First-quarter growth dispels threat of recession

The economy bounced back from the brink of recession in the first three months of the year, but economists expect more subdued growth for the rest of the year before any signs of a sustained recovery emerge.

Gross domestic product data yesterday showed the economy expanded by 0.7 per cent in the March quarter, taking annual growth to 2.2 per cent. The expenditure-based measure of GDP came in at 0.6 per cent for the quarter and 2.1 per cent for the year.

Yesterday's data, which were in line with market expectations and slightly ahead of Reserve Bank projections, dispelled fears of a recession which emerged after the 0.1 per cent December quarter contraction. A recession is two quarters of negative growth.

Economists said the numbers from both the December and March quarters were distorted by a significant rundown in businesses' inventories late last year followed by an increase during the March quarter.

"That explains a huge part of the volatility from quarter to quarter," said Deutsche Bank chief economist Darren Gibbs. "As usual with Kiwi GDP data, you've got to draw a pretty thick line through it and try and ascertain what the trend is."

He believed the quarterly trend was probably around 0.3 to 0.4 per cent.

Likewise, ANZ economists said the result was not as strong as the 0.7 per cent headline number implied.

"It is clear that the economy is on a slowing growth path. Financial conditions remain restrictive, and continue to exert a braking influence on economic activity.

"The impact of higher petrol prices (despite the recent decline) and interest rates are starting to be felt, and we are already seeing signs of weaker activity in the June quarter."

Looking ahead, ANZ expected June and September GDP data "to come out soft", with growth likely to trough at 1 to 1.5 per cent over 2006.

"Exports will not reap the full benefits of a lower New Zealand dollar until the end of this year, and domestic demand will continue to head south. The middle of this year looks potentially to be a soft spot for growth, with only the Government providing a floor."

Yesterday's data contained little to alter the interest rate outlook.

Deutsche Bank's view remained that the Reserve Bank would begin easing in March next year. However, Gibbs said, "We see the outlook as particularly fluid given the competing tensions in the economy."

BNZ economist Stephen Toplis said the data showed the economy was not collapsing.

Yesterday's data showed the most significant contribution to growth over the March quarter came from the government, construction and agriculture sectors.

The Government administration and defence sector grew 3.2 per cent, mostly thanks to the central Government, but local authority activity also increased.

Construction grew 1.7 per cent on a 6.4 per cent rise in non-residential activity, while residential construction was flat. Agriculture grew 1.5 per cent.