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UDPATE: NZ economy grows 1% in 3Q as primary sector keeps momentum going

New Zealand's economy grew at a faster pace than expected in the September quarter as a good start to the dairy season and increased oil and gas activity stoked activity.

Gross domestic product expanded 1 percent to a seasonally adjusted $53.87 billion in the three months ended Sept. 30, ahead of the 0.7 percent forecast in a Reuters poll of economists and accelerating from the 0.7 percent pace in the June quarter, according to Statistics New Zealand. The annual pace of economic growth edged up to 2.9 percent from a revised 2.8 percent pace in the June quarter.

The government statistician changed its methodology in how it measures GDP, which led to a series of downward revisions in past quarters. UBS senior economist Robin Clements said the revisions still paint a picture of a strong economy, even if the headline is slightly lower.

"We're not showing signs of weakening," Clements said. "Three percent is still damn good compared to our history and compared to what's going on offshore."

The New Zealand dollar spiked briefly on the announcement but dropped back to 76.95 US cents after hitting 77.44 cents, from 76.93 cents just before the 10.45am release.

Primary production led the quarterly expansion with agricultural activity growing 4.7 percent on increased milk production and an 8 percent lift in mining activity, which was driven by increased oil exploration and oil and gas extraction. Primary sector activity grew 1.7 percent on an annual basis, led by a 3.9 percent increased in mining production.

"This is some of the strongest growth in the primary industries for 15 years," Statistics NZ national accounts manager Gary Dunnet said in a statement. "Milk production had a good start to the season, while oil exploration, and oil and gas extraction also grew."

Treasury forecasts this week expect economic growth will peak in March 2015 as growth in the booming construction sector slows down and as falling global dairy prices weigh on export receipts. Still, the tepid pace of inflation has surprised forecasters and the economy is now expected to have greater potential output without putting strain on consumer prices.

Clements said economic growth is showing up across all sectors, and he anticipates interest rates will eventually have to rise despite current low inflation.

"We'll still get to the point where we need to put rates up," he said.

Today's figures show construction activity shrank 1.2 percent in the September quarter, for an annual expansion of 12 percent. Manufacturing grew 2 percent, turning around two quarters of contraction, led by increased activity in metal product manufacturing and machinery and equipment manufacturing, and was up 2.1 percent in the year.

New Zealand's services sector, which makes up about two-thirds of the economy, grew 0.3 percent in the quarter, led by a 3.5 percent gain in information media and telecommunications, which snapped three quarters of contraction. A 2 percent contraction in business services and a 2.6 pecent decline in transport, postal and warehousing activity weighed on the sector. Services activity grew 2.2 percent on an annual basis.

Investment in residential property was flat in the quarter, while non-residential investment grew 4.4 percent and other construction, such as infrastructure and engineering, shrank 17 percent. Investment in plant, machinery and equipment grew 9.3 percent in the quarter, transport equipment investment expanded 16 percent, and investment in intangible fixed assets grew 2.4 percent.

Total business investment grew 3.8 percent in the quarter, accelerating from a 2.7 percent pace in June. Gross fixed capital formation expanded 3.5 percent.

On the expenditure measure of GDP, the economy grew 1.3 percent in the quarter, for annual expansion of 2.6 precent, driven largely by a 16 percent lift in residential building investment. Private consumption was up 1.5 percent in the quarter, underpinned by a 1.5 percent increase in household spending. Central government spending grew 0.2 percent in the September quarter, while local government spending grew 1.9 percent.

Real gross national disposable income, which measures the country's real purchasing power, grew 0.1 percent in the quarter for a 4.8 percent lift in the year .