Uncertainty surrounds this week's GDP news

Nick Tuffley
Nick Tuffley
The GDP release this Thursday is probably as low a priority as it can get, sandwiched between two quake-affected quarters and with the market more concerned about developments overseas.

Westpac chief economist Brendan O'Donovan said the main point of interest was likely to be whether the economy met the "technical" definition of a recession by contracting for a second straight quarter.

"Our forecasts suggest just the opposite - a technical recovery not due to any underlying strength in the economy but to the fact there are easy gains to be had in many sectors relative to their depressed September-quarter levels."

In particular, drought conditions and the first Canterbury earthquake weighed heavily on second- and third-quarter activity.

Those influences were likely to have washed out by December.

Westpac expected a 0.4% increase in GDP, the measure of the country's economic activity, after a 0.2% contraction in September, he said.

The forecast was more uncertain than usual, as a few major indicators were missing.

The February 22 earthquake severely disrupted Statistics New Zealand's operations and it appeared that in some cases - the manufacturing and wholesale trade surveys - preparing the figures for internal use in the GDP calculations had taken priority over external publications.

That was especially frustrating because manufacturing was one of the biggest swing factors behind the Westpac December GDP forecast, Mr O'Donovan said.

ASB chief economist Nick Tuffley believed that fourth-quarter GDP contracted 0.1%, pushing New Zealand into a technical recession.

"The economic recovery that had been in place in early 2010 stalled over the second half of the year.

"We expect growth to occur in manufacturing, wholesale trade and construction."

That would be offset by falls in other sectors due to the underlying weakness in demand, he said.

ASB expected a sharp contraction in retail sales.

Weak housing market activity and weak agricultural production due to dry weather conditions would also slow growth.

Mr Tuffley agreed with Mr O'Donovan that there was more uncertainty about Thursday's GDP release because of the damage to Statistics NZ's Christchurch offices.

"This leaves forecasters to make a rough stab - instead of an educated guess - at what amounts to 20% of GDP.

Along with heightened uncertainty, the market reaction is likely to be asymmetric given recent events in Japan," he said.

Tomorrow, Statistics NZ will release the current account balance, which is expected to have narrowed to about 2.4% of GDP in December, led by an improving trade balance.

Mr O'Donovan said it had been difficult to get a clear picture of the underlying drivers of New Zealand's current account during the past two years because the data had been muddled by one-off events.

Reinsurance flows and large tax settlements by banks had all obscured the picture.

"While the December quarter will be free of these distortions, this clarity won't last long.

Reinsurance flows following Christchurch's second devastating earthquake could even catapult the current account balance into surplus this year."

Should the current account data post a small narrowing of the deficit, it was unlikely to garner significant market reaction, he said.

Markets remained focused on the Christchurch earthquake and more recently that in Japan.

The release tomorrow predated both of those events, but they would have a significant impact on future current account results, Mr O'Donovan said.

 

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