New Zealand's economy is spluttering right when it shouldn't be spluttering

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New Zealand’s economy spluttered its way though the first three months of the year, continuing the trend seen in the final quarter of 2016.

According to data released by Statistics New Zealand (StatsNZ), quarterly GDP rose by 0.5% in the March quarter (production basis), a slight acceleration on the 0.4% increase registered in the December quarter last year.

The modest increase saw annual growth slow to 2.5%, down from 2.7% in the prior quarter.

While seemingly a solid increase, and one that many other developed nations would be envious of, the increase missed expectations for a larger gain of 0.7%.

Source: StatsNZ

Gary Dunnet, national accounts senior manager at StatsNZ, said weakness in the construction sector contributed to the underwhelming result, offsetting growth in most other industries during the quarter.

“Much lower building activity combined with mixed results for the service sector took the shine off higher dairy production and saw a second quarter of moderate overall GDP growth,” he said.

Construction fell 2.1%, led by a slump in non-residential building. It was the first decline reported since the June quarter of 2015.

Helping to offset that drag, StatsNZ said a majority of industries grew during the quarter, with agriculture and retail trade logging the largest increases.

“Agriculture grew 4.3% due to higher milk production,” it said. “This flowed through to higher dairy product manufacturing, which contributed to the overall rise in food, beverage, and tobacco product manufacturing.”

Strong growth in retail trade, manufacturing and healthcare also helped to boost growth, rising 1.8%, 1% and 1.6% respectively from the prior quarter.

According to economists at ASB Bank, who correctly forecast the GDP result, the recent deceleration in growth does not fit with robust business confidence surveys.

“The New Zealand economy is supposed to be humming on the back of strong population growth, improving export incomes and low interest rates. On the other hand, sub-trend growth could be an early warning that the economy is not firing on all cylinders,” they wrote in a note before the GDP report was released.

From an expenditure basis, the group said GDP grew by a smaller 0.2% for the quarter.

Household consumption expenditure increased by 1.3%, while investment in fixed assets grew 1.2%. With export volumes falling as import volumes rose, net exports detracted from quarterly growth.

Revealing the impact of high population growth, the group said that GDP per capita fell 0.1%, following a larger 0.2% decline in the final three months of 2016.

Over the year per capita GDP grew by 0.9%.

As a result of the small increase in growth, StatsNZ said the size of the New Zealand economy grew to $NZ265 billion.

The New Zealand dollar has fallen modestly in response to the underwhelming report, fitting with the view expressed by ASB’s economics team that it provides no catalyst for the RBNZ to start hiking rates.

“The RBNZ has a full year — if not more — to figure out just how strong the economy really is,” they wrote.

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