New Zealand's economic growth slowed more than expected in the second quarter, as a contraction in the construction and mining sectors hindered the country's recovery.

Gross domestic product grew 0.1 per cent in the three months ended June 30, according to Statistics New Zealand, short of a Reuters survey of economists picking a 0.5 per cent pace of growth and a 0.6 per cent rate forecast by the Reserve Bank.

Statistics NZ revised first quarter growth up 0.1 percentage points to 0.9 per cent, taking annual GDP growth to 1.5 per cent.

The construction sector continued to weigh on the economy, shrinking 4.3 per cent to $1.1 billion in the quarter, with the value of building work put in place falling to a decade low amid a lack of new housing. That's set to reverse when the rebuild of Christchurch kicks in, though that has suffered several delays amid confusion as to whether insurers will re-enter the market.


Mining shrank 5.4 per cent, recording its fourth consecutive quarterly decline on weak oil and gas extraction. Fishing, forestry and mining as a whole contracted 3.8 per cent to $809 million.

"Levels of activity are nearly back to where they were in the peak of December 2007," Statistics NZ's Jason Attewell told a briefing in Wellington.

The New Zealand dollar sank to as low as 79.93 US cents from 80.40 cents immediately before the release, having already shed 2 cents during Northern Hemisphere trading. It was recently at 80.20 cents.

The release comes hot on the heels of a Federal Reserve decision to sell short-dated bonds to buy long-term debt in a bid to improve US liquidity and bolster private borrowing in the world's biggest economy in a bid to give it a kick-start.

Global markets have been in turmoil since August, when Standard & Poor's downgraded the US's credit rating, while more recently Europe's never-ending sovereign debt crisis has been grabbing headlines, and Reserve Bank Governor Alan Bollard today told a business audience in New York he is in no hurry to raise the official cash rate from the current 2.5 per cent.

Westpac Bank chief economist Dominick Stephens said today's GDP numbers were "much weaker than expected". The bank had been forecasting a 0.7 per cent increase, higher than the market forecast of 0.5 per cent.

Since it was weaker than either the bank or the Reserve Bank anticipated, there was now "clearly less pressure to increase the OCR."

"It is odd that such a weak growth read should pop up at a time when the broad swathe of capacity and confidence measures were clearly tightening," said Stephens. "Business and consumer confidence was rising, labour was becoming more difficult to find, and firms were more likely to report capacity as the limiting factor to expansion, rather than demand."


Stephens said there was a chance that the growth reported in the first quarter was overstated.

"...but at this stage we are more likely to consider this weak read as a pothole rather than a renewed broad-based economic slowdown."

Statistics NZ said manufacturing, which underpinned growth in the previous two quarter, shrank 0.1 per cent to $4.12 billion, led by declines in machinery and equipment manufacturing, and wood and paper products.

Last week, the BNZ-Business New Zealand performance of manufacturing index showed the sector slowed for a third month in August to 52.9, though was still expanding. Similarly, the Performance of Services Index showed the sector grew for a seventh month in August.

Service industries grew 0.5 per cent to $24.4 billion in the quarter, led by strong gains in finance, insurance and business services, which expanded 1.5 per cent, its fastest growth since March 2005.

Agriculture grew 4.3 per cent to $1.81 billion on increases in dairy and livestock production, as New Zealand producers continued to benefit from record high commodity prices.

Household consumption expenditure rose 0.3 per cent in the quarter, with increased spending on durable goods, such as furniture and major appliances.

General government final consumption fell 0.1 per cent in the June quarter, led by 0.8 per cent decline in central government administration. The government is looking to shave an annual $1 billion from the public sector's retirement plans and general operations.

Gross fixed capital formation, which measures investment in fixed assets, shrank 0.4 per cent in the period, following a 1.3 per cent decline in the first three months of the year. That was based on tepid investment in residential housing.

Total inventories were built up by $126 million in the quarter, following a $101 million run-down in the March period. That was driven by the New Zealand Defence Force buying aircraft parts for its Orion aircraft upgrade.