New Zealand's quarterly growth hits fastest in two years, but challenges loom

By Charlotte Greenfield

WELLINGTON (Reuters) - New Zealand's economy grew at its fastest in two years last quarter, a surprise result in a gloomy business climate that could spare the central bank from any need to raise the prospect of a rate cut at its monetary policy meeting at the end of the month.

Statistics New Zealand figures out on Thursday showed quarterly gross domestic product grew 1 percent in the three months to the end of June, double the pace of the previous quarter.

Annual growth was 2.8 percent, again outpacing analysts' forecasts of 2.5 percent.

That easily beat market expectations of 0.7 percent, and the Reserve Bank of New Zealand forecast of 0.5 percent.

"The Q2 outcome is a significant positive surprise for the RBNZ," said Nick Tuffley, chief economist at ASB Bank.

"Q2 GDP reinforces that the momentum in the economy was relatively robust over the first half of the year despite some of the negative headlines and weak business confidence."

The RBNZ has expressed concerns over mounting business pessimism, which has hit its worst levels in a decade as the Labour-led government presses an agenda to reduce inequality and carbon emissions.

Governor Adrian Orr signalled in August that the RBNZ would consider a rate cut if gloomy business sentiment hampered investment and led to growth missing forecasts in coming quarters.

The New Zealand dollar jumped half a U.S. cent to a three-week high of $0.6652, though it later slightly pared its gains to trade around $0.6643.

CAUTION REMAINS

Though the GDP result would stave off worries that the RBNZ would imminently switch its bias towards a rate cut, the bank's underlying challenges and the fragile medium-term outlook for growth suggested it would keep rates on hold for some time yet.

"We expect that the RBNZ will 'look through' the temporary strength, but will be reassured by the underlying resilience in today's data, providing some breathing room to continue to 'watch, worry and wait'," said ANZ Chief Economist Sharon Zollner.

The bank will announce its next official cash rate decision on September 27 and is seen as all-but-certain to keep rates at a record low of 1.75 percent for the 13th time in a row.

The risk of business pessimism filtering through to economic performance still lingers, economists say, with growth expected to ease off in 2019.

"We still believe that the combination of low confidence, a subdued housing market and easing net migration will result in growth slowing further next year rather than accelerating as the RBNZ hopes," said Paul Dales, chief Australia and New Zealand economist at Capital Economics.

Inflation has also remained stubbornly below the bank's target mid-point of 2 percent in recent years, and Thursday's GDP report showed the inflation measure for the domestic economy, excluding trade, was flat for a second straight quarter.

Gains in the second quarter were broad-based but led by agriculture as the dairy industry bounced back with gusto from bad weather that had hampered production.

That helped propel growth in agriculture to 4.2 percent, the sector's largest gain in almost four years.

(Reporting by Charlotte Greenfield; Editing by Eric Meijer)