News: UPDATE 2-New Zealand Q3 economic growth tops expectations, outlook pales

• NZ posts Q3 GDP of 0.6 pct
• Beats analysts' forecasts of 0.5 pct
• NZ dlr rises 0.4 pct

(Re-casts, updates market reaction adds economist comment)

New Zealand's economy grew faster than expected in the third quarter, sparking a rally in the local dollar, but downturns in some sectors pointed to a more muted outlook than the new government would like.

Official figures out on Thursday showed a rebound in the construction sector drove gross domestic product up 0.6 percent in the three months ending September, topping economists' forecasts of 0.5 percent, but falling well short of the revised 1 percent hit the previous quarter.

The announcement drove the New Zealand dollar up 0.5 percent to $0.7015.

Thursday's GDP figures were the first since the centre-left Labour Party took office in October and suggest it may have to grapple with a slower economy next year.

Annual expansion was 2.7 percent, beating the 2.3 percent forecast by economists, but still suggesting growth could undershoot the government's forecasts of 3.3 percent in the year to June 2018.

"I think, it will be safe to say, even with those new numbers we will be forecasting sub-3 percent," said Stephen Toplis, chief economist at BNZ Bank.

Statistics New Zealand revised its GDP figures for previous years, raising 2015 growth to 3.6 percent from 2.4 percent and 2016 to 4 percent from 3 percent.

Economists said the revision gave the RBNZ even more reason to hold its official cash rate at a record low because the revision underlined tame inflation even as the economy had raced ahead.

"With growth having been much faster but CPI inflation the same, either there was more spare capacity than thought or the inflation pulse is much weaker," said Paul Dales, chief Australia and New Zealand economist at Capital Economics.

"This supports our view that low inflation will keep interest rates stuck at 1.75 percent for all 2018 and a lot of 2019 too."

One bright spot in the latest figures was the construction sector, which grew 3.6 percent, unwinding two quarters of falls as investment poured into rail, road and other infrastructure.

But growth was dented by dairy production, which had been hampered by wet weather and lower global prices.

Economists cautioned that the economy also faced headwinds as the housing market slowed and as the dairy sector hit production hurdles from more extreme weather thanks to an unusually dry summer.

Quarterly growth undershot the Reserve Bank of New Zealand's 0.7 percent forecast, an outcome likely to reinforce the RBNZ's determination to keep rates on hold for years.