By Praveen Menon
WELLINGTON (Reuters) - New Zealand's economy expanded at a steady pace in the first quarter, thanks to solid construction activity, but policymakers are expected to cut rates again before year-end to underpin growth in the face of a slowing housing market and global demand.
Central banks around the world have either cut rates or turned decisively dovish in recent months to prop up their economies as an escalating Sino-U.S. tariff war hurts trade, investment and corporate profits. Overnight, the Federal Reserve opened the door to rate cuts in the coming months to combat rising economic risks.
In New Zealand, gross domestic product (GDP) data released on Thursday showed growth for the quarter ended March at 0.6%, meeting analysts' expectations but beating the central bank forecast of 0.4%. The economy grew at a similar 0.6% pace in the fourth quarter.
Yet, analysts say the headline numbers masked underlying weakness, with a slowing housing market and immigration adding to the rising external pressure on the economy.
The GDP data on its own may not prompt further action from the Reserve Bank of New Zealand at next week's meeting, said ASB Chief Economist Nick Tuffley.
"However, subdued business confidence and the continued deterioration in global economic conditions may still sway the RBNZ to cut the OCR at least once more," said Tuffley
Citing economic risks, the RBNZ cut its Official Cash Rate (OCR) for the first time in more than two years in May, taking it down 25 basis points to an all-time low of 1.50%. Analysts say given risks to the growth outlook, and with inflation moving further under the RBNZ's target midpoint of 2 percent, policymakers have enough room to ease again.
SOFT UNDERBELLY
The data drove the New Zealand dollar 0.3% higher to $0.6561, as traders bet the RBNZ would hold rates next week. Domestic bond yields had already dived overnight in the wake of the Fed with the two-year yield hitting an all-time low of 1.14%, far below the cash rate.
Year-on-year GDP growth picked up to 2.5% from 2.3% in the previous quarter, Statistics New Zealand said, and faster than the median analyst forecast of 2.4%.
Construction was the main driver of GDP growth in the quarter, rising 3.7%, compared with a 2.2% increase in the fourth quarter.
Yet, subdued service sector activity and household spending pointed to a "soft underbelly", ANZ Senior Economist Miles Workman said.
Private consumption grew just 0.4% quarter-on-quarter in a sign of weak momentum, with household expenditure on services up a measly 0.3%.
"Yes, today’s headline was a little stronger than we were expecting, but a softer underbelly remained," Workman said, adding that the weaker services sector activity was a better signal of underlying momentum given the industry accounts for two thirds of GDP.
Indeed, many analysts say slowing house price and population growth as well as global trade tensions pose risks to the economic outlook.
Prime Minister Jacinda Ardern's budget released last month focused on social 'wellbeing' goals over GDP, but flagged a smaller surplus and economic slowdown.
The Treasury department last month cut its GDP growth forecast to 2.1% in the year ending June 30, 2019, from the 2.9% expansion predicted in December.
"While the RBNZ will take some reassurance from today’s stronger-than-expected data, we doubt that economic activity will sharply accelerate from here in line with their forecasts," said Ben Udy, the Australian and New Zealand economist for Capital Economics.