New Zealand Q2 GDP comes in stronger than expected at 2.6% y/y, easing RBNZ growth worries

The better-than-expected GDP figure provides some support for the Reserve Bank of New Zealand as it continues raising rates, with its hiking cycle mainly focused on inflation rather than economic activity. The central bank lifted the official cash rate to 2.75% earlier this month for a second straight meeting, despite a weak growth backdrop. A central bank tightening into resilient rather than deteriorating growth is arguably more beneficial for the kiwi than the data surprise itself. However, NZD/USD barely moved, edging up to $0.5724 from $0.5718, with the broader US dollar strength following the Federal Reserve's rate hike offsetting the local beat. That leaves the New Zealand dollar's reaction skewed toward external drivers for now. Westpac's view that inflation data, not growth data, will determine the RBNZ's next move suggests the currency's next real trigger lies with upcoming CPI releases rather than Thursday's GDP figures.

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New Zealand's economy outperformed a gloomy RBNZ forecast, but the currency barely reacted as the Fed's rate hike continued to dominate.

Summary:

• NZ Q2 GDP rose 0.2% q/q, beating the 0.1% forecast and the RBNZ's own flat projection; annual growth came in at 2.6% versus 2.2% expected
• Growth slowed from an upwardly revised 0.9% q/q pace in Q1, as the US-Iran conflict weighed on confidence
• Westpac's Michael Gordon said the economy has largely held its ground through the conflict, though not entirely unscathed, and that this should ease some RBNZ concerns about downside growth risk
• The RBNZ hiked the OCR 25bps to 2.75% earlier this month, its second consecutive hike, with inflation still above target; Westpac says inflation data, not growth, remains the key driver of the next move
• NZD/USD ticked up only slightly to $0.5724 from $0.5718, with gains capped by broader dollar strength following the Fed's rate hike
• Kiwibank called the result solid given the oil crisis backdrop but noted NZ still posted the weakest growth among peer countries Stats NZ benchmarks against; the data lands amid a tight November 7 election campaign

New Zealand's economic growth slowed in the second quarter compared with the first, but the outcome still exceeded forecasts, providing some relief to the Reserve Bank of New Zealand over downside growth risks. Statistics New Zealand published data on Thursday showing GDP increased 0.2% quarter on quarter, above the 0.1% analysts had predicted and well ahead of the RBNZ's own expectation of zero growth. That represented a deceleration from an upwardly revised 0.9% pace in the first quarter, previously reported as 0.8%, as the US-Iran conflict hurt confidence. Annual growth stood at 2.6%, comfortably above the 2.2% the market expected.

Westpac noted that the data reinforced the message that New Zealand's economy has mostly held up during the conflict, although it has not escaped entirely unscathed. The bank added that the result should help ease some committee members' concerns over downside growth risks, but Westpac continues to view inflation indicators as the main input for the RBNZ's next move, not growth. That context matters because the central bank has been raising rates despite a soft growth outlook, increasing the official cash rate by 25 basis points earlier this month for a second consecutive meeting, to 2.75%, with inflation remaining above its target. The RBNZ has said it expects the recovery to strengthen and broaden from here, and Thursday's beat gives that forecast some initial support.

The currency response was more subdued than the headline beat might indicate. The New Zealand dollar ticked up only slightly to around $0.5723 from $0.5718 on the data, with gains limited by the broader pressure the currency remains under following the Fed's rate hike this week, which has kept the US dollar firm across the board.

Results were varied beneath the headline figure, with Statistics New Zealand reporting that only nine of 16 industries expanded in the quarter, with construction the standout performer. Kiwibank economists described the outcome as solid given the backdrop of the oil crisis driven by the Middle East, but noted that New Zealand still recorded the weakest growth among the nine other countries and country groups Statistics New Zealand benchmarks it against. They added that the path forward depends on whether the momentum from June holds up. The data also falls in the middle of an election campaign, with the economy a key battleground ahead of the November 7 vote.