Economy grew by 1.1 per cent in March quarter

11.45am

The New Zealand economy expanded by a healthy 1.1 per cent in the March quarter, Statistics New Zealand said today.

The growth was precisely on economists' expectations and following other strong economic indicators will probably be sufficient cause for the Reserve Bank to hike interest rates again on Wednesday despite falling business confidence.

SNZ revised up the December quarter growth to 0.7 per cent from 0.6 per cent which resulted in March annual average growth of 3.2 per cent against expectations of 3.1 per cent.

The news comes after New Zealand yesterday posted its best quarterly current account surplus ever. The annual balance of what New Zealand earns and spends in the world substantially improved to a deficit of 2.2 per cent of GDP, its best level in 13 years.

The two key indicators of the New Zealand economy -- GDP and the current account -- showing a buoyant economy have however not stopped business confidence falling, however. The latest National Bank survey out today showed a net 7 per cent expect the economy to deteriorate compared with a net 7 per cent in the May survey who were positive.

New Zealand's GDP growth rate compares with US data out last night showing the world's powerhouse economy grew at an annualised 6.1 per cent in the March quarter -- its fastest clip in over two years. On an annualised basis New Zealand's economy grew at 4.4 per cent in the March quarter.

SNZ released further good news today. Preliminary figures showed there was a trade surplus of $496 million in May --- beating economists' forecasts of $433 million. That gives a $327 million surplus for the year compared with a deficit of $76 million in the May 2001 year.

The March quarter lift in economic activity reflected higher consumer spending coupled with a rise in export volumes.

The economy has grown in the last seven quarters and is 4.0 per cent higher than the March 2001 quarter.

Export volumes were up 3.7 per cent in the quarter, reversing the falls of the previous two quarters. Both goods and services exports rose during the quarter, the latter reflecting a recovery in inbound tourist numbers.

Dairy and seafood products were the key contributors to the increase in the volume of goods exported, SNZ said.

Internal demand rose 0.7 per cent and was up 3.5 per cent an annual basis. This quarter's increase was due to continued buoyant consumer spending, up 1.5 per cent, and a further rise in business inventory levels. This was partly offset by lower fixed investment with both business and housing capital spending down for the quarter.

There were strong rises in household spending on both durable and non-durable goods. Spending on furniture and major appliances was up and spending on food and beverages was a key contributor in non-durable goods.

Manufacturing activity fell 0.5 per cent in the quarter although on an annual basis was up 0.9 per cent. Dairy processing, wood, metal and non metallic products manufacturing rose.

These were more than offset by a fall in petroleum, chemicals, other food and machinery and equipment manufacturing.

Most of the overall growth in the quarter occurred in the service industries, which rose 1.6 per cent and are now 4.6 per cent ahead of the March 2001 quarter.

Wholesale trade rose 2.1 per cent reflecting the increase in external trade. There were further rises in retailing, accommodation and restaurants as households maintained their spending and inbound tourist numbers recovered.

Travel services also increased due to a recovery in both domestic and international travel.

Agricultural production rose with increases in dairy, wool and lamb production. In contrast, activity in forestry, mining and construction all fell.

Business investment in fixed assets fell 3.5 per cent in the quarter. Plant, machinery and equipment investment continues to be volatile, falling 8.5 per cent compared with a 19.1 per cent rise in the December quarter.

WestpacTrust economist Donna Purdue said WestpacTrust still expects the Reserve Bank to raise interest rates.

She said that the business confidence survey suggested businesses' own activity expectations remained quite buoyant.

"We continue to believe there will be a 25 basis point interest rate rise and that's primarily because there is a lot of domestic demand out there and that's been shown through these GDP numbers."

Ms Purdue said there was also evidence of capacity constraints "and with the demand pressures that we are seeing at the moment that all implies inflationary pressure going forward."

WestpacTrust forecasts that inflation is hovering near the top of the Reserve Bank's 0-3 per cent target band and they expect the cash rate to more towards "neutral" -- 6.0 per cent as opposed to 5.5 per cent at present.

- NZPA