March quarter likely to show GDP slowdown, say economists

ANZ chief economist Cameron Bagrie expects weakness in the primary sector and food manufacturing to be more than offset by a strong services sector. Photo / NZME.

Dry spell early in year blamed for reduced milk production but services sector strong.

Economists expect the pace of economic growth to have slowed when the March quarter national accounts are released on Thursday.

Consensus forecasts collected by the New Zealand Institute of Economic Research have gross domestic product growing 0.6 per cent in the quarter, which would be a slowdown from 0.8 per cent in the December quarter and an average quarterly pace of just under 0.9 per cent in the past year.

Westpac economist Michael Gordon, who is picking 0.6 per cent for the quarter and an annual average rate of 3.3 per cent, said the spell of dry weather early this year reduced milk production 4 per cent in seasonally adjusted terms.

Though the dry spell turned out less severe than initially feared, the flipside of that was the return to normal levels of farm output would not provide as much of a boost to growth over the rest of the year as initially thought, Gordon said.

"The other potential negative is in the oil sector, though this is highly uncertain," Gordon said.

"Anecdotally, the plunge in world oil prices has knocked the stuffing out of onshore oil exploration and drilling. But we simply don't have any data on this to guide our forecast."

Beyond those temporary factors indicators pointed to solid growth in the services sectors - which account for around 70 per cent of GDP - and in construction, Gordon said.

ANZ chief economist Cameron Bagrie also expects weakness in the primary sector and food manufacturing to be more than offset by a strong services sector, which - outside of a pre-election pause in the September quarter - has been growing by around 1 per cent per quarter since the start of 2014.

The BNZ/Business New Zealand performance of services index rose last month to its highest level since July last year.

ASB chief economist Nick Tuffley is at the low end of the range of forecasters, picking 0.2 per cent GDP growth for the March quarter. In addition to the drop in dairy production he points to unexpectedly weak wholesale trade activity and expects a decline in communications value-added.

"Other parts of the economy remain buoyant. In particular, retail spending increased strongly, supported by high levels of consumer confidence and strong growth in tourist numbers," he said.

"Construction activity continues to grow modestly, although it appears that building activity may peak in 2015."

Looking further out, the NZIER consensus survey finds forecasters less optimistic about the outlook for the next three years than the Reserve Bank was in its June monetary policy statement last week.

Where the central bank forecasts GDP growth to average 3 per cent over the next three years, the consensus is an average of 2.6 per cent, with lower tracks for private consumption, and for both residential and business investment.