Lower growth means rate rise less likely

By BRIAN FALLOW

The economy expanded less than forecasters expected in the December quarter, lessening the chances that the Reserve Bank will raise interest rates next month.

Gross domestic product increased 0.6 per cent from September quarter levels, making 3.5 per cent growth for the year, Statistics New Zealand said. That continues its decline from a peak of 4.4 per cent in the year ended last March.

Growth was heavily concentrated in services sectors, especially government and wholesale trade.

But manufacturing was almost flat, recording only a 0.1 per cent increase in activity, and the construction sector fell 2 per cent, albeit from a high level. Construction activity is still 14.9 per cent up on a year earlier.

"It is important to remember that this quarterly fall comes after a period of extremely strong construction activity - an increase of 64 per cent since early 2001 - and at a time that labour constraints are evident," said ASB chief economist Anthony Byett.

"We believe there is still a lot of building in the pipeline and the residential building sector will remain very active for months to come."

Bank of New Zealand economists said the growth figures substantially reduced the likelihood that the Reserve Bank would want to raise interest rates when it next reviews them on April 29. Like most market economists, the Reserve Bank had expected the economy to clock up a growth rate of around 0.9 per cent in the December quarter.

The fact that growth was weaker than that would reduce the bank's estimate of the extent to which resources were overstretched and would weaken the case for raising interest rates.

But offsetting that, the BNZ said, was the fact that the dollar was now substantially lower than the Reserve Bank had assumed in its latest economic forecasts.