The New Zealand dollar fell more than half a US cent after second quarter gross domestic product grew just a quarter of the pace expected.

The economy grew 0.2 per cent in the three months ended June 30, according to Statistics New Zealand, short of the 0.8 per cent forecast by a Reuters consensus survey and 0.9 per cent expected by the Reserve Bank. In the previous quarter GDP grew by 0.6 per cent.

The kiwi dollar was last trading at 73.08 US cents, down from 73.59 immediately before the announcement.

"The GDP numbers were weaker than most people thought and more importantly weaker than Reserve Bank factored into its forecasts." said Mike Jones a market strategist for Bank of New Zealand.

"That certainly means short term headwinds for the currency, and supports our view that rates will be on hold until next year."

Overnight the kiwi dollar broke into the 74US cents range overnight on US dollar weakness, before slipping back into a holding pattern ahead of the GDP announcement.

ASB economist Jane Turner said at first glance it appeared that quarterly result was dragged down by a bad result in a few sectors, rather than being symptomatic of underlying weakness in economic activity.

"In particular, the impact of the Northland drought had a greater than expected impact on agricultural production than we expected, which then feed through to extremely weak manufacturing activity," she said.

"Manufacturing activity fell 4 per cent, much weaker than we had expected. With manufacturing accounting for 12.3 per cent of GDP, this area alone created a drag on GDP growth of 0.2 percentage points," said Turner.

"Beyond the pockets of weakness related to communications, lower milk production and manufacturing activity, were some relatively respectable performances. Retailing and construction posted strong gains as expected. Mining activity and forestry also positively contributed to growth as expected.
We were also encouraged by the strong lift in investment that took place," said Turner.

"The extent of the surprise is enough to rock the Reserve Bank, even after its recent flip from optimism to mild pessimism on the economic growth outlook, being fully 0.7 percentage points below the forecast in last week's September Monetary Policy Statement."

"Closer inspection shows that much of the surprising weakness was concentrated in small pockets. Even so, the underlying strength of the economy was a touch softer than expected," said Turner.

She said she now expected the Reserve Bank would wait till March to lift the Official Cash Rate.

"That gives another 6 months to allow the economy to strengthen and better assess the earthquake disruption."

A 4 per cent fall in the manufacturing industry offset nearly all the growth this quarter.

By industry, the largest contributors to the increase in economic activity in the June 2010 quarter were:

- construction, up 6.4 per cent, the largest increase since the September 2003 quarter

- finance, insurance, and business services, up 0.5 per cent, due to real estate and business services.

"All manufacturing sub-industries, with the exception of wood and paper products, were down in the June 2010 quarter," acting national accounts manager Stephen Oakley said. "The largest decline was in food, beverage, and tobacco manufacturing."

GDP for the year ended June 2010 was up 0.7 per cent when compared to the year ended June 2009.

This annual increase in GDP is the first since the year ended September 2008.