Economy trudges along a slow path

Growth figures for the December quarter, due on Friday, are expected to show the economy trudging at the pace of the previous three months.

The median pick of 11 forecasters polled by Reuters is for a quarterly increase in gross domestic product of only 0.2 per cent - the same as the September quarter. That would bring the annual average growth rate down to 2.4 per cent, from 2.7 per cent three months ago and 4.4 per cent a year ago. But even a negative quarter would fall within economists' forecasts, which go from minus 0.3 to plus 0.6 per cent.

Westpac chief economist Brendan O'Donovan said weakness had spread from goods-producing sectors hit by the high dollar such as forestry, fishing and manufacturing into services.

Tourist numbers were down, while the normally buoyant property and business services sector would be weaker in line with a sharp fall in housing market turnover, he said.

The consumer had been the cornerstone of the economy over the past couple of years, spending freely with good job security, rising incomes and increased wealth as house prices climbed.

"But recent indicators suggest that consumers' willingness to spend is waning," O'Donovan said. "Retail sales figures for the December quarter revealed a 0.7 per cent fall in volumes, the first quarterly decline since December 2000 and the biggest decline since 1997." Nominal sales flatlined over the six months to January. That could be a portent of worse to come when housing stalled and shut down the stimulus from the wealth effect.

International trade data for the quarter showed a decline not only in imports of consumer goods but also plant and machinery, suggesting the rise in business investment is faltering. But with import volumes flat overall while export volumes were boosted by a solid start to the primary production season, net exports were likely to make a small positive contribution to GDP, O'Donovan said.

ASB Bank economist Daniel Wills said the improvement in export volumes might well prove short-lived. Exporters were likely to remain under pressure from the exchange rate for some time, while prices for export commodities had been softening.

Wills expects net exports to be a drag on growth in the March quarter but to get better as the kiwi dollar's fall improves export competitiveness.

The December growth figure should be boosted by the residential building sector, with figures for building work put in place showing a 3.3 per cent increase in the quarter. But O'Donovan says the surge in construction will be temporary and does not herald a resurgence in housing.

HSBC chief economist John Edwards said that the combination of slowing GDP growth and a swelling current account deficit (due out on Thursday) would put more downward pressure on the New Zealand dollar. But that would not worry Reserve Bank Governor Alan Bollard one bit, Edwards said.

"His ideal outcome is one where the currency declines even though the cash rate stays high, permitting an increase in exports while domestic demand remains constrained."