NZ economy may have expanded 0.7% in first quarter as primary industries recover

New Zealand's economy likely continued to expand in the first quarter of this year as output in the primary industries recovered and strong population growth continued to spur the services sector, helping offset weaker construction output.

The median in a Reuters poll of 11 economists forecast gross domestic product expanded 0.7 percent in the three months ended March 31 for an annual pace of 2.7 percent. The central bank is forecasting quarterly growth of 0.9 percent. New Zealand's economy grew 0.4 percent in the fourth quarter of 2016 while the annual pace was also 2.7 percent.

"Poor spring weather certainly hampered agricultural production late last year, and more favourable conditions should see that reverse," said ANZ Bank New Zealand senior economist Phil Borkin.

Westpac Banking Corp acting chief economist Michael Gordon said growth in the December quarter was hurt by a pullback in milk production in response to low dairy prices and a temporary shutdown of the Maari oil platform: "Both of these factors have since unwound, and accordingly we expect strong contributions to growth from the agriculture and mining sectors," he said.

Both he and Borkin, however, pointed to the construction sector as weighing on growth. "The biggest weak spot for the March quarter was in the construction sector. In particular, there was a sharp drop in non-residential building, concentrated in Auckland," said Gordon. Borkin and Gordon are forecasting quarter-on-quarter growth of 0.8 percent.

ASB Bank senior economist Jane Turner also pointed to a fall in construction activity, largely due to the "volatile and lumpy non-residential construction activity" and weak housing-related activity.

Recent data showed the value of New Zealand residential building work inched higher in the March quarter but total building values fell, weighed on by a sharp fall in non-residential construction. Total building volumes fell 3.5 percent, seasonally adjusted, in the first quarter, while the value fell 2.2 percent. The total was weighed by a 6.4 percent slide in non-residential building values and a 7.2 percent drop in non-residential building volumes. Turner is tipping more muted growth of 0.5 percent.

Still, Turner said even if the first quarter growth is close to her forecast and of concern to the central bank "there is no urgency for rate hikes." In May the central bank kept rates on hold at 1.75 percent and stuck to its forecasts that point to a rate hike in September 2019.

The Reserve Bank has plenty of time to determine how strong the economy is and "can continue to hold rates for as long as necessary to jump-start broader consumer demand and investment spending," said Turner.

(BusinessDesk)