"Much lower building activity combined with mixed results for the service sector took the shine off higher dairy production and saw a second quarter of moderate overall GDP growth," said Stats NZ national accounts senior manager Gary Dunnet.
"At an industry level, 11 out of 16 industries increased this quarter, with agriculture and retail trade having the biggest increases, while construction was significantly down."
Agriculture grew 4.3 per cent due to higher milk production. This flowed through to higher dairy product manufacturing, which contributed to the overall rise in food, beverage, and tobacco product manufacturing.
Dairy exports fell 11 per cent in the March 2017 quarter, resulting in a build-up in dairy inventories.
Construction fell 2.1 per cent, with all building sectors showing a fall.
Non-residential building construction, declining from a recent peak, was the key driver. This was also reflected with falling investment in both residential and non-residential building construction.
ASB senior economist Jane Turner correctly picked the 0.5 per cent figure.
Turner remained "upbeat about the medium-term outlook for growth" and expected construction to recover, however, she warned that weaker growth outcomes could not be dismissed outright.
"Growth contributions from tourism and construction are likely to be smaller over the next few years, compared to the previous years," she said. "If the rest of the economy is not firing on all cylinders when growth slows in those sectors, then growth will struggle to lift above its trend rate."
Westpac senior economist Satish Ranchhod noted that while "some downside surprises in the March quarter may bounce back over the next quarter, we are still left with a picture of subdued per-capita growth in the economy."
ANZ economists wrote: "Stepping back, although the headline result is a clear disappointment, we don't believe it is a true reflection of growth momentum across the economy at present".
Per-capita GDP has fallen in both of the past two quarters, he said.
On a per capita basis, GDP shrank 0.1 per cent in the quarter, following on from a 0.2 per cent contraction in December, for a 0.9 per cent annual increase.
Real gross national disposable income per capita, which measures purchasing power, shrank 0.9 per cent in the quarter, following a revised 1.8 per cent expansion in December, for an annual increase of 1.8 per cent.
Labour finance spokesperson Grant Robertson described the decline in the construction sector as particularly worrying.
"We already have a shortage of 60,000 houses, growing by the day. We need more houses than ever, yet the building sector is shrinking," he said.
But Finance Minister Steven Joyce said that, despite the decline for the quarter, the annual construction figure increased by 9.3 per cent for the year.
"These figures move around from quarter to quarter, but we remain in one of the biggest building booms New Zealand has ever seen."
