Racing economy likely to lead to rate rises

The economy raced ahead far faster than expected in the June quarter and that is likely to result in higher interest rates from next month.

Gross Domestic Product (GDP) figures released by Statistics New Zealand (SNZ) today showed the economy expanded by 1.1 per cent in the June quarter.

That figure was well above the 0.5 to 0.9 per cent range forecast by economists.

With the Reserve Bank struggling to contain inflation, it almost certainly means it will hike interest rates again in its next review on October 27.

Before today's shock number, economists had already changed their tune from forecasting the next rate move to be down to a prediction of two more rate hikes over the next six months.

"They have been wanting to enact hike rates for some time and this data will cement that opportunity," said ANZ National Bank economist Sean Comber.

He said the most surprising data was the strength of other investment groups such as non-residential building.

SNZ statistician Rochell Barrow said the extra growth could not really be attributed to British and Irish Lions rugby tour, which only overlapped for one week of the quarter.

SNZ said the economy grew by an inflation-adjusted 3.1 per cent in the June year, down from 3.8 per cent in the March 2005 year and from 4.2 per cent in the June 2004 year.

The department said the June quarter growth was driven by strong business investment and household spending.

Investment in non-residential buildings rose 18 per cent while investment in transport equipment rose 15.2 per cent.

There was a further build-up of inventories, particularly wholesale and retail inventories.

Household consumption spending rose 0.7 per cent and was up 5.8 per cent for the June year.

Export volumes were up 1 per cent in the quarter, driven by export services (up 4.3 per cent) but were up just 0.5 per cent for the June year.

Import volumes increased 4.2 per cent and were up 10.1 per cent for the year. Imports of goods rose 4.4 per cent with large increases in capital goods (up 12.2 per cent), consumption goods (up 5.9 per cent) and cars (up 10.2 per cent).

SNZ said that from an industry perspective, economic growth in the quarter was largely due to increased activity in the service sector.

Most service industries recorded rises and June year activity in these industries was up 4.4 per cent.

Activity in the distribution industry was strong. Wholesale trade rose 2.5 per cent in the quarter and 5.9 per cent for the year.

Retail trade was up 1.4 per cent for the quarter and 6.5 per cent for the year.

Primary industry activity was up 0.5 per cent in the quarter but was down 0.9 per cent over the year. Goods-producing industries rose 0.6 per cent in the quarter with the construction industry, up 2.3 per cent, the main contributor.

The New Zealand dollar rallied sharply on the data, rising to US69.05c by 11am, from US68.72c at its local open.

On the money market, 90-day bank bills -- the wholesale rate from which banks fund many of their mortgages -- rose to 7.22 per cent from 7.19 per cent.

- NZPA