21 Mar 2014

Growth rate may be underestimated

8:30 am on 21 March 2014

The strength of economic growth is likely to have cemented the Reserve Bank's signalled hikes to the official cash rate and has some economists concerned the rate of expansion is being underestimated.

Official figures show the economy grew a seasonally adjusted 0.9 percent in the three months to December, compared with 1.2 percent growth in the previous quarter, which was revised down from 1.4 percent.

Activity in the December quarter was 3.1 percent higher than the same quarter in 2012.

Manufacturing rose 2.1 percent, driven by increased activity in food, beverage, and tobacco manufacturing and is now at its highest level since March 2006.

Expenditure rose during the quarter, household spending led the way with a 1.3 percent rise, as more consumers splashed out on durable goods and services.

A decline in dairy and livestock production drove a 2 percent fall in agriculture, forestry and fishing, however, this was from a high base in the September quarter as the sector recovered from drought.

Bank of New Zealand head of research Stephen Toplis says the economic expansion is widespread across sectors.

He says the momentum is likely to accelerate further in the next 12 months with a lot of impetus from the construction sector, strong population growth and money coming in from the dairy sector.

Mr Toplis says the household sector is also doing well with real wages going up, employment going up and interest rates are still very low.

He says if the economy is stronger than anticipated it means that inflationary pressures will rise more quickly than anticipated and that would lead to higher interest rates.

But Mr Toplis says it's not just a negative occurrence because a stronger economy also creates more jobs and more wealth.