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Q2 GDP data were much stronger than expected, with the economy growing 1.2% on the quarter after an upwardly-revised 0.7% in Q1. Domestically, both consumption and investment were key drivers. Low interest rates and rising real incomes are supporting households, with consumer spending up 1.9% q/q in Q2. Investment continues to be led by residential construction, which rose 6% q/q, but there are also signs that firms are looking to increase capacity. Exports were somewhat mixed, with goods rising sharply but services dropping back. The challenging external environment, particularly for New Zealand's dairy and meat farmers, will limit export volume growth this year to 4.2%.
Although the economy is performing strongly, the Reserve Bank of New Zealand cut interest rates to 2% in August and signalled further monetary loosening at its next meeting in November. The Bank is concerned about the global environment and the appreciation of the NZD, which has dragged inflation down to near-zero. However, with the economy growing robustly we do not expect any further loosening after November, as we expect wage growth and inflation to pick up over the next year.
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