New Zealand Q1 GDP Preview: reaction or overaction?

• GDP expected to be stable to slightly positive
• RBNZ May rate cut meant to stave off further weakness
• Manufacturing PMI in May fell to 50.2

Statistics New Zealand, the data department of the government of New Zealand will release its estimate for first quarter gross domestic product (GDP)  at 10:45 am NZST June 20th, 22:45  GMT June 19th , 18:45 EDT June 19th.

Forecast 

Gross domestic product is projected be 2.4% y/y in the first quarter slightly ahead of the 2.3% rate in the final quarter of last year. Quarterly GDP is expected to gain 0.6% in the first quarter the same as in the previous period.

New Zealand Economy

The New Zealand economy has been slowing for more than two years after reaching an annual average of 3.875% in the final quarter of 2016. The last three months of 2017 saw a year over year expansion of 3.4% and over the next year growth ebbed by more than a point to 2.3%.

Reuters

 Concerns over the fallout of the US-China trade war, directly involving the nation’s first and third trading partners and at one remove the other three of the top five, Australia, Japan and South Korea, weakness in inflation, and slipping growth were enough to prompt the Reserve Bank of New Zealand (RBNZ) to cut the cash rate for the first time in more than two years. The 0.25% cut to 1.5% on May 8^th was more of a preventative than a move to a reduction cycle.

The RBNZ meets next on June 25^th and it expected to maintain the current cash rate.

Reuters

Retail sales were weaker in the first quarter, ahead 0.7% but the annual average turned up to 0.9% due to the strong 1.6% result in the final three months of 2018.

Reuters

The purchasing managers’ index from Business New Zealand fell to 50.2 in May from 52.7 in April for the largest monthly drop since 2012.

Despite the cautious analysis of the central bank the New Zealand economy, absent an escalating trade war between the US and China,  is not headed to recession.   

New Zealand Dollar

The kiwi has been hard hit this year by several factors. A strong US Dollar supported by safe-haven flows from the trans-Pacific trade dispute, the general slowdown in global growth and the central bank’s rate cut to a record low and the seeming promise of more reductions to come.

Conclusion

While several major central banks including the Federal Reserve, the ECB and the Reserve Bank of Australia have expressed their concern about the directions of global and national growth, only the RBNZ has acted.   

The pivot around which the rate policies are turning is the US-China trade dispute. With the Chinese and US presidents slated to meet at the G-20 summit in Japan on June 28-29 the results of that conclave will go a long way to determining the direction of the world economy and central bank rate policy for the balance of the year.

The New Zealand economy on its own probably does not need further support and unless the US-China trade dispute explodes, it is unlikley to get it.  The New Zealand Dollar could act accordingly.