GDP growth likely to be slow, patchy

Stronger food manufacturing is expected to lift economic growth to 0.6 per for the first three months of the year, economists say.

But a decline in construction and lower retail sales highlight the "patchiness" of the New Zealand recovery, while the softness in recent activity indicators point to growth remaining modest of the next few months.

ASB chief economist Nick Tuffley said the modest 0.6 per cent increase in gross domestic product (GDP) largely reflected an increase in milk production and livestock slaughter, boosting agriculture and food manufacturing in the march quarter.

ASB's forecast was slightly stronger than the Reserve Bank of New Zealand's expectation of 0.4 per cent.

But excluding the food sector, the Economic Survey of Manufacturing indicated the increase in core manufacturing was much more subdued, Tuffley said.

The latest Business NZ PMI survey also showed a drop in confidence in April, suggesting manufacturing could contract over the next few quarters.

"Softening global growth poses downside risks to demand for our manufactured exports," Tuffley said.

A surprising decline in housing construction had helped to subdue construction activity in the March quarter.

But residential building consents had improved in recent months.

"We expect this will flow through to stronger residential building over the coming year, as post-earthquake rebuilding activity in Canterbury gathers momentum," Tuffley said.Outside of the Christchurch rebuild residential construction remained weak – but it should start to pick up over the next few years to satisfy population growth, particularly in Auckland, he said.

Consumption would gradually pick-up over the next few years as household finances recovered, unemployment reduced and the housing market improved, bolstering consumer confidence.

However, given the continued high level of household debt, consumers were likely to remain cautious, Tuffley said.

Statistics New Zealand last week revised its core retail and supermarket sale figures which had been surprisingly bad in the March quarter with volumes falling 2.5 per cent compared to the previous quarter.

The revised number showed they had actually fallen 1.4 per cent.

Overall, the underlying trend in the New Zealand economy remains one of a gradual recovery over the next few years, he said.

"This adds to the case for little urgency for the RBNZ to raise the Official Cash Rate."

Escalating concerns over European debt would continue to dominate the Reserve Bank's thinking and ASB expected interest rates to remain on hold till at least March next year.