Economists equivocate as economy rebuilds head of steam

Economists botched their estimates of economic growth for the June quarter and now they are all over the show on how the Reserve Bank (RB) will respond.

Statistics New Zealand data today showed the economy rebuilt a head of steam in the quarter, rising 1.1 per cent, against the median 0.8 per cent forecast in a poll of economists.

Quarterly growth was driven by a 6.1 per cent increase in business investment in new factories and plant and a 0.7 per cent rise in consumer spending, particularly on cars and appliances. Investment in new housing, previously a strong driver of the economy, fell 3.6 per cent.

Exports rose 1 per cent, mainly through services such as travel, but were outstripped by a 4.2 per cent rise in imports.

The annual growth rate slowed to 3.1 per cent from 3.8 per cent in the March year, the latter was revised down from 4.2 per cent.

Given the higher than expected growth mixed with a forecast of plus-4 per cent inflation next year together with a likely fiscal loosening whoever forms the government, it seems logical RB Governor Alan Bollard will hike rates at his next review on October 27.

ANZ National Bank chief economist John McDermott says his bank's business confidence survey published today confirmed that with a worrying rise in inflation expectations.

The economy was decelerating but not rapidly enough to eliminate the pressures the RB is talking about, he said.

"Now, we are as certain as you can ever be that the Reserve Bank will increase interest rates in October."

Contrast that with the opinion of Goldman Sachs JBWere economist Shamubeel Eaqub who says a rate rise now would be a "policy mistake".

"We are a very finely balanced economy and a rash decision could push us into a very deep, hard landing.

It could tilt the economy into recession, he added.

He believes inflation pressure will ease as growth falls.

Much of the surprise in today's numbers came from spending on commercial buildings, infrastructure and rising inventories.

"Those are not the factors that the RBNZ is trying to cool."

While household spending was only slowing modestly but residential construction investment was "coming off nicely, following a typical slowdown cycle".

"I didn't see a lot in the details of the numbers that got me worried," said Mr Eaqub.

The recent rise in 90-day bank bill yields had been "a little bit of a beat-up".

The kiwi dollar responded by briefly rising back above US69c but the rally was not sustained.

Mr Eaqub said the last thing exporters and manufacturers needed was a rally in the currency.

He said the RB had so far taken a pragmatic view on the effects of oil prices -- it has been prepared to look through the first round inflationary effects.

Mr Eaqub said everyone was focusing on the inflation effects of higher oil prices but not on growth suppressing aspects.

BNZ treasury economist Stephen Toplis said he remained on the fence after today's numbers.

"Our view is that whatever your call was before this release, the call should be exactly the same. There's no new information."

He had forecast a 0.9 per cent rise for the June quarter and said the difference in the result was mostly due to revisions of earlier periods.

Mr Toplis believes a key to today's data was how the build-up in inventories panned out.

"If it was intentional, in that people expect to sell more, then clearly that has a big positive implication for future growth.

"If it is an unintentional build -- i.e. there is a whole pile of big ticket items on shop shelves that aren't going to be sold -- then that has substantial negative implications for future growth."

The result of that conundrum won't be known for another quarter.

Unlike many economists, Mr Toplis has not recently altered of what the RB's next move will be.

"If they are going to move, it will be up."

He said, the RB's Monetary Policy Statement this month was a rate rise in all but words and action. There was confusion about the likely impact of fiscal expansion and oil price rises.

"If at any stage that confusion is diminished, then they will move."

- NZPA