Economy growth slower in quarter

The economy grew less than expected in the first quarter, pushing the kiwi lower amid speculation the Reserve Bank will not add to its seven interest-rate increases in the past 18 months.

Statistics New Zealand said yesterday the economy expanded 0.6 per cent from the fourth quarter, when it grew 0.3 per cent.

The median forecast of 10 economists surveyed by Bloomberg News was 0.8 per cent.

The economy expanded 2.5 per cent from a year earlier, the slowest pace in four years.

Business confidence slumped after Reserve Bank governor Alan Bollard raised rates to the highest of any country with a top credit rating at Moody's Investors Service.

The economy grew only half the pace forecast by Bollard as an 11 per cent gain in the currency in the past year slashed the value of overseas sales at companies such as Fonterra, the world's biggest dairy exporter.

"The external sector is weak on the export side," said Ulf Schoefisch, chief economist at Deutsche Bank and a former head of forecasting at the Reserve Bank. "If the bank continues to push rates higher, then the risk of a hard landing is fairly real."

The dollar fell as low as 70.33USc from 70.75USc before the report, the world's biggest decline yesterday. It was buying 70.55USc at 5pm.

The yield on a 6 per cent Government bond maturing April 2015 fell five basis points, or 0.05 percentage points, to 5.70 per cent.

Bollard, who in June forecast the economy would expand 1 per cent in the first quarter, has over-estimated growth for three successive quarters.

On June 9, he kept the benchmark interest rate at a record 6.75 per cent and said he could not rule out another increase.

"Growth is clearly undershooting what the bank expected," said Robin Clements, chief economist at UBS New Zealand.

"That's partly why the market thinks the bank is crying wolf on further interest-rate increases."

The currency has fallen 1.5 per cent since Thursday's report that the current account deficit widened to a record $10.35 billion or 7 per cent of gross domestic product in the year to March 31 because of an export slump.

Declining income from overseas sales is crimping earnings at companies such as Scott Technology, which makes automated production machinery. The company said profitability "is being impacted by the high dollar".

- BLOOMBERG