Economists expect a slow down

By BRIAN FALLOW

The economy ended 2003 with a good head of steam up, but economists expect it to lose momentum as this year goes on.

Gross domestic product, a measure of economic output, grew 0.8 per cent in the December quarter, making 4.4 per cent for the year, Statistics New Zealand said yesterday. That was at the high end of market expectations and only fractionally below the 0.9 per cent the Reserve Bank forecast.

Growth was propelled by household spending (up 2 per cent for the quarter, the strongest since March 1996) and business investment. Spending on plant and Machinery rose 3.1 per cent in the quarter, making 6.6 per cent for the year.

Growth was underpinned by immigration. The population grew 1.4 per cent last year, the strongest gain for five years.

But even on a per capita basis GDP grew a still-respectable 2.9 per cent.

The growth was broad-based. Every sector expanded except for manufacturing, which recorded a 0.5 per cent fall, following two quarters of strong growth.

But the latest consensus forecasts compiled by the New Zealand Institute of Economic Research, released on Thursday, found that forecasters on average expect growth to slow to 2.5 per cent in the coming March year.

The housing sector has been one of the engines of growth over the past year but seems to be coming off the boil. Turnover in the housing market peaked last October.

Investment in new housing rose 20 per cent over the past year, but although it maintained its high level there was almost no increase in building activity between the September and December quarters.

Agriculture was one of the main drivers of growth last year but drought is expected to take a toll of agricultural production over the year ahead.

Deutsche Bank chief economist Ulf Schoefisch said that non-farm GDP increased at an annualised rate of only 2.6 per cent in the second half of last year. Then there are the effects, incalculable at this stage, of the war in Iraq on the frail United States and world economy.

Bank of New Zealand's economists add to the list of reasons for expecting a slowdown:

* Recent falls in business and consumer confidence.

* The impact of a rising exchange rate.

* An expected slowdown in tourism growth in the wake not only of the war but the SARS virus.

* The adverse impact of rising electricity prices.

A majority of economic forecasters expect the Reserve Bank to cut interest rates, but not before June at the earliest.