Economy continues on modest recovery track

BUSINESSDESK: The New Zealand economy continues to pick up pace in the first quarter, reflecting record milk production and increased livestock sent for slaughter and affirming the nation remains on a modest recovery track.

Gross domestic product grew 0.5% in the first three months of the year, based on a Reuters survey of 13 economists. That would continue the mild pick-up in growth after GDP rose 0.2% and 0.3% respectively in the final two quarters of 2011.

A 0.5% pace would exceed the central bank’s latest estimate, released last week, of 0.4% for the first quarter, a rate it expects continued through the second quarter.

The Reserve Bank kept the official cash rate unchanged at 2.5% 0n June 14 and pushed out the track for future increases, while showing it doesn’t share Treasury’s view of a return to fiscal surplus by 2015.

All the state agencies are grappling with volatile numbers in making their economic forecasts.

Statistics New Zealand revised its quarterly retail sales data to a smaller decline of 0.6%. On the strength of the revisions, some economists revised their GDP numbers.

“While the global backdrop presents downside risk to New Zealand’s economic outlook and the absolute rate of activity growth is still subdued, we forecast this sequential improvement in growth momentum to continue gradually over 2012,” Philip Borkin, economist at Goldman Sachs, said in a report.

Mr Borkin lifted his quarterly forecast for GDP to the survey average 0.5% from 0.3%.

Christina Leung, economist at ASB, sees 0.6% growth in the quarter.

"A large part of this reflects an increase in milk production and livestock slaughter, which we expect will have boosted agriculture and food manufacturing production over Q1," Ms Leung says. Growth of 0.6% was "modest" as it will remain over the coming months.

The Reserve Bank's revised forecasts are for a weaker track of GDP growth in the first half of 2012 from what it was picking in the March MPS.

The cycle peaks a quarter late with March 2013 GDP forecast at 0.9% versus the March estimate of growth peaking at of 1% stating in December this year.

“The resulting moderation in export incomes, although partially offset by depreciation in the exchange rate, will weigh on economic activity in New Zealand," governor Alan Bollard said last week.

The central bank expects housing market activity, spurred by lower interest rates, and rebuilding in Canterbury will lift construction activity in coming quarters.

In the first three months of the year, the value of residential building work put in place fell about 1.5% to $1.35 billion, government figures show. Non-residential construction rose 1.8% to $1.15 billion.

That left the overall value of work put in place unchanged at $2.5 billion.

Traders have almost given up their bets that Dr Bollard will cut the official cash rate any time soon. Some 12 basis points of cuts are priced into the Overnight Index Swap curve for the next 12 months.

That is up from almost 50 basis points of cuts to the official cash rate seen in early June.