GDP growth forces rethink on rate cut

Reserve Bank Governor Alan Bollard is now unlikely to cut the OCR after today's surprising economic figures. Photo / NZH

Traders have stopped betting on a rate cut by the Reserve Bank after the New Zealand economy grew more than twice the expected pace in the first three months of the year as good weather conditions stoked agricultural production.

The market is betting the central bank will add 1 basis point to the 2.5 per cent official cash rate over the next year, according to the Overnight Index Swap curve, removing the expectation of 44 basis points of cuts a fortnight ago.

The turnaround comes after Government figures showed the economy grew 1.1 per cent in the first three months of the year, its fastest quarterly pace in five years.

"You've got to dispense any thought of a rate cut from a domestic economy perspective," said Doug Steel, economist at Bank of New Zealand.

The New Zealand dollar rose above 80 US cents for the first time in 2 ½ months, and recently traded at 79.94 cents, while swap rates climbed across the board, with the two-year swap rate up 11 basis points to 2.81 per cent and the 10-year swap rate up 10 basis points to 3.84 per cent.

The growth was more than twice what markets were expecting, and almost three times the Reserve Bank's forecast in its June monetary policy statement, prompting some economists to question the accuracy of the numbers.

Last year's first-quarter gross domestic product figure was more than twice the market's expectation when first released, though it was subsequently revised. This year the department has removed and then added back one quarter to 2008's deep recession.

Darren Gibbs, chief economist at Deutsche Bank, said he struggled to see how the economy grew at such a pace in the first quarter of this year.

"By looking at other sources of data, nothing suggests the economy is doing okay," he said. "The Reserve Bank will be more circumspect in how it interprets this."

Statistics New Zealand put much of the gain down to bigger agricultural production after the stellar growing conditions, with the agriculture, forestry and fishing sector growing 2.1 per cent to $2.12 billion.

Since the end of 2011, dairy prices have been falling on Fonterra Cooperative Group's online trading platform, and the exporter recently trimmed its forecast payout to farmers as a resiliently high kiwi dollar erodes the value of overseas sales.

BNZ's Steel said those growing conditions probably won't be repeated, and there will be some impact as that effect washes through the annual numbers.

The manufacturing sector rose 1.8 per cent to $4.72 billion as greater milk production stoked output of dairy products. Food, beverage and tobacco manufacturing climbed 3.2 per cent.

Figures yesterday showed the current account deficit widened deficit of $2.8 billion in the quarter on weaker dairy prices and a drop off in visitors after the Rugby World Cup.

There was a $416 million build-up in inventories due to greater manufacturing and a decrease in exports.

Much of the economy's gain was in an inventory build-up, and Steel said that could also lead to an overhang in supply that could drag on future growth.

"Increases in inventory were concentrated in manufacturing, particular the food and beverage and metals industries," Steel said.

Economic activity was up 2.4 per cent in the March quarter compared to the same period a year earlier. The economy grew 1.7 per cent in the year ended March 31, beating the
Treasury's forecast of 1.6 per cent. The economy was $202 billion in current prices, Statistics NZ said.

Business investment rose 2.1 per cent in the quarter, its biggest rise since December 2010, on more imports of plant and machinery and non-residential building work.

Construction activity shrank 0.1 per cent to $1.47 billion as building work remains subdued ahead of the Canterbury reconstruction.

Information, media and telecommunications shrank 3 per cent to $2.1 billion in the quarter, the biggest drag on the economy in the period.

Retail, trade and accommodation grew 4.5 per cent to $9.59 billion in the quarter.

That came as household consumption remained muted, up 0.1 per cent to $21.18 billion in the quarter.