Building boom keeps GDP growth on track - just

Building boom - GDP in the first quarter has been bolstered by strength in the construction sector. Photo / Getty Images

In the end the extent of the economic gloom that prompted even the Reserve Bank to downgrade its forecasts proved over done.

Growth for the first quarter of 2019 came in at 0.6 per cent for an annual percentage change of 2.5 per cent.

That was largely in line with expectations but ahead of the RBNZ's forecast, and some of the gloomier bank economists, at 0.4 per cent.

But the result hasn't prompted much optimism and most economists still expect another official cash rate cut will be needed before the end of the year.

Data released by StatsNZ today showed the booming construction sector was keeping growth on a roll while the service sector was flat and primary sector slipped backwards on low volumes of dairy production in the dry, late summer.

"Building boom masks weak underbelly," wrote ASB chief economist Nick Tuffley.

Weaker than expected results for the service sector and in household spending will be cause for some concern at the Reserve Bank, he said. The strength in construction was unlikely to be repeated.

GDP

"Subdued business confidence and the continued deterioration in global economic conditions may still sway the RBNZ to cut the OCR at least once more," Tuffley said.

Continuing with the abdominal theme, ANZ said the data revealed "a softer underbelly".

"The underlying details were softer than the headline suggests, and the overall narrative that momentum has weakened still holds," said ANZ senior economist Miles Workman.

There is a broad consensus among economists that New Zealand's economy is going through a cyclical slowdown, likely to bottom out this winter.

A rebound, led by rate cuts, increased Government spending and - hopefully some improvement in business sentiment and export returns - is expected later this year and through 2020.

But the services industries posted a very weak 0.2 per cent lift (quarter on quarter), following a robust 0.9 per cent increase in the final quarter of 2018 and this raises some concerns about the prospects of a strong bounce back.

"This [services] is perhaps a better signal for underlying momentum than goods-producing industries and primary production, given services are typically less volatile and account for around two thirds of GDP," said Workman.

There were signs in the data that suggested household demand may be going through a softer patch, he said.

"As long as household incomes and sentiment remains buoyed, still-strong (but easing) population growth should continue to put a floor under further significant deceleration. But risks do appear heightened."

Per capita growth was soft at 0.1 per cent quarter on quarter, with annual per capita growth moderating to just 0.9 per cent.

"Per capita growth certainly confirms that New Zealand's labour productivity performance is nothing to write home about, with population growth remaining the key driver of headline GDP growth," Workman said.

Net migration numbers stayed relatively strong through the first quarter, although Workman noted the volatility of recent migration data, which could yet see per capita growth revised upwards.

Australian based Capital Economics was equally downbeat.

"While the RBNZ will take some reassurance from today's stronger-than-expected data, we doubt that economic activity will sharply accelerate from here in line with [its] forecasts," said economist Ben Udy.

Reserve Bank of NZ Governor Adrian Orr. Photo / File

"We think that economic activity will ultimately prove disappointing, averaging just 2.2 per cent in 2019, well below the economies potential growth rate of around 2.8 per cent."

Westpac economist Michael Gordon warned that low confidence "weighing on firms' hiring and investment plans...will not be alleviated quickly."

However, he did expect growth to accelerate over the next year or so.

"Interest rates are low, government spending is ramping up, and there is a substantial amount of building work in the pipeline."