Hopes high for GDP rebound

Westpac chief economist Brendan O'Donovan

A pick-up in economic growth is expected to be reported on Thursday when the national accounts for the last three months of 2009 are released.

Market forecasts are clustered around an increase of 0.8 per cent in gross domestic product in the December quarter, from a feeble 0.2 per cent in September.

Westpac chief economist Brendan O'Donovan, who is picking 0.7 per cent, describes it as a "half-decent" rate of growth that is fairly disappointing in the context of a global recovery.

The Reserve Bank has forecast 0.6 per cent but expects the quarterly growth rate to pick up to an above-par 1 per cent later in the year.

Manufacturing is likely to be among the better-performing sectors. The BNZ-Business New Zealand performance-of-manufacturing index has been pointing to expansion since September after 18 months of contraction. "By our reckoning manufacturing expanded 1.9 per cent, propelled by restocking activity, strong domestic and Australian demand and the low exchange rate with the Australian dollar," O'Donovan said.

But that follows a year and a half during which manufacturing activity shrank by a sixth.

By contrast, primary production looks to have been more subdued than in previous quarters, ASB chief economist Nick Tuffley said.

He is picking growth of 0.5 per cent for agriculture but none in the forestry, fishing and mining sector as trade figures suggested forestry and oil volumes declined following strong growth in the June and September quarters.

Construction presents a mixed picture, with residential building having turned around but non-residential construction remaining weak.

A weak housing market weighs on activity in many service sectors, such as real estate.

Credit growth in general is weak. Household debt rose just 2.7 per cent over 2009, while business sector borrowing shrank 7.2 per cent, making for lean times in the finance sector.

On the expenditure side of the accounts, a further fall in business investment is expected to be balanced by signs of recovery in consumer spending - core retail sales volumes rose 1.3 per cent in the December quarter, albeit supported by discounting - and exports. A hefty boost is also expected from the inventory cycle if firms have largely completed the run-down of stocks.

On prevailing forecasts the economy will return to pre-crisis levels of output later in the year, representing three years of lost growth.

Tuffley expects inflation pressures to become an increasing concern.

"New Zealand fared far better than expected through the recession, but as a result inflation pressures have not unwound substantially. Prior to the crisis the economy was pushing hard up against capacity constraints. It will not be long before activity levels have fully recovered the ground lost during the recession and growth is pushing against capacity limits once again, exacerbated by the fall in [business] investment over the past year."

The Reserve Bank says it expects to start raising the official cash rate, from an historic low of 2.5 per cent, around the middle of the year.