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24-09-2007

Cautious predictions over slowing economy

Economists are expecting a slowing in June-quarter gross domestic product figures due out on Friday, compared with a boisterous 1 per cent in the March quarter, but hopes of an interest rate cut are a way off.

The Reserve Bank is predicting a 0.5 per cent rise in gdp, and market picks are anywhere between 0.4 per cent and 0.8 per cent.

At the top end, Westpac economist Doug Steel said the growth would be centred on the services sector, with retail below par for the quarter.

Manufacturing and construction would contribute to the growth, he said, while household spending had taken heed of interest rate increases and fallen back from previous levels.

ASB economist Daniel Wills was slightly more conservative, with a 0.6 per cent forecast due to the dip in household spending and a lag in the export sector recovering from previous high currency levels.

Exporters remained under pressure from a strong Kiwi dollar throughout much of the quarter and were only now back to a reasonable exchange rate, he said.

"Exports should eventually take over as a principal growth driver - although the timing of this pick-up is uncertain," Mr Wills said.

International uncertainty caused mainly by volatility in United States markets would affect this, but continued growth was still expected, led by dairy exports.

Mr Steel said a result on Friday around the 0.8 per cent mark would make the strongest half-year gdp growth since 2004 and be an unwelcome surprise for the Reserve Bank.

Even at 0.6 per cent, the bank was unlikely to take enough encouragement from the figures to cut the official cash rate at its next meeting on October 25, Mr Wills said.

The result was likely to indicate the central bank was some way off from relaxing its inflationary outlook, he said.

"The first OCR cut remains unlikely until the second half of 2008 at the earliest."

Credit Suisse predictions supported this view, giving a 2 per cent chance of a rate cut next month.

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