Bubbly services sector keeping growth afloat in June quarter

There was a 4 per cent rise in dairy production. Photo / Getty Images

Service sector output may have kept the economy ticking over in the June quarter, but economists say the sluggish backdrop points to at least one more interest rate cut before December.

The median in a Bloomberg poll predicts gross domestic product expanded 0.4 per cent in the three months ended June 30, slowing from a 0.6 per cent pace of growth in the March quarter, and below the Reserve Bank's forecast 0.5 per cent. The economy is expected to have expanded 2 per cent from a year earlier, slowing from the 2.5 per cent pace in March.

ANZ Bank economist Miles Workman expects growth was 0.4 per cent, driven by a 0.7 per cent rebound in services output after a 0.2 per cent lift in the prior quarter.

Output from the services sector makes up about two-thirds of New Zealand's economy.

On the flip side, he expects goods production contracted 0.9 on the quarter and noted activity in both manufacturing and construction probably shrank.

Workman said there are signs economic momentum has been "running out of puff for a while now."

He doesn't, however, expect growth to stall given monetary conditions are – and will remain – accommodative.

The central bank cut the official cash rate by 50 basis points last month to a record low 1 per cent - citing weak domestic growth as one factor - and is widely expected to deliver more cuts.

Workman expects the central bank to use all of its "conventional" ammunition, cutting the OCR to 0.25 per cent by May 2020.

Westpac's economist Michael Gordon expects a 0.6 per cent lift in second-quarter GDP. He also expects that growth was powered by service sector activity, while construction, mining and food manufacturing were likely to have eased back. He expects the agricultural sector expanded, led by a 4 per cent rise in dairy production.

However, Gordon noted retail spending was soft, with the volume of spending up just 0.2 per cent in the quarter, and is not so upbeat about the future.

"While GDP growth appears to have held up in the June quarter, stepping back and taking a longer-term look at economic activity, it's clear that the wind has come out of New Zealand's sails," he said.

Against the backdrop, the RBNZ is likely to cut the cash rate again later this year in order to boost demand, he said.

ASB Bank expects quarterly growth was 0.5 per cent. "NZ GDP growth has slowed below its full potential pace and requires policy support to prevent growth slowing further and (to) limit the risk that a recession forms," said ASB economist Jane Turner.

Turner also expects another rate cut this year but said it is more likely to happen in November rather than September, given the aggressive reduction in August had pre-empted a certain amount of "bad" economic news, including muted GDP growth over the second quarter.

Bank of New Zealand economist Craig Ebert is more pessimistic. He expects second-quarter GDP growth was 0.3 per cent largely due to "shaky" manufacturing data. The volume of total manufacturing sales fell 2.7 per cent on quarter in the June quarter while the value was down 0.7 per cent.

Even if the economy managed to hold up in the second quarter, "questions will linger about 3Q," he said. There are signs consumer spending might be struggling, manufacturing activity contracted in July and August and "tourism is something to watch closely in the context of the slowing global economy."

- BusinessDesk