Economy still crawling

The Northland drought hit the dairy sector. Photo / NZ Herald

The economy sank to its knees and crawled through the June quarter, growing just 0.2 per cent when the market had expected 0.8 per cent.

In addition, Statistics New Zealand revised the March quarter's gross domestic product growth down from 0.6 to 0.5 per cent.

"Certainly, the weak momentum evident in this GDP report does not bode well for near-term job creation," Deutsche Bank chief economist Darren Gibbs said.

Although the June quarter was the fifth in a row in which GDP expanded, following the recession's five quarters of contraction, in per capita terms it has clawed back only one-seventh of its peak-to-trough drop of 4.9 per cent.

Economists now think it is likely to be March next year before Reserve Bank Governor Alan Bollard thinks of raising the official cash rate again.

The dollar and wholesale interest rates fell on the news; the market is now pricing in 50 basis points of interest rate increases over the next 12 months, which is in line with what the bank foreshadowed last week.

Manufacturing was the biggest drag on growth on the production side, falling 4 per cent compared with the March quarter.

Dairy processing was weaker, reflecting the impact of the Northland drought which also saw agricultural output fall 2.1 per cent. But all the other sub-sectors of manufacturing were down as well, apart from forest products.

Manufacturing activity is nearly 19 per cent below its peak five years ago.

The biggest positive contribution was construction, up 6.4 per cent in the quarter, but from a low base. Construction activity is only back to where it was 18 months ago and still 14 per cent off its peak in late 2007.

For a glass-half-full view, Prime Minister John Key and Finance Minister Bill English pointed to the expenditure side of the books and evidence of the economy rebalancing, with growth driven by investment and net exports, not consumption.

Private consumption was flat (up 0.1 per cent) but gross fixed capital formation was up 6.2 per cent, the largest quarterly increase for six years.

That was spread across residential investment (up 11 per cent), investment in intangibles (which includes mineral exploration and was up 10 per cent), non-residential construction (up 9 per cent) and transport equipment (up 15 per cent).

Investment in plant and machinery, however, declined 1.5 per cent.

"It is now nearly 30 per cent below historical peaks," ANZ economist Mark Smith said.

The addition of productive capacity was sorely needed, to achieve decent growth and contain inflation in the medium term, he said.

Since the end of the recession growth had averaged only 0.4 per cent a quarter. Debt reduction was holding growth back.

"We continue to expect a better 2011. The more the economy undertakes the necessary adjustment now, the sooner it will set the stage for a more robust and sustainable recovery," Smith said.

Bank of New Zealand economist Stephen Toplis expects the June GDP number to be the worst for a while. "Despite its being very close to zero, there is no suggestion we are heading for a double dip," he said.

"We see sufficient positives to outweigh the negatives: Global growth is hanging in there. The dairy sector continues to have an optimistic outlook as evidenced by Fonterra today. The unemployment rate appears to have peaked. The October 1 tax changes will support growth."

The Canterbury earthquake had destroyed wealth but should help support activity levels through 2011, as would the Rugby World Cup.

"And the June quarter GDP out-turn was held very low by a significant inventory reduction. This augurs well for future growth."

ASB economist Jane Turner said the surprise would be big enough to rock the Reserve Bank, being 0.7 percentage points below its forecast last week.

"We now expect the bank will wait until March to resume lifting the OCR."