N.Z.’s Economy Expanded More Than Forecast on Construction

New Zealand’s economy expanded more than forecast in the second quarter from a year earlier as increased construction activity offset the drag from the worst drought in 30 years, sending the nation’s currency higher.

Gross domestic product grew 2.5 percent in the three months through June from the year-earlier period, Statistics New Zealand said in a report in Wellington, beating the median forecast of 2.3 percent in a Bloomberg survey of economists. Growth slowed to 0.2 percent in the second quarter from an upwardly revised 0.4 percent in the first, matching estimates.

Central bank Governor Graeme Wheeler this month said he is likely to start raising interest rates next year as the pace of growth picks up to the fastest since 2007, led by consumer spending, house construction and rebuilding in earthquake-damaged Christchurch. He said he expected to keep borrowing costs unchanged in 2013 at a record-low 2.5 percent.

“Aside from drought-induced volatility, the New Zealand economy is firmly in the grip of a widespread upturn,” Michael Gordon, senior economist at Westpac Banking Corp. in Auckland, said in an e-mailed note. “The driving forces are the Canterbury construction boom and rising house prices,” which are starting to stoke consumer spending, he said.

New Zealand’s dollar rose to as much as 84.07 U.S. cents, the highest since early May. It bought 83.92 U.S. cents as of 12:34 p.m. in Wellington from 83.33 cents before the data.

Christchurch Rebuild

The central bank on Sept. 12 projected annual growth will be 3.5 percent by the second quarter next year, led by the NZ$40 billion ($33 billion) rebuild in the South Island city of Christchurch, where houses, roads, shops and commercial buildings were destroyed by earthquakes in 2010-11.

“Business and consumer confidence have been high and the Canterbury rebuild continues apace,” Finance Minister Bill English said in a statement today. “All these factors mean that we can anticipate relatively strong growth resuming in the September quarter.”

Wheeler last week said he expected to start raising borrowing costs next year, citing the outlook for inflation amid the housing boom and pick-up in consumer spending.

Thirteen of 15 economists surveyed by Bloomberg News earlier this month expected he will raise the rate by March 31.

Construction Surge

Construction expanded 15 percent in the second quarter from a year earlier, led by residential building and civil engineering projects on roads and bridges.

Farm output fell more than 10 percent in the first half of the year as the drought hurt milk and meat production, the statistics agency said. New Zealand in March declared a drought across the entire North Island including the province of Waikato, its biggest milk producing region.

“The cumulative effect of the drought has been significant,” the agency said in the report. “Because of the strong increase in slaughter numbers, especially for dairy cows, it may take longer to recover from than previous droughts.”

Quarterly growth matched economists’ expectations as construction expanded, offsetting a drop in farm output and manufacturing, today’s report showed. Residential building fell for the first time in five quarters.

Retail spending and business services such as architecture increased in the quarter from the previous three months. Electricity generation declined, reflecting a warmer-than-normal autumn.

The expenditure measure of GDP increased 0.1 percent in the quarter, led by household spending and investment, today’s report showed. Exports fell. Spending on durable goods such as furniture and cars contributed most to the rise in consumption, the statistics agency said. Purchases of services also rose.

Business spending on civil engineering projects rose the most since 1992, the agency said. Investment in plant and machinery also increased. Exports, which make up about 30 percent of the economy, declined 5.9 percent as overseas shipments of meat and dairy products dropped. Imports gained.

Before it's here, it's on the Bloomberg Terminal.