Drought fails to halt growth
Despite a vicious summer drought, the economy still grew a creditable 0.3 per cent in the March quarter and will keep picking up in the months ahead, according to Bank of New Zealand economists.
In official figures out yesterday, the economy grew slower than the 0.5 per cent expected, which was seen as a "downside surprise" by some economists. The economy was caught between the considerable impact of drought and the Canterbury rebuild.
The "modest" March quarter growth in economic activity followed a rise of 1.5 per cent in the December 2012 quarter, and some economists said the weak March quarter reflected a "payback" from the strong growth at the end of last year.
Economists said the slower-than-forecast growth in the March quarter was not expected delay the Reserve Bank's first move to lift official interest rates in March next year, nor keep rates lower for longer.
BNZ is expecting the official cash rate to move up from 2.5 per cent to 3.25 per cent by the middle of next year. Official interest rates would eventually move up to 4.5 per cent, a 200 basis point lift from present levels, BNZ said.
The Canterbury rebuild saw a 5.5 per cent lift in construction in the quarter, including a near 10 per cent rise in home building, which was not a one-off.
But on the other side, there was a 4.7 per cent slide in agricultural output because of the drought, which BNZ said was bigger than expected.
Despite the negatives in the March quarter, BNZ still expected June quarter growth of 0.5 per cent, with strong signs from the latest manufacturing and service sector surveys. Growth would pick up firmly in the second half of the year and expand at above trend next year.
BNZ senior economist Craig Ebert said the slower growth in the March quarter would "definitely not" affect the timing of the Reserve Bank's first move on interest rates.
"We know from a whole range of other information that the growth pulse is actually quite strong," Ebert said.
Based on recent surveys, growth would likely pick up in the second half of the year, though the June quarter would be affected by drought.
"The fact it is growing reasonably well, in spite of the drought, is the underlying story," Ebert said. And the drought had already finished and the construction growth would be an ongoing story and get even bigger.
ASB Bank chief economist Nick Tuffley said the March quarter growth only missed expectations by a small margin, and with inflation still low, there was no urgency for the central bank to lift interest rates.
ASB expected the first rate rise in March next year, eventually rising by 150 basis points to 4 per cent by late 2015, which would dampen demand for housing.
But rate rises were likely to be gradual, with two initial moves close together, and the rest more spread out, Tuffley said.
That was because households were still cautious about high debt levels, and were sensitive to rising interest rates because many home mortgages were on floating or short term mortgages.
Debt servicing costs would rise from less than 9 per cent of average disposable income and have more bite than usual, because more people were on floating or short term rates.
"We don't think the Reserve Bank will need to really ratchet rates up in the way we have seen in the past," Tuffley said.
Debt servicing at 9 per cent of income was considered a "normal" level in the longer run, but it would not go back up to the 14 per cent market seen at the tail end of the last housing boom.
Meanwhile, there was likely to be another hit on growth in the June quarter from the drought.
"It will show more negative [drought] effects than the first quarter, but by the second half of the year, a lot of the drought will be getting behind us," Tuffley said.