New Zealand's economy grew in line with expectations in the first quarter, shored up by strong construction activity, but weak services output – which represents two-thirds of the economy - was a drag on growth.

Gross domestic product expanded 0.6 per cent in the three months to March 31 after a 0.6 per cent rise in the December quarter, and was 2.5 per cent higher than the same quarter a year earlier, Stats NZ said.

Economists polled by Bloomberg predicted GDP expanded a quarterly 0.6 per cent and was 2.4 per cent higher than a year earlier. The Reserve Bank predicted quarterly growth of 0.4 per cent.

The New Zealand dollar rose to 65.61 US cents from 65.38 cents immediately before the announcement. It was recently trading at 65.64 US cents.

Advertisement

"Construction was the main contributor to GDP growth this quarter, rising 3.7 per cent on top of a 2.2 per cent increase in the previous quarter," national accounts senior manager Gary Dunnet said.

However, strong growth in the construction was tempered by subdued results in the service industries, which represents about 66 per cent of the economy, he said. The service industries experienced their lowest quarterly growth since the September 2012 quarter, rising 0.2 per cent.

"A slowing service sector is concerning. Service sector growth tends to be a stable source of growth," said Kiwibank senior economist Jeremy Couchman.

He expects growth to continue to weaken and is forecasting growth to fall to around 2 per cent year on year in the current quarter as "stellar growth" in the construction sector can't continue given capacity constraints.

He is expecting the Reserve Bank to cut rates in August to 1.25 per cent from their current record low 1.5 per cent and has said rates could go as low as 0.75 per cent.

"The economy is growing below its potential and with other central banks cutting rates or looking to add stimulus, the RBNZ has more to do to ensure inflation can get back to target," said Couchman.

ANZ Bank also said the underlying activity was softer than the headline growth figure suggests and the "overall narrative that momentum has weakened still holds."

Senior economist Miles Workman still expects the central bank will move to cut interest rates as it is forecasting quite a strong pickup in economic momentum that "we think is on the optimistic side."

Advertisement

"By November the gap between the RBNZ's forecasts and the dataflow will warrant a further OCR cut, though we will be paying close attention to next week's official cash rate review for an updated sense of how the RBNZ is weighing it all up, given the firmly dovish tilt from global central banks of late," Workman said.

ASB Bank senior economist Jane Turner also said services growth was weaker than expected and a continued slowdown in household spending and plant, equipment and machinery investment should concern the RBNZ.

She said the first-quarter GDP result on its own may not convince the central bank that further stimulus is needed but "subdued business confidence and the continued deterioration in global economic conditions may still sway the RBNZ to cut the OCR at least once more." She expects a 25 basis-point cut at the August review.

Within services, retail, accommodation and restaurants production shrank 0.5 per cent. The lower activity in accommodation and restaurants reflected a dip in visitor arrivals to New Zealand in February and March.

Rental, hiring and real estate services, and ownership of owner-occupied dwellings fell 0.2 per cent due to fewer property sales in the March quarter.

Within the goods-producing industries, which represent around 19 per cent of GDP, the rise in construction was reflected in investment in non-residential building, which lifted 9.9 per cent and residential buildings, up 2.7 per cent.

Manufacturing activity rose 1.4 per cent in the March quarter after falling 0.4 per cent in the prior quarter. Increased food, beverage and tobacco manufacturing contributed strongly to the rise this quarter.

The primary industries, which represent 7 per cent of GDP, shrank 0.7 per cent after a 0.3 per cent contraction in the December quarter. The fall in the March quarter was due to unfavourable weather conditions. Agriculture was down 2.3 per cent, forestry and logging was down 1.2 per cent and fishing eased 0.4 per cent.

Mining rose 9.6 per cent due to more exploration activity along with an increase in oil and gas extraction.

On an expenditure measure, GDP expanded 0.8 per cent on the quarter and 2.9 per cent on the year.

Within the expenditure measure, household spending was up 0.5 per cent in the March quarter after a 1 per cent rise in the prior quarter. Investment in fixed assets was up 2.4 per cent in the March quarter after lifting 1.5 per cent in the December period.

On a per capita basis, GDP expanded 0.1 per cent in the quarter from a 0.2 per cent lift in the December quarter. For the year ended March, GDP per capita was up 0.9 per cent.

Stats NZ also said the real purchasing power of New Zealanders rose in the March quarter and real gross national disposable income – or RGNDI – was up 0.6 per cent.

With a population increase of 0.5 per cent, the RGNDI per capita was up 0.1 per cent in the March quarter after falling 0.7 per cent in the December quarter.

The size of New Zealand's economy in current prices was $296 billion, Stats NZ said.

- BusinessDesk