Poor GDP lowers rate-hike prospects

Economic growth was a pale and sickly 0.2 per cent in the September quarter, further reducing the likelihood of an interest rate hike by the Reserve Bank in the new year.

On an annual average basis, gross domestic product growth slowed to 2.7 per cent, its weakest rate since September 2001, Statistics New Zealand said.

Agriculture's 0.4 per cent growth was more than offset by a 2.7 per cent fall in output from fishing, forestry and mining.

Manufacturing managed a 0.3 per cent increase after contracting through the first half of the year, but the construction sector fell 4.7 per cent after two relatively strong quarters.

The service industries expanded 0.7 per cent, their weakest performance for three years.

Westpac chief economist Brendan O'Donovan pointed to the softer performance of the services sector as evidence the economic malaise, hitherto confined to the export and import-competing sectors, had spread.

"This economy needs far easier monetary conditions," he said.

The Reserve Bank (which had forecast 0.8 per cent growth in the September quarter) had overestimated GDP in four of the past five quarters, he said, a cumulative error of 1.6 percentage points.

The data continued to show a two-speed economy, with household spending going strong while the export sector struggled.

Internal demand was sustained by a 1 per cent rise in household spending, after a similar rise in the June quarter, and business investment up 2.2 per cent on top of a 5.8 per cent increase in June.

But that increased demand was entirely met by imports. After allowing for a 1.5 per cent fall in exports and a 2.4 per cent rise in imports, GDP on an expenditure basis was flat.

And, since the September quarter, business and consumer confidence have fallen sharply.

Deutsche Bank chief economist Darren Gibbs said the weaker growth marginally reduced the chances of a rate hike in January, but the prospect of such a hike was not particularly high in any case.

When the anaemic growth in output was put alongside the increased use of labour, whether measured on a head count or hours worked basis, it showed labour productivity growth to be weak, he said.

With wages climbing at the same time, it meant unit labour costs were were surging at the same time as businesses faced higher costs for energy and raw materials.

"It's not hard to understand why business confidence surveys report significant pessimism," Gibbs said.

Bank of New Zealand economist Stephen Toplis said the good news, from the Reserve Bank's perspective at least, was that growth in domestic demand was softening.

However, it was still way too strong, he said.

"Anecdotal evidence has us believing the December quarter has seen an acceleration in this slowdown," he said.

But the kiwi dollar had fallen sharply over the past few days, despite high demand from the issuers of uridashis - bonds issued to Japanese investors and denominated in New Zealand dollars.

"As more and more investors come round to the view that the Reserve Bank has done its dash and/or that the economy is heading for a hard landing, the prospect of a near-term slump in the currency heightens," Toplis said.

"If the slide happens now, while domestic demand remains relatively robust, then the threat of inflation increases and the Reserve Bank may be forced into hiking again."

ASB Bank chief economist Anthony Byett said recent statistics and his bank's own lending and transaction data did not provide clear evidence yet of the kind of slowdown in household spending the Reserve Bank was looking for.

To rule out another interest rate hike was premature, he said.