Strong growth for NZ economy tipped

Photo / Supplied

New Zealand's economy probably accelerated in the first quarter on construction activity, supporting the central bank's view that it must press on with interest rate increases to keep inflation at bay.

The economy grew 1.1 percent in the first three months of the year, from a 0.9 percent pace in the fourth quarter of 2013, economists and the central bank forecast. That would mark the fifth quarter with growth of 1 percent or above in the past six years.

Last week, the Reserve Bank said the economy's expansion had "considerable momentum" and raised its estimate for growth in the first half of the year to 4 percent from 3.5 percent.

Net immigration that's expected to peak near 40,000 this year and income growth are seen underpinning economic demand. The data on Thursday is likely to be a key figure for investors betting on whether the central bank will lift rates again at its next review in July.

"The RBNZ highlighted at the June MPS the boost much stronger than expected net migration will have on housing and household demand," said Nick Tuffley, chief economist at ASB. "Along with the emerging recovery in business investment, the RBNZ is mindful that such strong activity will see spare capacity diminish rapidly. Construction cost inflation is a key concern for the RBNZ given the surge in construction activity."

ASB expects construction to make the biggest contribution to quarterly GDP after government figures this month showed the volume of residential building work put in place grew a seasonally adjusted 15 percent in the first quarter, the biggest quarterly increase since September 2002.

The volume of non-residential work grew 17 percent.

Demand for building material is also likely to have driven manufacturing activity
"It appears higher business confidence is finally flowing through to increased demand for new commercial buildings," Tuffley said. "The continued improvement in businesses' intentions to invest in new office buildings and retail outlets suggest the recovery in non-residential investment will pick up pace over the coming year."

Expansion in the first three months of the year would mark the 13th straight quarter of GDP growth and see the annual pace speed to 3.6 percent from 3.1 percent.

"We expect the GDP data to reinforce the chances of another hike in the current sequence, with the recent partial indicators suggesting that there is upside to our +1.1 percent q/q forecast," Robin Clements, senior economist at UBS New Zealand, said in his weekly note.

Manufacturing remains in expansion, based on the BNZ-Business NZ seasonally adjusted performance of manufacturing index which fell to 52.7 in May, in the face of decline new orders and rising inventories. Figures today are expected to show the services sector is also expanding, albeit at a more modest rate.

Ahead of the GDP figures on Thursday are the results of the latest GlobalDairyTrade auction, which may show prices fell for a ninth straight sale. Fonterra Cooperative Group is forecasting its milk payout for 2015 will decline from the record payout it is projecting for the latest season.

The decline in dairy is likely to see the nation's terms of trade, a big driver of the economy, retreat from a 40-year high this year.