GDP probably dominated by drought flow-on and quake rebuild

Drought and the Christchurch rebuild are expected to dominate the GDP data out tomorrow, with economic activity expected to have grown by 0.7% in the three months ending in March.

GDP, or gross domestic product, is a measure of the output produced in an economy.

ASB senior economist Nick Tuffley said 0.7% growth would build on the strong 1.5% increase in the December quarter and would largely reflect the effects of the drought and Canterbury earthquake rebuilding.

Increasingly dry weather in late February and March led farmers to bring forward livestock slaughter and reduce milk production.

''We expect the negative effects of the drought will be largely seen in the June quarter, after some farmers dried off their dairy herds earlier than usual and livestock slaughter fell from the spike in early 2013.

''These factors will likely be reflected in a drop in dairy production and primary manufacturing activity in the second quarter.''

There were anecdotes of farmers holding off slaughter of remaining stock in anticipation of higher prices, he said.

Fonterra had indicated milk production continued to fall in April and May because farmers dried off herds earlier than normal ahead of winter.

The substantial amount of rain before the winter cold set in was encouraging for pasture growth for the next production season.

Mr Tuffley expected milk production would recover to almost normal in the 2013-14 season.

In contrast, for lamb and beef farmers the negative effects of the drought were likely to persist to next season, given the lower quantity and quality of stock farmers were left with in the wake of the drought, as well as weaker prices.

Building activity data pointed to strong construction movement in Canterbury as the rebuild gathered momentum, he said. Stronger house-building demand in Auckland was also underpinning strength in residential construction.

''We expect these two factors will remain the key drivers of higher construction activity over the coming years as the New Zealand economy continues to recover.''

The ASB forecast of 0.7% growth in the first quarter was in line with what the Reserve Bank was likely expecting, he said.

On balance, there was some upside risk to the forecast, reflecting the potential for transport and services activity to be stronger than expected.

The Reserve Bank was more confident about the sustainability of growth in the New Zealand economy. Recent activity indicators had been encouraging with continued improvement in business confidence pointing to a recovery in household consumption and business investment.

''We expect the household sector will continue to recover over the coming year although high household debt and the modest recovery in the labour market may be constraining factors,'' Mr Tuffley said.

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