Strong economic growth predicted for quarter

Economists expect a pick-up in growth to be recorded for the first three months of the year, driven by strong internal demand, but see it as a wiggle in a declining trend.

The median forecast among market economists is that the March quarter gross domestic product figures due on Friday will record growth of 0.8 per cent, up from the December quarter's 0.4 per cent.

It would mean the economy was 2.7 per cent larger than a year earlier, a slowdown from annual growth of 3.9 per cent over calendar 2004.

Westpac economist Donna Purdue said continued solid growth in household spending, as evident in a 2 per cent increase in retail sales volumes, underpinned growth.

Residential construction should record a rebound from the decline in the December 2004 quarter.

At the same time, strong investment spending by business was likely, given increased imports of plant and machinery and a growth in non-residential building work.

Much of the increase in demand has been met from imports, however, while export volumes have declined. So the external sector is expected to make a negative contribution to growth overall.

Westpac expects the relatively strong start to the year to be followed by more muted growth.

"In particular, consumer and construction spending are likely to be a lot softer. April retail sales have already shown some signs that the pace of growth in spending is slowing and dwelling consent issuance has reverted to the downward trend that began prior to the fixed rate mortgage war at the end of 2004."

While a 0.8 per cent out-turn for March would be weaker than the 1 per cent the Reserve Bank forecast, it is not likely to take much comfort from it.

With inflation nudging the top of the bank's 1 per cent to 3 per cent target band, and bottlenecks in the labour market and firms' physical capacity still near historic highs, the bank indicated last month an asymmetrical attitude to surprises: Bad news (from its point of view) could easily trigger another rate rise, but good news would not turn its mind towards easing for the foreseeable future.

Bank of New Zealand economist Craig Ebert said the key thing for the Reserve Bank was not whether growth slowed but why.

If the slowdown merely reflected an inability of the supply side of the economy to produce any more, that did not represent any weakening on inflation pressure. The bank needed to see a weakening of demand.

Deutsche Bank chief economist Ulf Schoefisch said domestic demand (consumption and investment) had eased back quite a bit.

Schoefisch said that while growth appeared to have been stronger during the March quarter than late last year that reflected volatility rather than a trend change.

ANZ National Bank economists agree: "When we roll our big black marker pen through recent quarterly out-turns, an easing trend is still apparent."