Recovery stays sluggish despite building spurt

House building work and manufacturing soared in the last three months of 2009, but despite better-than-expected figures economists still expect the Reserve Bank to hold interest rates this week.

The Reserve Bank's next Monetary Policy Statement is out on Thursday, but economists do not expect any interest rate change from 2.5 per cent.

The first move up may be as soon as June or as late as September, economists said, because of the more recent weakness in the housing market, still high unemployment and weak inflation.

Residential construction was up 7.4 per cent in the December quarter, according to Statistics New Zealand, in the biggest rise for five years and better than some economists expected.

Despite the rebound, the real value of work was still down about a quarter on the peak of work at the end of 2007.

But that rebound was almost fully offset by weaker-than-expected commercial and other non-house building work.

Overall, the volume of building work was up 0.7 per cent, which was the strongest result for two years.

However, in the short term the rebound may not carry into house building, given weaker consent figures for recent months, higher fixed term interest rates and government indications that tax allowances for property investors will be removed in the Budget.

The housing market seems to be losing steam with a recent slump in house sales, more listings on the market and it is taking longer for homes to sell, economists said.

However, there could be a spurt later this year to beat a rise in GST to 15 per cent which is expected to come in October.

Manufacturing sales volumes jumped 3.1 per cent in the December quarter, a strong gain after six quarterly falls in a row which saw manufacturing slide 17 per cent. Manufacturing was down to a nine-year low before the latest rebound.

Both building work put in place and manufacturing are key pointers for December quarter economic growth figures, due out on March 25. The latest figures suggested the economy finished the year in a better state, with close to 1 per cent growth in the quarter.

However, economists say the recovery is still patchy and sluggish with slow consumer spending, bank lending growth and business investment.

Some economists say the economy is looking slightly weaker than expected so far this year, but should do better later in the year as manufacturing exporters get a boost from a low exchange rate with Australia which is New Zealand's biggest export market.

The low exchange rate, at A76.8 cents yesterday, also makes New Zealand attractive for Australian tourists. Last week, the New Zealand dollar hit a nine-year low against the Aussie of just above A76c.

The New Zealand dollar also firmed to almost US70c after the better-than-expected building and manufacturing figures.

The full effect of the low currency against Australia's dollar would not be clear till next year, ANZ Bank said, but would be a "real boon" for exporters.

Short-term economic growth was likely to be weaker than expected, but 2011 should be much stronger, ANZ said.

The bank's economists now expected the Reserve Bank to start lifting rates in the September quarter, rather than the June quarter.

"The economy is not picking up a head of steam. The recovery is on track but the economy is not firing on all cylinders," ANZ said.

ASB Bank expected the Reserve Bank to start lifting interest rates in June. But official interest rates would keep rising slowly from 2.5 per cent to 5 per cent.

The Reserve Bank would also be more comfortable about holding rates this week because of uncertainty about expected changes to property taxes in the Budget and recent rises in fixed-mortgage rates, ASB said.

- © Fairfax NZ News