Economy lifts 0.2 per cent

Strong visitor arrivals boosted accommodation and food services. Photo / Kenny Rodger

Services sector growth offsets effects of drought on agriculture

The economy eked out growth of 0.2 per cent in the June quarter as a buoyant services sector offset the toll the drought took on agricultural production and manufacturing.

Many economists had expected a negative number. The New Zealand dollar jumped four-tenths of a cent to US83.7c on the news, having already gained a cent following the US Federal Reserve's decision not to start reducing its quantitative easing.

Compared with the June quarter last year, economic activity was 2.5 per cent higher but most of that increase was the December 2012 quarter's blockbuster 1.6 per cent; the other three quarters have averaged 0.3 per cent.

Services, which make up nearly two-thirds of economic activity, expanded by 1 per cent in the quarter, their best showing for six and a half years.

Business services led the charge, growing 2.6 per cent, led by architectural and engineering services.

Accommodation and food services expanded 3.4 per cent, boosted by strong visitor arrivals.

Retailers saw a 1.5 per cent increase, especially those selling furniture or consumer electronics such as televisions.

"At one stage the Reserve Bank doubted that rising house prices would induce much of a consumer frenzy, and therefore would not be much of a problem for CPI inflation," said Westpac chief economist Dominick Stephens.

"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 historically."

But Deutsche Bank chief economist Darren Gibbs said nominal consumer spending was growing slightly more slowly than households' labour income.

"There is still no evidence of credit-driven consumer spending."

As expected, agricultural output slumped, reflecting the drought - down 6.4 per cent in the quarter and 10.4 per cent over the first half of 2013.

"In previous droughts there have been attempts to maintain production by using more inputs. This time, however, there does not appear to have been an increase in inputs but a more dramatic fall in production," Statistics NZ said.

And because of a strong increase in livestock numbers slaughtered during the drought, especially dairy cows, it might take longer to recover from than previous ones, it said.

Less throughput in dairy factories and meat works saw manufacturing overall contract by 0.1 per cent in the quarter.

But that means that a 3.8 per cent decline in food processing was largely offset by gains elsewhere in the manufacturing sector, much of which is devoted to producing inputs to the construction sector. The Reserve Bank estimates that a 1 per cent increase in construction requires about a 0.4 per increase in manufacturing.

Construction was up 2.3 per cent in the quarter, to its highest level since December 2007, propelled by roading work and infrastructure.

Non-residential building activity also rose but residential building declined.

"We expect growth in construction will continue to underpin domestic manufacturing demand over the coming year," said ASB economist Christina Leung.

ASB economists expect economic activity will grow by around 1.2 per cent in the September quarter. ANZ economists are forecasting growth of 2 per cent over the September and December quarters combined.