By Lucy Craymer
WELLINGTON (Reuters) -New Zealand's economy grew more than expected in the second quarter underpinned by a pick-up in the services sector, and dodged a technical recession, which will help the government, under fire for its handling of the economy ahead of an election.
The stronger-than-expected expansion may worry the central bank, which has said it needs slower growth to dampen inflation, and could lead to rates being held at their highest in more than 14 years for longer than anticipated, economists said.
Official data out on Thursday showed gross domestic product (GDP) rose 0.9% in the June quarter, higher than analysts' forecasts of 0.5%, and followed a revised 0.0% in the first quarter.
Flat growth in the first quarter means the country was never technically in recession.
Annual growth increased to 1.8%, Statistics New Zealand data showed, above expectations of 1.2%.
The New Zealand dollar hit an intraday high of $0.5952 following the data but as of 0105 GMT was down 0.3% to $0.5913 due to U.S. dollar strength. Two-year swap rates jumped 12 basis points to 5.745%, the highest since 2008, but this was likely in part due to the U.S. Federal Reserve stiffening its hawkish stance.
Statistics New Zealand said growth in business services was particularly strong largely due to growth in computer system design, while the manufacturing sector benefited from a rebound following the impact of Cyclone Gabrielle in the first quarter.
New Zealand's governing Labour party, which is struggling in the polls three weeks out from the Oct. 14 election, was pleased with the turnaround in the economy.
"It's a victory for the New Zealand economy and for the people who work hard every single day to deliver high quality jobs," Finance Minister Grant Robertson told reporters.
The handling of the economy has been a central theme in this year's election with the opposition criticising the government's role in record high inflation and the slowing economy.
"Present headwinds mean we still expect the pace of activity to slow over the course of the next year, but the continued resilience of the New Zealand economy highlights the risk that OCR (official cash rate) settings will need to remain tight for a prolonged period to get inflation back into target," ASB economists said in a note.
The Reserve Bank of New Zealand (RBNZ) has been forecasting the economy would slip into recession in the second half of 2023.
The RBNZ has undertaken its most aggressive policy tightening since 1999, when the official cash rate was introduced, lifting it by 525 basis points since October 2021 to 5.50%. It said in May and again in August that it was likely done hiking.