NZ economy tipped to have grown quickly this year

Retail activity has grown, along with manufacturing, say economists waiting for the latest GDP stats due out this week. Photo / Herald on Sunday

New Zealand's economy probably grew at the fastest pace in four quarters in the first three months of 2011 as robust manufacturing and exports helped make up for the impact of Canterbury's earthquakes.

The economy expanded 0.4 per cent in the first quarter, according to a Reuters survey.

That would be the fastest since the 0.7 per cent expansion in the same quarter last year and would exceed the 0.3 per cent pace forecast in the Reserve Bank's June monetary policy statement.

Governor Alan Bollard concluded in the last MPS that the Feb. 22 quake had a smaller and more localised impact on the economy than feared. He's betting it will help drive the rebound in growth in the second half of this year, with GDP speeding to 1.2 per cent in the fourth quarter.

Manufacturing rose to its highest level in almost a year in May, based on the BNZ-Business New Zealand performance of manufacturing index.

The GDP report will show "an economy in a slightly better position than initially feared, particularly considering the disruption caused by the earthquake," said Philip Borkin, economist at Goldman Sachs & Partners New Zealand, in a report.

Economic indicators released since the central bank's June 9 report include retail sales growing more than expected in the first quarter, at 0.9 per cent based on the core measure excluding motor vehicles.

Business confidence rose to the highest level highest since before the September earthquake in June, the National Bank Business Outlook showed.

Merchandise exports rose 10 per cent to $4.63 billion in May, led by dairy, meat and timber. While the kiwi dollar reached a new post-float high against the greenback last week, the currency is some 6 per cent lower against Australia's dollar than it was this time last year, meaning exports are still relatively competitive in the nation's biggest export market.

Nick Tuffley, chief economist at ASB, expects manufacturing made the biggest contribution to GDP in the first quarter, followed by retailing and transport/communications. He tips construction to be the biggest drag on GDP.

"Over recent weeks we have been pleasantly surprised by the strength of Q1 economic data and have subsequently revised up our forecast," said Tuffley, who is expecting first-quarter GDP of 0.5 per cent.

"The data suggest the underlying economy is recovering robustly," he said in a note. "The recent lift in consumer and business confidence over Q2 suggests momentum has continued to build."

Signs of stronger manufacturing prompted some economists to conclude farmers are spending again, encouraged by strong export prices, having paid down debt.

Bollard is expected to raise the official cash rate by more than 60 basis points over the next 12 months, based on the Overnight Index Swap curve.

In the June MPS he said underlying inflation is expected to rise as economic growth picks up, which will require "a gradual increase in the OCR over the next two years."