Shoppers give year a flying start

By BRIAN FALLOW

Consumers get the credit for seeing the economy off to a flying start to the year.

Gross domestic product grew 1.1 per cent in the March quarter - bang in the middle of market expectations - which pushed the annual average growth rate up to 3.2 per cent.

Growth was underpinned by household spending which rose 1.5 per cent, with the strongest increase in purchases of durable goods such as furniture and major appliances.

Such spending is typical of a housing boom.

In the March quarter, however, investment in new housing fell 9.6 per cent, but that only partially retraced a 17.9 per cent increase in the December quarter.

Building consents have continued to climb since March. Approvals for April and May were 42 and 41 per cent respectively above their levels a year earlier. Business investment also recorded a decline in the March quarter, but investment in plant and Machinery is volatile from quarter to quarter: the 8.5 per cent fall in the March quarter followed a 19.1 per cent rise in December.

Imports of plant and machinery over April and May were 8 per cent up on the same period last year.

Growth in exports and imports of goods largely cancelled each other out, up 2 and 2.2 per cent respectively.

But net exports overall made a positive contribution to GDP, reflecting an 8.5 per cent increase in exports of services, largely tourism which by the March quarter had shaken off the effects of the terrorist attacks of September 11.

A build-up of inventories in the distribution sector and in livestock numbers also contributed to growth in the quarter.

At 3.2 per cent, annual average growth is the strongest it has been since December 2000. The average estimate, in a recent NZIER survey of 12 economic forecasters including the Treasury and the Reserve Bank, is that growth will stay slightly above 3 per cent over the year to next March before easing back to 2.8 per cent the following year.

ANZ Bank chief economist David Drage said that the New Zealand economy would continue to enjoy the tailwinds from the agricultural export boom, the low interest rates last year and the return to net inflows of migrants.

But these positive influences were starting to wane, he said, with key world commodity prices down sharply in recent months, the New Zealand dollar rising sharply and interest rates also increasing.

"Moreover it is difficult to say how long net immigration will continue at its present pace."

The path of the dollar and the potential for turbulence in world financial markets to derail the global recovery raised question marks over how much further interest rates would rise, Drage said.

But he said the Reserve Bank would now be able to mount a strong case for at least returning the official cash rate to more neutral levels, around 6 per cent (from 5.5 per cent.)