KEY POINTS:
The dollar rose and expectations for interest rate cuts next year were dialled back on news that the economy grew by a stronger-than-expected 0.7 per cent in the June quarter.
Although the data reflect activity three to six months ago they mean that the economy went into the turbulent September quarter with more momentum and less spare capacity than the Reserve Bank or the markets thought - especially as March quarter growth was revised up from 1 per cent to 1.2 per cent as well. "The Reserve Bank which is forecasting inflation to be at the top end of its target band [3 per cent] and can't accommodate any upside surprise has just had another one," said Westpac chief economist Brendan O'Donovan.
The kiwi, trading just above US75c before the announcement, jumped half a cent, trading around US75.7c, before closing at US75c.
And the market now expects interests rates to be 27 basis points lower by this time next year, compared with 42 points on Thursday, according to Credit Suisse's swaps-based indicator. The quarter's 0.7 per cent increase in gross domestic product pushed the annual growth rate up to 3.2 per cent from 2.5 per cent in March and a cyclical low of 1 per cent in the June and September quarters last year. It beat market consensus and Reserve Bank forecasts of 0.5 per cent.
Domestic demand grew 1.5 per cent or $500 million, but most of that ($300 million) was met by imports.
Growth in household consumption slowed to 0.7 per cent from a rip-roaring 2.2 per cent in the March quarter as spending on durable goods such as new cars fell.
"More worrying for a capacity-constrained economy was that business investment showed a big fall," said First NZ Capital's Jason Wong.
Investment in plant, machinery and equipment (PME) fell 5.9 per cent in the quarter, following three quarters of strong growth, Statistics New Zealand said.
On an annual basis PME investment was up 2.9 per cent.
Residential construction grew 3.8 per cent in the quarter, offset by a 2.3 per cent drop in non-residential construction.
O'Donovan said there was now a good chance that the Reserve Bank might have to raise interest rates next year, unless the currency went through the roof and did some of the work for it.
"Inflation pressures look all-pervasive. The Reserve Bank's looking for a crisis to get itself out of trouble.
"If the credit dislocation doesn't get worse and house prices don't drop significantly, then inflation will be well outside its [1 to 3 per cent] target."
The economy had expanded at an annualised rate of 3.8 per cent in the first half of the year, which O'Donovan said was well above anyone's estimate of the growth rate that could be sustained without inflation climbing.
Meanwhile the country could expect a large income boost from sky high dairy prices.
"The tight labour market is pushing up wages and there is a loud sucking sound coming from the booming Australian economy," he said.
"Energy prices are up even before carbon prices come through, and there's substantial food price inflation to feed through."
Bank of New Zealand economist Stephen Toplis said the higher than expected GDP figure would marginally increase the Reserve Bank's inflationary concerns when it already acknowledged inflation threatened the top if its target band. "But remember these data are for the June quarter when everything seemed to be going along swimmingly," he said.
"The world is now very different. There have been clear signs that the housing market has come unstuck, US economic fears have heightened markedly, the supply of credit has been substantially impacted by global developments and there has been distress in the local non-bank financial sector."
But Toplis does not expect inflation pressures to diminish substantially for some time and thinks that over the next six months there is a much greater chance of an interest rate increase than a cut.
Growing pains
* Economic growth in the June quarter exceeded forecasts.
* The markets took that as bad news for inflation at a time when the Reserve Bank has no tolerance for any surprises.
* Growth was concentrated in the services sectors.
