New Zealand third-quarter growth tempered by weak commodities, to keep central bank sidelined

WELLINGTON (Reuters) - New Zealand's economy is expected to have slowed in the third quarter, weighed by a sharp slide in commodity prices and keeping pressure off the central bank from raising interest rates until well into 2015.

Cooling growth in China, New Zealand's major trading partner, and a general weakening in the global outlook argues for the Reserve Bank of New Zealand to take a cautious approach after it raised the cash rate to 3.5 percent in four quarter percentage point moves this year.

Economists polled by Reuters expect the data on Thursday to show that gross domestic product rose 3.3 percent in the 12-months to September, enviable by global standards but slowing from a near-decade high of 3.9 percent in the second quarter.

Quarter-on-quarter growth is seen underpinned by an increase in the production of dairy products, the country's biggest export earner.

But activity in the wider agriculture, forestry and fishing sector is expected to be tempered by falling global commodity prices as China slows its buying of commodities as the world's second-biggest economy steps back to a lower tempo.

"The forestry sector is likely to be the biggest underperformer by a wide margin," Westpac senior economist Michael Gordon wrote in a note.

"Like with dairying, world prices for logs have fallen this year as Chinese demand has slowed."

The data, which will include historical revisions, is also forecast to show the economy grew 0.7 percent on the previous quarter, unchanged from the second quarter and slightly slower than the RBNZ's forecast of 0.9 percent.

Such a reading would bolster expectations the central bank may wait until late 2015 or early 2016 before resuming its monetary tightening cycle - in line with signals from the RBNZ.

DAIRY RISKS

Economists say a quarterly reading of around 0.7 percent would suggest economic growth momentum remains, albeit at a slower pace compared with the past year.

As a result, the RBNZ will likely hold rates while it continues to monitor the impact of a solid economy on annual inflation, which has cooled to 1 percent, well below the central bank's 2 percent target.

"The economy looks like it will be tracking at or above its potential growth rate, possibly slightly above, which means that over time, growth will add slightly to inflation pressures," ASB economist Nick Tuffley said.

"At the moment the Reserve Bank is quite happy to just wait and get a better handle on how sensitive inflation is to capacity pressure in the economy."

As a glut of global dairy supply has knocked prices 50 percent this year, economists see risks of slowing activity in the dairy industry as farmers produce less milk, crimping economic growth.

On the upside, construction demand remains solid, supported by a strong housing market and earthquake reconstruction projects in the Canterbury region. Domestic demand is also seen picking up thanks to ongoing immigration.

"There's less of a pick up happening around now in an annual growth sense but less of a moderation coming down the track so we've got a smoother growth outlook, a transition from a bit above 3 percent to a bit below," ASB's Tuffley said.

(Editing by Shri Navaratnam)