Growth burst welcome before expected slowdown

By BRIAN FALLOW

The economy entered the second half of the year at the gallop.

Gross domestic product expanded 1.7 per cent in the June quarter, well above market expectations, and lifted annual average growth to 3.5 per cent, its fastest clip for 18 months.

Manufacturers contributed about a third of the growth. Food processing, wood products, metal products, Machinery and chemical and petroleum processing all posted gains.

But although manufacturing value-added grew 4.3 per cent in the June quarter, over the June year its growth was a more modest 2.5 per cent, the same sort of annual growth it has been recording for a year.

On an annual basis it has been the primary sector and services sector (which make up two-thirds of the economy) which have grown most strongly, 4 per cent or more.

Those sorts of growth rates are not sustainable indefinitely, warns Bank of New Zealand economist Stephen Toplis.

The BNZ expects growth to slow to around 0.3 per cent in the September quarter, but that would still mean an average of 1 per cent a quarter over the past year.

"We have to see a slowdown just to get back to a level that's not inflationary.

"The fact that we get one is no cause for concern, or grounds for the Reserve Bank to ease to prevent it."

In the absence of another global shock the likelihood of the bank easing this year was low, Toplis said.

On the demand side of the ledger, net exports were the driver of the quarter's 1.2 per cent growth in the expenditure measure of GDP.

Export volumes jumped 7.7 per cent in the quarter, including a 17.7 per cent increase in dairy exports and 10.2 per cent rise in meat exports. Much of that represented a run-down of stocks, however.

Household consumption was up 0.4 per cent for the quarter and 2.9 per cent for the year, buoyed by spending on big-ticket items such as furniture and appliances.

Investment in new housing reversed the March quarter's fall and was up 10.7 per cent for the year.

Business investment increased 3.2 per cent in the quarter, driven by a 5.6 per cent increase in plant and machinery investment, offset by falls in transport equipment and non-residential construction.

ANZ chief economist David Drage expects growth to slow over the second half of the year as weaker commodity prices and a stronger dollar come home to roost.

He is cautiously optimistic about the outlook, because of the considerable momentum in the domestic economy and because of signs that good growing conditions will provide some rise in agricultural volumes to partially offset weaker prices.

Drage said the European Union had just cut export subsidies on whole milkpowder.

On the home front retail spending is underpinned by strong employment growth, relatively low interest rates and rising house prices.

Meanwhile, net migration inflows remained as strong as ever, Drage said.

In the year ended June, migrants' transfers injected $1.5 billion into the economy.

If the world economy managed to remain on a modest recovery path, it was possible the present momentum in the New Zealand economy would be largely maintained, Drage said, with growth possibly reaching 4 per cent for the calendar year.