New Zealand's economy grew faster than expected in the second three months of the year as expansion in architecture and engineering services offset the impact of the drought which slowed agriculture. The kiwi dollar jumped on the figures.
Gross domestic product grew 0.2 per cent to $37.26 billion in the three months ended June 30, slowing from a revised gain of 0.4 per cent in the March quarter, according to Statistics New Zealand.
That was ahead of 0.1 per cent growth forecast in a Reuters survey of economists, where the local bank economists were picking a contraction. Annual growth of 2.7 per cent was ahead of the 2.4 per cent pace predicted.
The New Zealand dollar climbed to 83.67 US cents from 83.24 cents immediately before the numbers were released. The trade-weighted index rose to 77.65 from 77.26.
Business services grew 2.6 per cent in the quarter, underpinned by architecture and engineering. Construction expanded 2.3 per cent on the strength of civil engineering activity, growing an annual pace of 14 per cent.
Those gains offset a 6.4 per cent contraction in agriculture as the effects of the worst drought in seven decades weighed on production and prompted farmers to slaughter stock to deal with dwindling food supply at the time. The drought has sliced 10.4 per cent from agriculture activity since the December 2012 quarter.
"Because of the strong increase in slaughter numbers in the 2013 drought, especially for dairy cows, it may take longer to recover from than previous droughts," Statistics NZ said in its report. "Farmers may take longer to restock their herds and build production back from pre-drought levels."
Westpac Bank chief economist Dominick Stephens said the GDP number "was a positive surprise to us and to markets. The NZ dollar rose half a cent and swap rates rose two basis points."
"The bigger picture here is confirmation that, aside from drought-induced volatility, the NZ economy is firmly in the grip of a widespread upturn. The driving forces are the Canterbury construction boom and rising house prices," said Stephens.
"But the most critical information was around consumer spending. At one stage the Reserve Bank doubted that rising house prices would induce much of consumer frenzy, and therefore would not be much of a problem for CPI inflation," he said.
"Those doubts will now have been well and truly dispelled in favour of our long-held view that consumers will respond to rising house prices in the same way as they have over history."
Research published this morning by ANZ Bank senior economist Mark Smith described the NZ economy as having "traversed the first half of the year in 1st gear, with sector volatility a reminder that the economy is navigating its way through various offsetting shocks."
"Our view is that the economy hit an inflexion point midway through the year and the scene is set for a stronger second half of the year. "
This was "consistent with the spirit of the September Monetary Policy Statement, which alluded to strengthening in economic activity."
The recovery was expected to be broad based, with the strengthening labour market backdrop, rising net immigration, and housing market tailwinds expected to underpin consumer spending, the mild winter expected to lift dairy production and export activity, and the $40bn Canterbury rebuild and lift in construction sector activity elsewhere expected to filter through into wider economic activity, said the ANZ economists.
"The key will be the extent to which supply side capacity will be able to accommodate the strengthening demand backdrop. At the moment, however, a still-volatile global scene, contained core inflation backdrop and a NZD heading into the stratosphere are encouraging the Reserve Bank to remain on the sidelines, with forthcoming prudential policy changes to directly address areas of financial stability and inflation risk."
The ANZ said a "rising trajectory for core inflation is likely to trigger OCR increases, and we continue to expect a March 2014 start, a gradual pace of policy tightening, and a low OCR endpoint by historical standards this cycle."
The drought was expected to keep a lid on New Zealand's growth through the first half of the year, though elevated services and manufacturing activity surveys and upbeat confidence gauges imply the economy has picked up in the current quarter.
Manufacturing shrank 0.1 per cent in the quarter as the drought weighed on food processing, and exports of meat, dairy and food, beverages and tobacco all declined in the period.
Household consumption expenditure grew 1.5 per cent in the quarter, with spending on durable and consumables up.
Business investment, which excludes spending on residential housing, grew 5.7 per cent in the quarter, led by other construction and transport equipment. Investment in residential housing shrank 1.6 per cent in the period.
Gross fixed capital formation rose 3.8 per cent and inventories built up by $248 million in the quarter.
The expenditure measure of GDP grew 0.1 per cent in the quarter for an annual gain of 2.7 per cent.
Real gross national disposable income grew at a quarterly pace of 1.4 per cent in the three months ended June 30, for an annual increase of 2.3 per cent.