September slowdown no guarantee of early rate cuts

Economic growth slowed to 0.6 per cent in the September quarter, a sign that the economy is gradually losing momentum.

The result was weaker than the 1 per cent the Reserve Bank had forecast, suggesting it may have overestimated how stretched the economy's capacity is and the resulting inflationary pressures.

But Bank of New Zealand economist Stephen Toplis said yesterday's figures did not mean an early cut in central bank interest rates was likely. "Growth needs to slow substantially just to stop the bank from tightening again."

Over the previous four quarters, growth had averaged 1.4 per cent - keeping the annual rate to September at a brisk 4.6 per cent.

But the average forecast among economists is for growth to slow to 2.3 per cent in the year to March 2006, from 4.5 per cent in this March year.

Statistics New Zealand data shows service industries drove growth in the September quarter, with wholesale trade, retailing, accommodation and restaurants, transport and communications and the public service all busy.

The finance and business services sector had a soft quarter, reflecting lower housing market turnover.

But agricultural production dipped 1.4 per cent. The dairy season started late and, despite a high lambing percentage, production from mixed livestock farms fell.

The construction sector slowed, after a strong June quarter, down 6 per cent in residential building and 2.2 per cent overall.

Manufacturing output was flat; sales were down but inventories rose.

On the demand side of the ledger, Statistics NZ said household spending was up 1.7 per net in the quarter, making 6.1 per cent for the year. Spending on durable goods was up 3.7 per cent; non-durables and services also rose, 1.4 per cent and 0.7 per cent respectively.

Despite a drop in residential investment in the latest quarter, new housing investment was up 8.5 per cent for the year.

Business investment in fixed assets remained high, increasing 4.3 per cent in the quarter and 16.3 per cent for the year. Investment in plant and machinery slowed (up 0.4 per cent) but remains high on an annual basis at 22 per cent.