy expanded by 0.2% quarter on quarter (q/q) during the fourth quarter of 2016 in real, seasonally adjusted expenditure terms. Third-quarter growth has been revised down from 1.4% q/q to 0.9% q/q and the second-quarter figure has been revised up slightly from 1.2% q/q to 1.3% q/q. Although the expenditure and production measures of GDP reported by SNZ are theoretically equivalent, it is more common for media and government agencies to report GDP in production-side terms, as SNZ has determined that the production measurement is less volatile. Therefore, in production-measure terms, the economy expanded by 0.4% q/q and 2.7% year on year (y/y) in the fourth quarter.

New Zealand real GDP (% change)

Q/Q

Y/Y

Nominal share

Q4 2016

Q3 2016

Q4 2016

Q3 2016

2016

2015

of GDP (%, 2015)

GDP, total*

0.2

0.9

3.5

4.1

4.0

3.1

100.0

Exports

-3.8

-1.1

-2.1

1.8

1.6

6.9

28.3

Imports

1.9

1.7

7.4

6.2

4.0

3.7

27.7

Private consumption

0.4

1.4

4.3

5.3

4.2

2.9

57.6

Public consumption

1.1

1.2

3.6

2.4

2.3

2.6

18.8

Gross fixed capital formation

0.7

1.2

6.9

4.2

5.7

2.1

23.1

Note: All data are seasonally adjusted

Source: Statistics New Zealand© 2017 IHS

Domestic consumption and fixed investment grow, but at a slower pace

Fixed investment activity remained strong in the fourth quarter, rising 0.7% q/q. However, this marked the fourth consecutive quarter in which the pace of investment growth had slowed since reaching 2.6% q/q in the first quarter of 2016. Residential building investment – normally the main driver of investment growth – remained flat during the fourth quarter, a worrying sign in a country beset by rapidly rising house prices. Investment in non-residential buildings, however, picked up some of the slack, rising 5.0% q/q. Machinery and equipment investment followed up on an impressive third quarter by growing 3.7% q/q, a welcome sign showing that businesses continue to hold a favourable view of New Zealand's growth potential. Investment in "other" construction, comprising telecommunications and infrastructure construction, rose 3.1% q/q, most likely as a result of continued post-earthquake reconstruction work in the Canterbury region and the emergency servicing of areas damaged by the recent Kaikoura earthquake. Due to rising oil prices over the quarter, investment in intangible fixed assets – driven by higher oil exploration investment – increased 5.1% q/q. The only sub-category of fixed investment to suffer a setback in the fourth quarter was transport equipment, falling 4.7% q/q, largely due to negative base effects from a stunning 30.0% q/q rise in the third quarter (see New Zealand: 23 December 2016: New Zealand maintains strong growth momentum in Q3 despite worsening trade balances).

Private consumption growth in the fourth quarter was solid, coming in at 0.4% q/q, but less impressive than growth over the previous two quarters, which had averaged roughly 1.7% q/q. This is likely to be in part due to decreased expenditure by consumers affected by the Kaikoura earthquake. Spending on services rose 0.9% q/q as New Zealanders increased spending on air travel, health, and vehicle repairs. However, restaurant meals appeared not to have been on the menu in the fourth quarter as spending on dining out contracted. Household expenditure on durable goods increased 1.3% q/q, with spending on furniture, cars, and audio-visual equipment on the rise. Non-durable goods spending fell 0.7% q/q as expenditure on gasoline (petrol), groceries, and electricity decreased.

The largest contribution to growth during the fourth quarter came from a sharp build-up in inventories of NZD906 million (USD632 million), equal to roughly 1.6% of seasonally adjusted GDP for the quarter, the highest share of GDP since the second quarter of 2008. This build-up followed two quarters of large inventories drawdowns, and was mostly due to an increase in manufacturing and distribution inventories.

Goods deficit widens sharply, but current-account deficit shrinks

New Zealand's net export position weakened considerably for the second straight quarter as exports of goods and services fell 3.8% q/q in real, seasonally adjusted, volume terms while imports of goods and services rose 1.9% q/q.  Goods exports fell 6.0% q/q, their largest quarterly drop since 1992, as dairy, meat, machinery, and crude exports all declined. However, agricultural exports as a whole rose 7.5% q/q to partially offset the decline. IHS currently expects agricultural exports to strengthen over the coming quarters now that the negative effects from the El Niño weather pattern and the Kaikoura earthquake have subsided. Goods imports grew 2.4% q/q, with capital goods imports rising 4.1% q/q, a good sign for fixed investment growth in the current quarter.   

