Faster than expected growth in December quarter

Reserve Bank tipped to cut interest rates.

The economy grew faster than expected in the December quarter but economists remained unimpressed, with most picking the Reserve Bank will still cut interest rates later this year.

Gross domestic product (GDP) expanded 0.9 per cent in the three months ended December 31, the same pace as the September quarter. GDP grew 2.3 per cent from the same quarter the previous year, and annual growth for 2015 was a solid 2.5 per cent, according to Statistics New Zealand.

The stronger than expected result was driven by tourism, the service sector and construction activity.

Westpac economist Michael Gordon noted that annualised growth of 2.5 per cent was less impressive when set against annual population growth of 2 per cent.

"Per capita GDP growth remains relatively sluggish," Gordon said. He also warned that the fall in agricultural output (down 1.6 per cent for the quarter) was worrying given the worst of the dairy downturn was still to flow through.

"We expect the drop in dairying income to weigh on consumption and investment growth over the next couple of years."

Paul Dales at Capital Economics in Sydney said the result wouldn't prevent the RBNZ from cutting interest rates from 2.25 per cent to 2 per cent in the coming months, although it does make it a little less likely that rates will fall below 2 per cent.

Economists at ASB and ANZ, and brokers UBS and First NZ Capital were also picking a further rate cut, most likely in June.

The Reserve Bank last week cut the official cash rate to 2.25 per cent.

Yesterday's figures showed the population grew 0.6 per cent in the December quarter, for an annual increase of 1.9 per cent.

That led to a 0.1 per cent fall in real disposable income per capita, following on from a 0.1 per cent contraction in September. On an annual basis, real gross national disposable income per capita shrank 0.4 per cent.

But Finance Minister Bill English said "despite the dairy industry doing it tough at the moment, we are in the unusual situation of solid growth, more employment and higher wages, but very low inflation." English said.

"The outlook remains for continued moderate economic growth," he said.

GDP expansion

• 0.9% growth in GDP in the three months ended December 31.

• 2.3% rise from the same quarter the previous year.

• 2.5% annual growth for 2015.

• Stronger than expected result.

• Driven by tourism, the service sector and construction activity.

- additional reporting BusinessDesk