NZ's engine stoked to beat recession

By BRIAN FALLOW economics editor

The economy was firing on all cylinders in the June quarter, reinforcing hopes that it is well placed to cope with international recession.

Gross domestic product increased 2 per cent in the quarter, said Statistics New Zealand, well above market expectations, which were in the 1 to 1.7 per cent range.

With March quarter growth revised up to 0.3 per cent, the result implies the economy expanded at an annual rate of 4.6 per cent in the first half of the year, well above its sustainable rate of around 2.5 per cent.

"This is more a comfort than a concern, considering the dire outlook for the world economy," said Bank of New Zealand economist Stephen Toplis.

The June quarter growth was broadly based. The only sectors to go backwards were agriculture (held back by difficult growing conditions in some areas) and electricity, where increased reliance on thermal generation shows up as a decline in value added.

Manufacturing activity jumped 4.8 per cent, following a year of "now you see it, now you don't" growth. Food processing was the largest contributor within the sector.

Construction increased 7.3 per cent, though it is still well off its high in March last year and down 10 per cent for the year.

The main increase was in non-residential building, but the residential sector is starting to show signs of picking-up.

Retail activity was up 1.5 per cent, reflecting higher spending by both households and visitors.

On the expenditure side the increase in demand was also broadly based.

While net exports contributed almost half of the increase in demand, internal demand also rebounded after shrinking in the previous two quarters.

Consumption grew 0.7 per cent, down slightly on March's 0.9 per cent but well ahead of the rates prevailing through last year. That included a 14 per cent jump in purchases of used cars.

Business investment in plant and machinery jumped 28 per cent, reversing an equally sharp fall in the March quarter.

Investment in new housing was up 1.2 per cent, after falling in the previous two quarters, but is still down 18 per cent on a year ago.

Some of the increased demand was met from stocks, which were run down by $106 million. A drop in inventories of plant and machinery was the main factor, consistent with the rebound in business investment.

Deutsche Bank chief economist Ulf Schoefisch expects the September quarter to record growth of about 0.8 per cent, consistent with an underlying rate of around 3 per cent.

"We expect the economy to grow by around 2 per cent during 2002," Mr Schoefisch said, but that would still be a very good performance in light of the international slowdown, and a period of below-trend growth would be "handy" from the Reserve Bank's point of view.

WestpacTrust chief economist Adrian Orr said that even with the strong June figures, its estimate of the output gap was still close enough to zero to imply little inflation pressure over the medium term.