Economy starts moving, but very slowly

By Brian Fallow

WELLINGTON - The economy on the move again, but at walking pace.

Economic activity increased 0.7 per cent in the December quarter, marginally ahead of market and Reserve Bank expectations of 0.6 per cent gross domestic product growth.

The outcome is consistent with the bank's view that demand in the economy is growing at roughly the same rate as the ability to meet it, implying little inflationary pressure. The markets took the result in their stride.

The main contributors to growth were the finance, communications and forestry sectors. Wholesale trade also featured, but partly because car companies have been reclassified. They moved from the manufacturing to the distribution sector following the closure of car assembly plants in the wake of the axing of tariffs on imported vehicles.

The end of domestic car assembly also contributed to a 1.4 per cent drop in manufacturing activity during the quarter (and 5 per cent drop for the year) but Statistics New Zealand said that even when that effect was removed manufacturing activity still fell.

Agricultural production also fell (0.2 per cent) despite a boost to dairy production from farmers bringing production forward in anticipation of drought in the new year.

When compared with the December 1997 quarter activity in the primary industries was 5 per cent lower and goods producing industries 4.5 per cent lower. Only service industries were ahead of their year-ago levels, by 2.4 per cent.

On the demand side growth was driven by private consumption (up 0.7 per cent in the quarter) and gross fixed capital formation (up 6.9 per cent), especially non-residential construction. Residential building was also up, by 1.1 per cent, the first quarterly increase for a year.

Deutsche Bank chief economist Ulf Schoefisch expects the March quarter to record growth of around 0.6 per cent, citing continuing recovery in housing market activity, a trend improvement in retail sales and robust business and consumer confidence.

Offsetting that improvement in domestic sectors sensitive to interest rates, is a deterioration in the external position with weakening exports and strengthening imports.

"Nevertheless we expect a consolidation in world growth, together with a recovery in commodity prices, will lead to an improvement in export prospects over the second half of 1999," Mr Schoefisch said.