Economic growth above OECD average won't stop Reserve Bank rushing to cut rates again - economists

New Zealand's annual economic growth is comfortably above the average for OECD countries but that's unlikely to stop the Reserve Bank rushing to cut interest rates again at its earliest opportunity on July 23, economists say.

Gross domestic product grew at just 0.2% in the first quarter, a third of the pace expected by the central bank and economists, and the weakest in two years. Both the oil and gas, and dairy sectors suffered from weaker prices in the first quarter, which resulted in lower production. Milk output was also hurt by drought. Annual average growth was 3.2%.

Market reaction to the data was swift. The kiwi dollar shed about half a US cent to trade recently at 69USc and swap rates fell. Economists at ANZ Bank New Zealand revised its projection for the official cash rate, adding a third cut this year following one already penciled in for July. Others, including ASB Bank, have brought forward the projected timing of an official cash rate cut to July from September and traders are pricing in a 68% probability of a cut next month, based on the overnight interest swap market.

"While most of the areas of weakness are unlikely to be sustained, we still expect the weaker result should be enough cause for concern on its own – particularly given the Reserve Bank's relatively bullish medium-term growth forecasts," said Jane Turner, senior economist at ASB. "We can no longer see why the Reserve Bank will wait until September."

In defending the government's economic performance, Finance Minister Bill English said the Treasury had anticipated a downturn in dairy output, while growth in retail trade, accommodation and construction suggested the economy was enjoying "solid, sustainable" growth.

Mr English also noted that annual growth in New Zealand at 2.6% in the year (or 3.2% on an annual average basis), was faster than the 1.9% average rate for countries in the Organisation for Economic Cooperation and Development.

ASB's Ms Turner said key areas of weakness in the first quarter were unlikely to be sustained. For example, milk production appeared to have picked up as drought abated.

Reserve Bank governor Graeme Wheeler cited the slump in global dairy prices and the impact on the terms of trade in last week's monetary policy statement, estimating farmers' incomes in the 2014/15 season would be down about $7 billion.

Agricultural industries contracted 2.3% in the quarter, today's data showed, reflecting lower milk production. In this week's GlobalDairyTrade auction, dairy prices fell to their lowest levels in almost six years.

The mining sector shrank 7.8%, "due to decreased exploration activity, and oil and gas extraction," the government statistician said. "There was less extraction and exploration as international prices fell."

The combined 2.9% decline in primary industries more than offset gains in business services, up 2.1%, retail trade and accommodation, which rose 2.4% on the back of tourist spending, and a 2.5% increase for transport, postal and warehousing, led by international air transport.

Retailing and accommodation recorded annual growth of 6.1%, the fastest in almost a decade, helped in the quarter by international events such as the Cricket World Cup and Chinese New Year. International tourist spending rose 2.3% in the latest quarter.

The expenditure measure of GDP grew just 0.1% in the first quarter, slowing from a revised 1.2% increase three months earlier. Household consumption rose 0.7%, led by spending on durable goods, and exports of goods and services gained 1.5%. Imports of goods and services rose 1%.

Inventories grew by $106 million, reflecting a build-up in agriculture and forestry. Investment in fixed assets fell 1.9%.

(BusinessDesk)