Economic growth continues

The New Zealand economy grew at the fastest quarterly pace in three years in the tail-end of last year as demand for forestry exports underpinned gains in the primary sector. The kiwi dollar climbed on the figures.

Gross domestic product grew 1.5 per cent to $36.81 billion in the three months ended December 31, from a 0.2 per cent pace in the September period, according to Statistics New Zealand.

That's almost twice the 0.8 per cent pace of expansion predicted by the Reserve Bank in its latest forecasts published last week and the fastest pace since December 2009.

The economy grew at an annual pace of 2.5 per cent, the highest annual GDP growth since March 2008. Activity in the December quarter was 3 per cent higher than the same period in 2011.

The New Zealand dollar jumped to 82.58 US cents from 82.23 cents immediately before the figures were released. The trade-weighted index rose to 76.08 from 75.79 and the kiwi climbed to 79.57 Australian cents from 79.18 cents.

Primary industries activity grew 3.2 per cent in the December period, underpinned by a 9 per cent lift in forestry, and is at the highest level since the series began in June 1987. Those gains offset a fall in dairy production, which was reflected in a decline in dairy product exports.

Primary industries grew 9.4 per cent on an annual basis, led by a 15 per cent gain in agriculture from favourable season at the start of the year.

The strength in the primary sector comes before official figures start showing the impact of the drought conditions across New Zealand's North Island. The arid climate has seen dairy prices surge on dwindling supply, and the potential cost of the drought has been put as high as $2 billion.

Statistics NZ said the impacts won't show up until more comprehensive data is known. The Reserve Bank trimmed 0.2 to 0.3 of a percentage point from its first half GDP forecasts to account for the drought.

Westpac Bank economist Dominick Stephens said the data was "much stronger than the Reserve Bank or other economists had forecast. It was a little stronger than our top-of-market pick of 1.2 per cent."

Growth was very broad-based and significantly, said Stephens , the service sectors had their strongest quarter in six years.

"The complexion of the data show that the economy is experiencing a generalised upturn in domestic demand," he said. "Weather conditions were still fairly favourable to farm production in the December quarter. The drought will not really impact GDP data until the June 2013 GDP numbers are released in six months' time."

"The Canterbury rebuild amounts to a huge stimulus for the New Zealand economy. We have long expected it to provoke a high rate of GDP growth, inflation pressures, and eventually interest rate hikes. The first phase of this process is now confirmed," he said.

"That said, we do not expect a repeat of this extremely high growth rate over the coming quarters, as it was partly payback for the weak growth experienced in mid-2012. We are forecasting quarterly GDP growth rates of just-below 1 per cent in 2013, although the June quarter could be weaker due to drought."

Stephens said today's GDP figures were "a significant development. Markets have long doubted the stimulatory effect of the Canterbury rebuild - those doubts will now be dispelled."

"To put it in perspective, the surprise to the Reserve Bank today is equivalent to the maximum downside impact they could reasonably build in for drought. We feel this data is a step towards backing our call for earlier and more aggressive OCR hikes than the market is currently pricing."

Retail trade and accommodation grew 2.3 per cent in its biggest quarterly gain since March 2007, with increased spending across the board. It has expanded 3.5 per cent on an annual basis.

Construction grew 1.8 per cent in the quarter, its fifth straight gain, on the strength of heavy and civil engineering. The sector has grown 6.1 per cent annually, though is still below it speak in June 2010.

Manufacturing was the only sector to contract in the quarter, shrinking 0.5 per cent. The decline was its second in a row, the first time it has reported two consecutive contractions since September 2010. The decline was put down to an 8.7 per cent fall in petroleum, chemical, plastic and rubber products manufacturing.

The expenditure measure of GDP, which measures the final purchases of locally produced goods and services, grew 1.4 per cent in the quarter, and was up 3 per cent annually.

Household consumption grew 1.6 per cent in the quarter, the biggest gain in six years, with increased spending across the board. Spending was up 2.3 per cent in the year.

Gross fixed capital formation, which is made up of business investment and residential building investment, grew 2.2 per cent in the period, with a 2 per cent gain in residential investment and a 2.2 per cent lift in business investment. GFCF grew 6.6 per cent annually.

Inventories were run down by $131 million in the quarter, after a revised build-up of $389 million in the September period. The run-down came from falling manufacturing and agriculture inventories.