Reconstruction of earthquake-damaged Christchurch will lift the economy this year as funds and jobs flow into the massive rebuild, the Government says.
Its assessment came as gross domestic product data yesterday showed the economy grew slightly in the three months to December, narrowly averting a "double dip" recession.
But the
impact of the more damaging February 22 earthquake will further sap growth and at least one major bank is forecasting the economy will contract again during the first three months of this year.
Prime Minister John Key and his Finance Minister Bill English acknowledged the economy was flat during the second half of last year, arguing that was unsurprising given the first destructive quake in September and debt crises in Ireland, Portugal and Spain.
Nevertheless, the Government's "rebalancing" of the economy away from debt-fuelled consumption towards saving and investment remained on track, said Mr English.
"In a lot of ways the adjustment we're seeing is the right kind ... In the longer run people can't borrow money to spend in the shops and they know that, so they're not borrowing as much and they're being careful with their spending."
Mr English said the Government believed unemployment had peaked and while it was not coming down as fast as he would prefer, "as the Christchurch rebuild picks up and higher commodity prices flow into the wider community we would expect further reductions".
That said, uncertainty around Christchurch meant a further spike in joblessness was still possible before the rebuilding effort began.
Mr Key has rejected funding the Government's share of the rebuilding bill through increased tax or borrowing, instead choosing to free up cash by severely curbing operational spending in this year's Budget.
But Labour finance spokesman David Cunliffe warned the Government's plan to fund quake recovery risked damaging the wider economy.
"Economics 101 says that budget cuts in the middle of a deep recession will only put more people out of work, undermine confidence, reduce demand and drive down tax flows.
"This isn't a plan. It's a recipe for continuing economic failure."
GROWTH
* 0.2 per cent: GDP growth in the three months to December 31.
1.5 per cent: GDP growth for the year.
