Interest rates tipped to rise sooner as GDP data shows economy running hot

The economy is running hot.

It is so hot that economists are moving forward their expectations for interest rate hikes as inflation risk grows.

Essentially the economy has burned off recession fears and faces a new set of challenges as parts of the economy boom.

For businesses trying to hire staff and keep up with customer demand this will come as no surprise.

But GDP data for the first quarter of the year has confirmed what we all expected – and then exceeded those expectations by some margin.

The quarterly growth figure of 1.6 per cent was double that of the most optimistic market economists.

While the grim second quarter of 2020 still leaves average annual growth in negative territory, on year on year measure we are 2.4 per cent ahead of where we started as the pandemic hit.

The strength of the numbers already has economists forecasting the Reserve Bank may have to bring forward interest rate hikes.

The central bank, which had a fall of 0.6 per cent in its forecasts, had signalled rate hikes from the middle of next year.

ANZ today moved its pick to next February.

ASB had been expecting hikes in May but today said the economic strength now skewed the risk to an earlier move.

While the Reserve Bank’s forecast now looks overly cautious, most market economist had anticipated that strong consumer spending through the summer would keep growth in positive territory.

It did, but other sectors also outperformed expectations.

“Households spent more on accommodation, eating out, and purchasing big-ticket items such as furniture, audiovisual equipment, and motor vehicles,” StatsNZ said.

Construction bounced back sharply to record 6.6 per cent growth – after a fall of 8.4 per cent in the December 2020 quarter.

“Construction services, heavy and civil engineering construction, and residential building construction all contributed strongly,” StatsNZ said.

“The construction industry has returned to near-record levels of activity with historically high volumes of residential building work contributing to overall activity”.

The solid rise in activity meant that New Zealand easily avoided a second technical recession, said Ben Udy at Capital Economics in Sydney.

“We expect GDP to continue its rebound over the rest of 2021”.

Once we move through the seasonal impact of the international tourist season (or lack of it), strong trade figures are expected to add momentum to the recovery.

KiwiBank chief economist Jarrod Kerr described the result as remarkable.

“You’d be forgiven for thinking that [1.6 per cent] was the annual rate. Nope. The annual rate was 2.4 per cent – compared to consensus expectations of 0.9 per cent,” he said.

“The report was stronger than expected – pretty much across the board. And the economy has confidently returned to pre-Covid levels.”

That figure of 2.4 per cent growth (year on year) puts us ahead of the Australia, the US, UK, Canada and the OECD average.

ANZ’s Sharon Zollner and Miles Workman were more circumspect, emphasising that some serious structural issues are lurking beneath the topline economic results.

But they recognised that growth figures showed “the recovery in domestic demand has been nothing short of spectacular”.

They are now forecasting that the Reserve Bank will have to move to lift interest rates as soon as February.

The view that track for rate hikes is creeping forward was reflected in the kiwi dollar which rose almost half a cent on the news.

Almost no one – even those who deemed New Zealand’s hardline pandemic response crucial for public safety – anticipated that the economy would withstand it so well.

We can now draw a line across the first financial year of the pandemic.

The recessionary fears of soaring unemployment and economic stagnation have proved unfounded.

The Government and Reserve Bank did what was required. We survived and we thrived.

New Zealand faces a new set of challenges as the world moves into recovery mode.

As ANZ’s Zollner notes, New Zealand has still suffered a big negative income shock.

“A hangover awaits, somewhere down the track,” she says.

“But for now, with inflation pressures building, unless the picture changes, the RBNZ will need to flip from one potential regret to the other, rather sooner than they are currently forecasting”.

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