We're half way there, GDP data to show

Brendan O'Donovan. Photo / Mark Mitchell

The market expects to hear on Thursday that the economy expanded 0.5 per cent in the March quarter, which would make the fourth successive quarter of growth, a cumulative 1.8 per cent, since the recession.

It would mean the economy had clawed back half of the drop in output that occurred during the recession's five quarters of contraction.

"The recovery has been distinctly export-led, thanks to skyrocketing commodity prices and strong demand from Australia," Westpac chief economist Brendan O'Donovan said.

"Business confidence has remained high enough for businesses to begin hiring and unemployment has fallen sharply. However, households are choosing to repair balance sheets rather than spend."

The sectoral picture is patchy.

"Forestry is one sector that has benefited from the global recovery, particularly in Asia," ASB economist Jane Turner said.

Mining is also expected to record a large increase in production.

"Production began at the Kupe oil and gas field and the Pike River mine made its first shipment of high-quality coking coal," O'Donovan said.

Agriculture's numbers, by contrast, will bear the mark of drought's impact on dairy production and are expected to be negative.

Less work for dairy factories in turn will partially (or in O'Donovan's view, entirely) offset recovery elsewhere in the manufacturing sector.

Turner expects core manufacturing - that is, excluding the food-processing sector - to have grown 2.2 per cent in the March quarter, aided by inventory rebuilding and, for exporting manufacturers, strong Australian demand and a favourable exchange rate.

Construction continues to recover, at least in the residential sector, despite weak activity in the market for existing properties.

Residential building work put in place during the March quarter was up 2 per cent, following a 7.2 per cent rise in December, but it is still running about 30 per cent below the levels prevailing in the boom years between 2003 and 2007.

Non-residential building work, by contrast, has declined for the past five quarters.

Retailers meanwhile continued to struggle in the March quarter, with volumes up just 0.2 per cent from December and only because of increased activity in the car yards. Excluding the automotive sector, retail sales fell 0.5 per cent in volume terms.

Among the service sectors, financial and business services are expected to have gone backwards, reflecting weak turnover in the housing market.

But employment data suggests a pick-up in public sector services.

Turner expects the recovery to gather momentum over the rest of the year.

"Consumer spending will be boosted in the near term as households bring forward purchases ahead of the GST increase on October 1. In addition, tax cuts and the improving labour market will underpin an underlying recovery in discretionary spending over the next year. Export incomes are also set to recover, supported by strong commodity prices."

She is also confident of a robust recovery in business investment. Investment in plant, machinery and equipment rose 4 per cent in the December quarter and imports of capital goods rose 3.5 per cent in the March quarter.

"An increase this early into the recovery, combined with the robust increase in inventory restocking, indicates firms are more confident of the recovery in demand and are readying themselves for future growth."

While private sector forecasts for March quarter growth in gross domestic product are clustered around 0.5 per cent, both the Reserve Bank and the Treasury are more optimistic, picking 0.8 per cent.

Axa chief economist Bevan Graham said the subdued nature of the recovery reflected the fact that household balance sheets were stretched and the residential property market soft.

"This, in turn, is keeping the lid on consumption. These have been the traditional drivers of economic recoveries in New Zealand."

This time it had to be different, Graham said. It had to be based on strong export growth.

"Our major trading partners are helping out in that regard, with Australia, China and South Korea among the strongest global growth performers."