Economic growth was weaker than expected in the last three months of last year but that might not be enough to reassure a Reserve Bank jumpy about inflation, economists say.
The reason is productivity growth, or the lack of it.
Economic activity grew 0.4 per cent in the December quarter,
less than the 0.6 per cent market economists had picked and well below the bank's 1.1 per cent forecast.
The pace of growth has been declining steadily since the March 2004 quarter, when it clocked up a 2 per cent increase.
Over the whole of 2004, the economy's output expanded 3.9 per cent.
ASB Bank chief economist Anthony Byett said: "That's impressive but the number of hours worked increased even more: 4.2 per cent, according to surveys of workers, 4.8 per cent, according to surveys of employers.
"The implied decline in productivity does not encourage confidence that the economy is on the verge of lifting its productivity growth rate."
The gross domestic product data also recorded a 2.7 per cent fall in business investment in plant and machinery in the December quarter, albeit from historically high levels.
This affects a key judgment the Reserve Bank has to make when setting interest rates, which is how fast the economy's productive capacity is growing.
In the simplest terms that is the sum of growth in the supply of labour and growth in labour productivity or output per hour worked.
If demand grows faster than the capacity to supply for a sustained period inflationary pressure mounts, which the bank will seek to relieve through higher interest rates.
With net immigration dwindling, the unemployment rate at 19-year lows and employers reporting an acute shortage of skilled workers, the outlook for growth in the labour supply is not encouraging.
If labour productivity is going backwards as well, the potential growth rate of 3.5 per cent assumed in the Reserve Bank's March forecasts begins to look optimistic.
If labour productivity were rising, the bank would be more relaxed about higher wages.
Wage increases which do not reflect higher productivity are more likely to be passed on to consumers.
Deutsche Bank chief economist Ulf Schoefisch said that even though GDP growth in the second half of last year had been only half what the Reserve Bank expected, there had been no easing of pressure on the economy's resources, as surveys of companies' capacity utilisation and skill shortages showed.
That reflected disappointing productivity performance and the Reserve Bank would see it as a justification for keeping monetary policy tight.
Household spending moderated in the December quarter, up 0.7 per cent compared with 1.7 per cent in September.
Spending on durables such as furniture and appliances was strong, but spending on non-durables fell.
Investment in residential building was down for the second quarter in a row.
Business investment dipped, though it is still up 12 per cent on December 2003.
Economic growth was weaker than expected in the last three months of last year but that might not be enough to reassure a Reserve Bank jumpy about inflation, economists say.
The reason is productivity growth, or the lack of it.
Economic activity grew 0.4 per cent in the December quarter,
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