The economy grew more than expected by the Reserve Bank (RBNZ) and most bank economists in the three months to March.

Gross domestic product (GDP) rose 0.6% in the quarter - the same rate it grew by in the December quarter.

Year-on-year GDP was up 2.5% (Statistics New Zealand revised its year-on-year figure for the December quarter up from 2.3% to 2.5%).

This data paints a rosier picture of the economy than the RBNZ anticipated when it in May cut the Official Cash Rate (OCR) and revised its forecast for the quarter down to 0.4%, and its forecast for the year down to 2.2%.

On the face of it this indicates the RBNZ might not move as quickly as some economists expected in cutting interest rates, however looking at the drivers of growth, the economy doesn't look a whole lot stronger than it previously did.

The NZ dollar only rose slightly from 65.4USc to 65.6USc on the news.

Weakness behind strong headlines

Growth in the quarter was largely driven by construction activity, which was up 3.7% from the previous quarter. Investment in non-residential buildings was up 9.9%, while investment in residential buildings was up 2.7%. Expenditure in these sectors hit record highs (on a seasonally adjusted basis).

Manufacturing activity was also up 1.4% in the quarter. The biggest drivers were food, beverage and tobacco manufacturing, metal product manufacturing and mineral manufacturing.

There was a fall in transport equipment, machinery and equipment.

A dark spot in the data was slowing growth in the services sector, which makes up a notable two thirds of GDP.

Services sector growth slowed to 0.2% - the slowest rate since the September 2012 quarter.

The main drivers of growth here were health care and social assistance, and transport, postal and warehousing. Meanwhile lower visitor arrivals saw activity in accommodation and restaurants slow.

Turning to the primary sector, which only makes a 7% contribution to GDP, activity fell 0.7%.

Agriculture activity was down 2.3%, largely due to bad weather. This was offset by mining, which picked up substantially due to higher oil and gas exploration activity.

GDP per capita - a measure that reflects productivity and has been stubbornly low for some time - only rose 0.1% in the quarter, a slow-down from the previous quarter.

Economists' reactions

ASB chief economist Nick Tuffley maintained the GDP figures on their own may not be enough to convince the RBNZ that the economy needs further stimulus.

"Yet subdued business confidence and the continued deterioration in global economic conditions may prompt it to make one more cut," he said.

"Furthermore, we believe that the strong Q1 lift in construction output masks a relatively soft quarter for economic growth."

On this point, Kiwibank economists Jarrod Kerr and Jeremy Couchman pointed out the strength in construction growth may not last as capacity constrains bite. They also flagged concerns weak services sector growth.

Tuffley went on to say: "We continue to expect the RBNZ will cut the OCR 25 basis points again later this year, with August still the most likely timing for that cut."

Westpac senior economist Michael Gordon's take was: "Today’s result should give the RBNZ some comfort about the state of the local economy, at a time when global risks are mounting.

"That said, the indicators for the June quarter so far have been subdued."

The RBNZ had expected GDP growth to hit a floor in the June quarter.

ANZ senior economist Miles Workman said: "The real test for the RBNZ’s outlook won’t occur until the forward-looking indicators for growth in the second half of the year begin to roll in.

"That’s because the RBNZ are forecasting quite a strong pickup in economic momentum that we think is on the optimistic side.

"While we agree in broad terms that the growth slowdown is bottoming out and will begin to turn a corner from mid-year, we think the improvement will be relatively gradual.

"And that implies softer-for-longer inflationary pressures, which in turn justifies a lower OCR."