3.8% growth beats forecast

Nick Tuffley
Nick Tuffley
Higher interest rates look likely next month, as New Zealand's economic growth soared in the three months to March.

Until recently, it was thought the Reserve Bank would leave the official cash rate at 3.25% until December but Statistics New Zealand's figures, released yesterday, showed economic growth of 3.8% for the year ended March.

Average annual growth was 3.3% and was expected to peak this year at 3.7%.

Gross domestic product (GDP) growth is expected to now top 4% in the year ended June, putting it among the top growth rates in the OECD.

''We expect the Reserve Bank will lift the OCR in July, barring events showing the economic outlook taking a sudden turn for the worst,'' ASB chief economist Nick Tuffley said.

The main event now before the July 24 OCR announcement was the second-quarter inflation figures due out on July 16.

The ASB expected a July OCR rise to be followed up in December and official interest rates to hit 4.5% in the second half of next year, he said.

The official figures showed construction provided a major contribution to economic growth in the quarter. As the earlier release of building work put in place data indicated, growth in both residential and non-residential construction was strong over the quarter.

This was partly offset by a fall in other construction activity, a component which tended to be volatile, given the lumpy nature of many infrastructure projects.

Total manufacturing activity was slightly softer than expected with the flat outcome reflecting a surprise fall in primary manufacturing over the quarter.

Mr Tuffley said strong growth in construction was providing not just a direct boost to the building sector but also other areas such as non-metallic mineral manufacturing which produced ready-mix concrete and plasterboard.

Reserve Bank research found construction was a key influence on domestic core manufacturing demand.

''We expect construction growth will underpin further growth in ex-primary manufacturing production over the next couple of years, although recent manufacturing sector surveys point to a more modest pace of expansion,'' he said.

Finance Minister Bill English said the GDP result was the latest in a run of encouraging economic indicators.

''Our challenge is to ensure this growth continues over the long-term because that's the best way to deliver more jobs and higher incomes for New Zealanders.''

Business and consumer confidence remained high, manufacturing activity had been expanding for almost a year and a-half and the current account deficit was less than half of what it was five or six years ago, he said.

There was still plenty of work ahead to ensure the positive indicators continued to translate into real opportunities and progress for New Zealanders and their families, Mr English said.

Council of Trade Unions economist Bill Rosenberg questioned whether most people would see money in their pockets as a result of the current high economic growth rates.

Economic growth was forecast to peak this year, yet wage growth had been slow.

''There is a real question whether the current growth will come and go with few people seeing the benefit of it in their own standing of living.''

There was an increasingly urgent need for policies to bring down the exchange rate, help industries create good, well-paying jobs, and ensure the income generated by the economy had benefits for wage and salary earners through rising wages, he said.


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