On the move again but concerns remain

The economy grew last year but is still off its peak in December 2008. Photo / Richard Robinson

The economy was up and running again - up and walking, anyway - in the last three months of 2009.

Gross domestic product grew 0.8 per cent, exactly in line with median market expectations.

The economy ended 2009 0.4 per cent larger than it started it but still 2.1 per cent below its peak in December 2008.

Of the quarter's 0.8 per cent growth, 0.5 percentage points came from manufacturing, which grew 4.5 per cent in the quarter.

But that uptick followed a long period of contraction and it still left manufacturing activity one-sixth below its cyclical peak back in September 2005.

Perhaps the most encouraging detail of the statistics was a 4.1 per cent increase in investment in plant, machinery and equipment and an 11.5 per cent rise in imports of capital goods.

That follows five straight quarters of declines in investment in plant and machinery, including an 8 per cent drop in the September 2009 quarter.

So it is a step in the right direction but from a starting point of very weak levels of business investment.

But at least it suggests firms have started to follow through on the pick-up in confidence they have been expressing, to sentiment surveys at least, for some time. It also offers some hope of improvement from the dismal productivity data released last week.

Much of the increase in manufacturing seems to have been gone into rebuilding inventories. Inventories rose $172 million in the quarter, most of which ($118 million) was manufacturing inventories.

Inventories had been run down aggressively over the previous year, including a $710 million decline in the September quarter.

"Stockbuilding is the first stage of every recovery, just as destocking is an important part of every recession," Westpac economist Dominick Stephens said.

"Nobody would claim the recession as somehow less real because it was partly caused by a stock cycle. The same applies to the recovery."

But a sustained recovery will require a sustained lift in final demand - consumption and investment.

In the December quarter final demand rose 0.5 per cent, including a 0.8 per cent lift in private consumption and 0.9 per cent rise in government consumption.

"While the economy is in expansion mode, there is nothing in the data to suggest the bounceback in activity will be anywhere near as strong as one might normally expect following the sort of recession we have recently experienced," said Bank of New Zealand head of research Stephen Toplis.

He expects growth in the March quarter to come in weaker, around 0.4 per cent. Partly that is because of the prospect drought will wither agriculture's contribution, in contrast to its 1.1 per cent growth in the December quarter,

Indicators of retail activity such as card transactions suggest its contribution will be modest, too, compared with 1.7 per cent growth in the December quarter, and a faltering housing market will impact parts of the service sector as well.

UBS economist Robin Clements expects despite that soft patch the trend will be towards an increasingly self-sustaining recovery, underpinned by a further recovery in residential construction, business capital expenditure and expanding exports especially to Australia, aided by an exchange rate at 10-year lows.

ANZ chief economist Cameron Bagrie still sees debt reduction and uncertainty as dampening factors over the coming months.

"However, the ingredients for a strong upturn are moving into place," he said.

"Arguably this is happening already, although we would characterise the early stages of the recovery as simply a reflection of aggressive policy action and a statistical bounce [from a low base] in areas such as manufacturing."