New Zealand's economy avoided a double-dip recession as manufacturing bounced back in the December quarter and underpinned growth. The kiwi dollar gained.

Gross domestic product grew 0.2 per cent in the three months ended December 31, according to Statistics New Zealand, after a 0.2 per cent contraction in the third quarter. That beat a Reuters survey of economists, which was picking 0.1 per cent growth.

Annual GDP grew 1.5 per cent.

Manufacturing activity drove the expansion, up 2.5 per cent and ended two quarters of contraction for the sector. Construction rose 1.5 per cent as rebuilding efforts began in Canterbury after Last year's 7.3 magnitude earthquake.

Still, most other parts of the economy struggled at the end of last year, and retail trade shrank 2 per cent as households continued to eschew spending in favour of repaying debt. Wholesale trade contracted 2.7 per cent in the quarter, its first decline since September 2009.

CTU economist Bill Rosenberg said the Christchurch earthquake was only part of the picture affecting the December quarter figures.

"What matters is the effect on people, their jobs and their standard of living. Continuing stagnation shows the government still has an important part to play in stimulating the economy and providing support for people out of work, as well as generous assistance to the people of Christchurch. It is not the time to cut expenditure," Rosenberg said.

There were growing fears New Zealand's economy contracted for a second quarter having last year dragged itself out of its worst recession in almost two decades, and economists aren't picking a strong rebound until 2013, according to a survey by the New Zealand Institute of Economic Research.

Signs of a turnaround in business confidence at the start of this year were snuffed out by last month's earthquake in Christchurch that killed more than 180 people and caused as much as $15 billion of damage to the country's second-biggest city.

The kiwi dollar rose to 74.24 US after Statistics New Zealand released the figures, and was last at 74.21 cents from 74 cents immediately beforehand.

Finance Minister Bill English has just issued a statement saying that the GDP stats "confirm the economy was subdued in the second half of 2010, although there are reasons to be optimistic about the outlook for the coming year".

"Gross domestic product figures for the December quarter largely confirm what other indicators have been telling us.

"They reflect slower domestic growth as New Zealanders increased their savings and paid down debt, as well as the significant impact of the first Canterbury earthquake," English said.

"The economy is making the adjustment it needs to - away from excessive borrowing and housing speculation and towards more savings and debt repayment. It's important the Government plays its part in this rebalancing by getting its own finances in order and returning to Budget surplus.

"In the short term, this is constraining growth, particularly in domestic sectors like housing and retailing.

English said that there were reasons to be optimistic about economic growth picking up later this year, despite the impact of the Christchurch earthquake.

"New Zealand's commodity export prices remain around record levels, interest rates and inflation are relatively low, the rebuilding of Christchurch will provide a boost to the regional and national economy, and the Rugby World Cup will attract tens of thousands of visitors." said English.

ASB Bank economist Jane Turner said that activity over the first three months of this year had been disrupted by the February earthquake and so the bank had "pencilled in a small decline in GDP for the quarter, in contrast to a sharp lift prior to the latest earthquake."

Beyond that, growth over the first half of the year was likely to be subdued.

"Nonetheless, the 50 basis point OCR should help bring some relief to stretched households and businesses, and we expect a recovery in confidence and underlying demand over the second half of 2011."

She cautioned that Statistics NZ would have a real challenge compiling GDP figures for the current quarter, because of the disruption and dislocation suffered by Christchurch business.

"The underlying momentum in the wider economy should gradually improve over the course of the year, and 'gradual' translates into the RBNZ being comfortable keeping the Reserve Bank on hold until early next year. At that point, it will start focussing on the inflation pressures kicked up by the bow wave of construction activity," said Turner.

Goldman Sachs economist Philip Borkin said that while today's data dispelled the fears that the economy had fallen back into recession, it did confirm what people knew for some time; 2010 was a tough year for the economy.

"While the first earthquake in September undoubtedly impacted, a theme of private sector deleveraging in our eyes is really the major reason for the lacklustre performance," he said. "Looking forward to 2011, the early part of the year will obviously again be hampered by an external shock."

Borkin said he estimated the February earthquake would knock growth in the first quarter of this year by around 0.7 percentage points.

"But later in the year we expect growth to improve due to 1) loose financial conditions; 2) a low base of activity to begin with; 3) eventual reconstruction activity; and 4) businesses putting better their balance sheets to work."

Statistics NZ said the February Christchurch quake caused more damage the September temblor, and the medium to long-term impacts on infrastructure and tourism will be felt throughout the Canterbury region.

The September quake was estimated to have caused some $4 billion of damage, and last month's may have wreaked more than $10 billion of damage.

WITH NZ HERALD ONLINE