Year ends with sigh as GDP growth falls below forecasts

By BRIAN FALLOW economics editor

The economy ended 2001 with more of a pop than a bang as a weak external sector offset strong growth in internal demand.

Gross domestic product grew 0.6 per cent in the December quarter, pushing the annual average growth rate to 2.4 per cent from 2.2 per cent in September.

The result was well below the average 1.1 per cent forecast by market economists, or the 1 per cent expected by the Reserve Bank.

National Bank chief economist Dr John McDermott said the forecast error would not affect the likelihood that the Reserve Bank would raise interest rates another 25 basis points to 5.25 per cent on April 17. "We still have an economy running at full potential, but the official cash rate is stimulatory."

It might, however, mean the peak in the interest rate cycle would be lower, with a cash rate of 6 per cent instead of 6.25 per cent, he said.

The financial market continues to price in a more aggressive interest rate outlook than that, peaking around 7 per cent. But it unwound some of that on Thursday in the light of the GDP data, shaving 10 basis points off short-term rates and 5 points off the long end.

Salomon Smith Barney economist Annette Beacher said that reaction was not necessarily the right one. The Reserve Bank was worried about domestic demand, she said, and the internal demand component of the December data increased a whopping 2.5 per cent:

* Household spending increased 1.4 per cent, making 3.5 per cent for the year. Demand was strongest for big-ticket items, particularly vehicles, Statistics New Zealand said.

* Investment in new housing leaped 20 per cent in the quarter. But ANZ chief economist David Drage said the surge in residential construction was largely a bounce-back from weakness through 2000 and last year. Even with December quarter's sharp increase, residential investment remained at levels nearly 10 per cent below those recorded in calendar 2000, he said.

* Business investment in plant, Machinery and equipment jumped 22 per cent. Investment intentions in the National Bank's business sentiment survey are also strong.

Coupled with an immigration-assisted expansion of the workforce, the increase in capital investment is encouraging, in the light of the Reserve Bank's concern that demand in the economy is already pushing up against the limits of its present capacity to supply.

But while internal demand was running hot, much of the increased demand - mainly in plant and machinery, and transport equipment - was met from imports, which were up 3.2 per cent in volume terms.

Export volumes fell 2.6 per cent, reflecting not only lower shipments of dairy products, wool and aluminium but also a 7 per cent drop in exported services in line with the drop in overseas visitors after the terrorist attacks of September 11.

The Bank of New Zealand's head of market economics, Stephen Toplis, said the run of recent data had been strong, including migration and tourist flows, house prices and building consents, and business confidence.

"We have been pummelled by data suggesting the Reserve Bank would have to be more aggressive. The GDP figures reduce the risk that they will go by 50 basis points in April, and that is how the market is reading it," he said.