In nominal, seasonally adjusted, balance-of-payments terms, the merchandise trade balance deteriorated as goods imports increased while exports remained roughly unchanged.

The current-account deficit improved during the fourth quarter, narrowing NZD420 million from the previous quarter to a seasonally adjusted NZD1.6 billion, or 2.7% of GDP. The services surplus rose NZD174 million to NZD1.2 billion thanks to improved services exports while services imports fell marginally. The main drivers of the improvement in the current-account balance were rising primary and secondary income balances. The primary income deficit narrowed as foreign investors chose to reinvest profits in New Zealand as opposed to paying dividends to their shareholders. The secondary income account shifted to surplus as New Zealanders issued claims for insurance policies – held by foreign insurance companies – related to the Kaikoura earthquake.

New Zealand balance of payments (NZD, bil.)

Q4 2016

Q3 2016

Q2 2016

2016

2015

Current account, total*

-1.6

-2.0

-1.9

-7.2

-8.0

Share of GDP (%)

-2.7

-3.0

-2.9

-2.7

-3.4

Balance on merchandise trade

-0.8

-0.7

-0.5

-2.6

-2.1

Merchandise exports

11.9

11.9

12.4

48.2

49.2

Merchandise imports

12.8

12.7

12.9

50.9

51.3

Balance on services

1.2

1.0

1.0

4.4

3.9

Balance on primary income

-2.0

-2.2

-2.0

-8.1

-9.4

Balance on secondary income

0.1

-0.2

-0.4

-0.9

-0.4

Note: The current-account, merchandise trade, and services data are all seasonally adjusted, primary and secondary income data are not.

Source: Statistics New Zealand© 2017 IHS

Outlook and implications

Although the economy missed growth expectations in the fourth quarter, New Zealand's 4.0% real GDP growth for 2016 as a whole made it one of the best-performing developed economies last year. The economy is on a sound footing with room to expand thanks to continued net inward migration and ongoing construction activity. However, slowing growth in both private consumption and investment activity could be a sign that growth momentum will slow substantially this year, leading IHS to potentially lower its 2017 GDP growth forecast from 2.4% to closer to 2.0% in its April forecasting round. We continue to believe that in spite of the slower-than-expected fourth-quarter growth reading, the Reserve Bank of New Zealand (RBNZ) will keep interest rates on hold until late 2017 when it will begin increasing its official cash rate to combat rising inflation (see New Zealand: 10 February 2017: New Zealand's monetary policy to remain accommodative for "considerable period" despite Reserve Bank's optimistic tone).

The fourth quarter's soft performance is cause for some concern as it highlights key vulnerabilities in private consumption and fixed investment activity, the two pillars of the country's remarkable 2016 growth story. Any reversal in the trend of strong inward migration – which could arise in the event of slowing post-earthquake reconstruction activity or a change in New Zealand's immigration policy – would further slow recent growth in consumption and investment. The downward trend in investment growth over the past three quarters could also signal an end to post-earthquake-reconstruction-fuelled growth, although new reconstruction activity as a result of the Kaikoura earthquake should keep reconstruction-related investment growth positive in the near term. A further slowdown in China and the resulting weakening in demand for New Zealand's exports remains an additional risk to the country's growth. A recovery in the tourism industry from a depreciating New Zealand dollar poses an upside risk to our forecast.

In spite of the downside risks, we expect private consumption to continue driving growth in the near term as a few years of strong inward migration have increased the number of potential customers. Investment activity is also likely to remain elevated as post-earthquake reconstruction activity continues and is possibly supplemented by new reconstruction activity related to the start of the Kaikoura reconstruction efforts. The RBNZ's commitment to expansionary monetary policy in the near term should also serve as a catalyst for increased investment activity and household consumption. We expect the agricultural sector to expand modestly over the coming quarters as prices continue to rise and production fully recovers from the effects of El Niño. GDP growth in 2017 is expected to come in at roughly half of 2016's figure owing to base effects from the strong performance last year and the dip in investment from the unwinding fleet expansion by Air New Zealand.

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