Economy weathers short, sharp shocks

By BRIAN FALLOW

The economy managed to expand in the June quarter despite a flurry of blows from drought, electricity shortages and the Sars virus.

Gross domestic product rose 0.2 per cent, pulling the annual average growth rate back to 4 per cent from the 4.4 per cent recorded over the previous two quarters.

The economy was pinched by a pincer of short-lived shocks: on the supply side dry weather which curtailed agricultural production and the power supply, and on the demand side Sars, hurting tourism and seafood exports as Asians ate out less.

But activity was underpinned by strong domestic demand, reflecting employment and income growth and the Reserve Bank's interest rate cuts.

The housing boom continued with investment in new homes up 6.9 per cent for the quarter, making 24.8 per cent for the year.

Household spending on durables like furniture, appliances and cars, rose 2.4 per cent in the quarter and non-durables like petrol and electricity were up 0.5 per cent.

Business investment increased 4.5 per cent for the quarter, especially computers, farm machinery and telecommunications equipment.

Overall, internal demand grew 2.4 per cent in the quarter and 5 per cent over the year.

But to a large extent the increase in internal demand was met from imports, which swelled 5.5 per cent in the quarter, Statistics New Zealand said.

At the same time export volumes shrank 3.1 per cent, leaving overall activity a scant 0.2 per cent up on the March quarter, the weakest quarter for three years.

But Westpac economist Nick Tuffley said that if the impact of the one-off shocks was allowed for, underlying growth appeared to be running at around 0.7 per cent a quarter or 2.8 per cent a year. "That is a very respectable rate for what is supposed to be the slow point of the current economic cycle."

The production data showed a stark split between goods-producing sectors which contracted, and services which continued to expand.

Agricultural production was off 0.3 per cent, on top of a 0.8 per cent fall in the March quarter.

The fish catch was lower, fewer trees were felled and less natural gas flowed.

Electricity generation fell by 4.3 per cent as households and businesses responded to calls to save power. Manufacturing activity declined 2.1 per cent.

But construction activity rose 0.7 per cent as a lift in residential construction was offset by a drop in non-residential work.

The services sectors all expanded, especially retail, accommodation and restaurants (up 1.4 per cent).

The 0.2 per cent increase in GDP was in line with market and Reserve Bank expectations. The composition of the growth held no surprises either, continuing the stark contrast between the buoyant domestic or spending sectors, notably the housing market, and the struggling export sectors.

Deutsche Bank chief economist Ulf Schoefisch said that imbalance was unlikely to correct in the coming quarters, with the dollar expected to remain firm and little evidence of a slowdown in domestic demand.

"The Reserve Bank's hands seem to be tied as far as helping the adjustment process is concerned," he said. While lowering the official cash rate would most likely help the export sector by weakening the currency, it would carry the danger of further fuelling the housing market and inflation.