Statistics NZ reports GDP growth of 1.0% in March quarter and 3.3% for the year; slightly below economists forecasts

By Bernard Hickey

Statistics New Zealand has reported GDP grew 1.0% in the March quarter and rose 3.3% in the year ended March, which was slightly below economists' expectations for the quarter, but slightly stronger for the year as previous growth figures were upgraded.

The New Zealand dollar was solid above 87 USc after the result, which confirmed a buoyant outlook for interest rates. Economists said the result firmed expectations for another Official Cash Rate increase on July 24 before a pause until December.

The kiwi dollar had earlier risen half a cent after the US Federal Reserve lowered its growth outlook for 2014 and signalled continued low interest rates, making the New Zealand dollar's interest rates relatively more attractive.

Statistics NZ said strong construction industry growth was a big factor in the economy's expansion, which was the third consecutive quarter of growth of over 1% in the quarter.

"Construction activity grew 12.5%, due to large rises in residential and non-residential building. Growth in construction activity was strong in Canterbury and in the rest of the country," Statistics NZ said.

"Construction was responsible for two-thirds of GDP growth this quarter," national accounts manager Gary Dunnet said. "This is the largest increase in construction in 14 years."

The expenditure measure of GDP rose 1.3% in the March 2014 quarter. Growth in construction activity was reflected in a 2.1% rise in investment.

Rises in residential and non-residential building were partly offset by falls in plant, machinery, and equipment and intangible assets.

Spending by New Zealand households was flat, while spending by tourists increased 7.7%.

Growth in the March quarter from the same quarter a year earlier was 3.8%, slightly above market forecasts for 3.7% growth because of an upward revision in previous quarters.

Economist reaction

ANZ Senior Economist Mark Smith said the result was slightly weaker than market expectations and the Reserve Bank's forecast, but remained "strong and robust."

"While construction growth dominated in the quarter and services activity was soft, it’s typical for NZ to bounce around from quarter to quarter as the growth baton changes hands," Smith said.

"With growth in demand (3.8% annual) outstripping supply (we put the potential growth rate in the 2.75-3% range), there will remain pressure for the OCR to move up (so we’re still calling a July hike)," Smith said.

JP Morgan Economist Ben Jarman described the result as "very punchy numbers for an economy that has in the past struggled to generate much above 2% growth without inflation challenges," adding that average growth was likely to drift lower as exports settled and earthquake spending began to fade.

"As to what has changed that is allowing such a favourable growth-inflation trade-off, there are two main possibilities. One is that excess capacity is yet to be absorbed. The other is that robust migration inflows are boosting realized growth, but predominantly through a supply-side effect. That would be contrary to the last such experience in the middle of the 2000s, where migration forced a housing and broader inflation explosion before it noticeably contributed to the supply side," Jarman said, adding he favoured the latter supply-side effect explanation.

ASB Senior Economist Christina Leung said the result did not change ASB's view that the Reserve Bank would hike again in July before pausing until December.

"The 1.0% increase was a touch softer than our forecast of a 1.1% increase, but does not change our core view that the NZ economy remains on a solid footing," Leung said.

Political reaction

Finance Minister Bill English said the GDP was the latest in a run of encouraging indicators.

"We are making good progress but our long-term challenge is to make the enduring structural changes needed for New Zealand to reach its economic potential," English said.

Green Party Co-Leader Russel Norman said economic growth was only benefiting a few.

"Average power prices have also risen by $360 under National, while nearly half the workforce didn’t get a pay rise last year," Norman said.

"New Zealand is the only developed country hiking interest rates right now, attracting hot money, pushing up the dollar, and undercutting our exporters," he said.

(Updated with more detail, reaction, NZ$ moves (corrects earlier link between GDP move and NZ$)