Under par GDP leads to OCR cut calls

News that GDP grew by just 0.2% in the March 2015 quarter has led Westpac, ASB and ANZ to announce they expect the Reserve Bank to cut the OCR again in July.

Both Westpac and ANZ also expect a further OCR cut later in the year.

Westpac senior economist Michael Gordon said the March quarter GDP release was a shocker and fell well short of the already subdued 0.6% growth that most were expecting.

The overall picture for domestic demand wasn’t flattering, he said.

“Business investment was weak - which doesn’t suggest a great deal of confidence about the economy’s longer-term growth prospects - and growth in the services sectors was highly dependent on tourist spending.”

The GDP figures have sealed the deal for a July cut in the minds of Westpac’s economists.

Gordon said they didn’t think it would stop in July, but expected the RBNZ to cut a third time, to 2.75%, in September and to maintain a bias towards further easing.

“An economy falling this far short of its potential growth raises the risk that inflation will continue to undershoot the 2% target in the absence of easier monetary conditions.”

ANZ senior economist Mark Smith agreed with Gordon.

In his view, the GDP figures indicate growth is drying up.

Not only did GDP growth in the March 2015 quarter come in well under expectation, but annual growth eased to 2.6% - which is the lowest rate since the end of 2013.

Smith said that, while part of today’s weakness was due to one-off factors (drought), it is apparent that growth momentum is sluggish.

“Local and external headwinds are building and we see a sub-trend pace of growth momentum persisting into mid-2015.”

The data cements ANZ’s expectation of a further RBNZ OCR cut in July, he said.

“However, we now expect an additional 25bp rate cut beyond this before the end of the year, taking the cash rate to 2.75%.”

ASB senior economist Jane Turner said that, while the weak GDP result was likely to be temporary, it should push the RBNZ over the line to cut the OCR again in July.

The RBNZ signalled another rate cut - the timing of which was data dependent, she continued.

“We now expect this rate cut to come in July rather than September. The GDP result will swing more forecasters and market participants into focusing on a July cut, increasingly making that move the path of least regret for the RBNZ.”

Meanwhile, HSBC chief economist Paul Bloxham said the headline GDP number was weaker than expected, but digging a little deeper reveals a domestic economy that still has solid momentum.

“Nonetheless, there are still limited signs of price pressures, as demand is being met by very strong supply. We expect the RBNZ to cut by another 25bps in the second half of 2015.”