KEY POINTS:
The Reserve Bank will take some comfort from this week's gross domestic product (GDP) data if it confirms market expectations and shows that the economy grew only slightly over the September quarter.
It may provide more evidence the Reserve Bank's tough line on inflation is gaining more traction, particularly if GDP growth comes in around 0.3 to 0.4 per cent for the quarter, as some expect, down from 0.7 per cent in the June quarter.
While that may seem like "bad news is good news", the Reserve Bank's main concern is about the inflationary impact of economic growth, particularly with the consumers price index expected to exceed its 1 to 3 per cent target range next year.
Economists went back to their computer models on Friday when Statistics New Zealand released data showing manufacturing sales fell a seasonally adjusted 2.1 per cent in the third quarter, pouring cold water on expectations for growth.
ANZ National Bank chief economist Cameron Bagrie now expects Friday's data release to show 0.3 per cent GDP growth over the September quarter.
But he says the underlying economy will look flat when the expected impact of the Tui oilfield is taken out of the equation.
"It looks to me like the 'David Lange stop for a cup of tea' scenario in terms of what really happened [in the third quarter], so the Reserve Bank is getting its wish," says Bagrie.
"We are seeing slower growth and we need more of the same through 2008 to make sure this inflation pressure dissipates."
The Reserve Bank can already claim some success in cooling inflationary hotspots with its four rapid-fire rate hikes between April and July.
The housing market is slowing and the retail sector has flattened, but economists say that the economy faces big challenges next year. Those challenges include the "Fonterra factor" - the likely inflationary impact of the dairy boom - and the impact of expected tax cuts expected in the run-up to next year's General Election.
Westpac economist Doug Steel has revised his September quarter growth forecast down from 0.7 per cent to 0.4 per cent following the release of the manufacturing data.
He agrees that a low GDP outcome will be good news to the Reserve Bank, which had forecast 0.6 per cent growth for the quarter.
"The Reserve Bank has been having an impact, but the question has been: Will it be enough of an impact to pull down inflationary pressure, especially going forward?" he says. "The jury is still out on that."
Balance of payments data, due on Thursday, is expected to show the current account deficit improved a little over the September quarter, thanks mostly to the dairy boom.
ANZ National's Bagrie is expecting the deficit to represent 8.1 per cent of GDP, down from 8.2 per cent in the year ending in the June quarter
