WEEKLY ECONOMIC COMMENTARY · Economy bags modest growth in Q2, patchy start to Q3

Key arguments

• Q2 GDP growth of 0.2% exceeded the RBNZ's flat September MPS forecast, with prior-quarter upward revisions lifting the GDP level about 0.5% above the RBNZ's estimate.
• Annual GDP growth of 2.6% exceeds the RBNZ's 1.6% potential growth estimate, suggesting the output gap has been slowly closing.
• A lack of real wage growth and falling house prices are offsetting primary-sector income, with retail spending down 0.9% in August.
• Westpac sees NZD/USD recovering to 0.5900 and the 2-10yr swap curve flattening to around 60bp by year end.

Corresponding source evidence

1. As it turns out, the preferred production-based measure of GDP grew 0.2% during the quarter, in line with our more recent expectations (revised higher after the final partial indicators were released).
2. Combined with modest upward revisions to the previous quarter – mostly due to stronger construction activity – the level of GDP in the June quarter was about 0.5% higher than RBNZ estimated.
3. Typically, a portion of this difference will flow through to the RBNZ’s estimate of the output gap, which was thought to be -1.5% of GDP as of the September MPS.