Economy still looking strong

By BRIAN FALLOW

Growth figures due tomorrow are expected to show the economic locomotive still has a fair head of steam.

In the latest Reuters poll, forecasters' average pick for gross domestic product growth in the June quarter is 0.9 per cent, or 4.2 per cent for the year.

And consensus forecasts compiled by the Institute of Economic Research see that slowing only to 3.8 per cent for the year ended March 2005.

Partial indicators of economic activity have continued to turn out better than economists expected.

Building work put in place in the June quarter was up 8.1 per cent on March, indicating that the construction boom will again be a major contributor to the GDP result.

So will consumer spending, which accounts for just over 60 per cent of GDP. Retail sales volumes in the June quarter were up 1.5 per cent on March.

Westpac economist Nick Tuffley said consumer spending had been boosted not just by higher wages and job security but by people dipping into their wealth. Westpac estimates home owners have withdrawn about $2.7 billion of the equity in their houses during the past year.

Business investment is also expected to swell the growth numbers. Imports of plant and machinery have risen by more than 25 per cent during the past year, which suggests strong levels of capital spending by firms bumping up against capacity constraints (surveyed capacity utilisation is at historically high levels).

The external accounts are expected to subtract from growth overall, as higher volumes of exports were outstripped by booming imports.

However, the rapid growth in the first half of the year is expected to ease in the second half.

Although July retail sales were strong, other indicators suggested the shopping spree might be near an end, Tuffley said.

"House sales have dipped and house price growth is slowing. As spending from wealth has been a major determinant of growth, the reduced gains from property ownership will eventually start to bite."

So will the Reserve Bank's interest rate increases. But that would not be noticeable until the middle of next year, Tuffley said, because people with fixed mortgages only felt the effect of higher rates when their loans came up for renewal.

The NZIER consensus forecast is for a soft landing - GDP growth easing back to 2.3 per cent by the year ended March 2006, then picking up to 3.3 per cent the year after.