ANZ tips rates rise in February after 'spectacular' 1.6% jump in GDP

Thursday, 17 June 2021

GDP growth beat economists' most optimistic forecasts.

The country’s largest bank, ANZ, is forecasting the Reserve Bank will raise the Official Cash Rate as soon as February, after Stats NZ reported much stronger-than-expected economic growth.

Stats NZ said the economy swung back into a broad-based recovery in the three months to the end of March, with GDP jumping 1.6 per cent.

That was despite Auckland's level 3 lockdown and the lack of international tourists during the normally busy summer season.

Consumer spending rose 5.5 per cent in the quarter.

The Monitor looks at how individual parts of New Zealand's economy have rebounded since the Covid-19 pandemic hit. Video first published in April 2021.

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“Households spent more on accommodation, eating out, and purchasing big ticket items such as furniture, audio visual equipment and motor vehicles,” Stats NZ accounts manager Paul Pascoe said.

The growth followed a disappointing 1 per cent drop in GDP in the December quarter and immediately fuelled speculation that the Reserve Bank will need to consider raising the Official Cash Rate from 0.25 per cent earlier than expected.

Most economists have been expecting the central bank to start tightening rates around the middle of next year.

But ANZ brought forward its forecast of a rate cut to February on the back of the GDP data.

It described the recovery in domestic demand as nothing short of spectacular and said “a year from now feels too far away” for a rate rise.

Expectations of an OCR hike could feed into mortgage rates and be felt by home-owners far sooner.

ASB described the GDP gain as “whopping” and warned stronger-than-expected domestic demand coupled with growing cost pressures, were a potent mix for inflation.

ASB warned that borrowers should be braced for higher interest rates, describing the first-quarter GDP gain as “whopping”.

“We currently expect the Reserve Bank to start normalising interest rates in May 2022, but risks are now very firmly skewed to an earlier move,” it said.

“Borrowers should brace for the end of record-low interest rates,” it said.

ANZ had been expecting a more modest 0.5 per cent rise in GDP in the March quarter, while the New Zealand Institute of Economic Research had been among the most optimistic, tipping a 1 per cent gain.

The Reserve Bank itself had pencilled in a 0.6 per cent drop in GDP for the quarter and the Treasury a 0.2 per cent drop, which would have put the country into a technical recession.

The breadth of the economic growth, as well as its strength, appears significant.

The services industry, which makes up about two-thirds of the economy, was the biggest contributor to the GDP gain in dollar terms, showing 1.1 per cent growth.

Spending by businesses on plant and machinery leapt 15 per cent.

Stats NZ's figure means the New Zealand economy grew at the same pace as the United States economy during the three-month period, despite expectations it would be outpaced as a result of the later recovery in the US, and was just shy of Australia's first quarter GDP growth of 1.8 per cent.

Annual GDP during the year to the end of March was still down 2.3 per cent on the prior year, due to the double-digit fall the economy experienced in the second quarter of last year as a result of the nationwide level 4 and level 3 lockdowns.

But Westpac economist Michael Gordon noted economic activity at the end of the quarter was up 0.8 per cent on the year prior.

Finance Minister Grant Robertson said the higher Covid alert levels during the quarter only had a limited impact on the economy “thanks to the Government’s quick response to provide cashflow and confidence”.

But he reiterated his usual warning over ongoing volatility.

The New Zealand dollar lifted on the back of the strong GDP growth, but the talk overnight of higher interest rates in the US remained the dominant influence on currency markets over the day.

“There is still a lot of uncertainty around how Covid is affecting different parts of the economy,” he said.

A black spot in the first quarter of this year was an 8 per cent drop in exports and a 7.1 per cent rise in imports fuelled by the consumer spending boom.

Stats NZ said exports “remain a drag on growth”.

The New Zealand dollar slid almost 1 US cent to US70.5c overnight after the United States Federal Reserve rattled financial markets with suggestions of two rate-hikes there next year.

ASB said that, globally, central banks were increasingly “waking up to surprisingly-quick rebounds in capacity and inflation pressures”.

In New Zealand, those pressures were being compounded by a lack of immigrants to fill gaps in the labour market, it said.

The New Zealand dollar regained some ground on the GDP data, but Westpac’s Gordon said currency markets were still probably digesting the Federal Reserve’s comments.

Westpac had been expecting only a 0.6 per cent rise in GDP here.

“While we weren’t surprised by what drove the strength in domestic activity, what was surprising was the magnitude,” Gordon said.

“Sectors such as construction, wholesale and retail trade recorded even larger gains than what their respective surveys indicated.”

Jarden economist John Carran said the Federal Reserve’s comments raised the chances of interest rates here also going up sooner, because of their likely impact on exchange rates and therefore inflation.

“No economy is an island,” he said.

But he believed there was only small chance of the OCR rising this year, given that both the Reserve Bank and the Fed had signalled they would look through short-term inflation.

“Something dramatic would have to happen.”

ACT Party leader David Seymour dismissed the economic growth as a “dead cat bounce”.

“The Reserve Bank printed $100 billion, the Government borrowed $60b – we've got an economy that’s running on a sugar hit,” he said.