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Monthly Economic Indicators

Executive Summary

  • GDP expected to fall around 1% in the March quarter
  • Inflation continues to ease
  • Signs of stabilisation in the international economy

Information over the past month indicates that demand and output contracted further in the March 2009 quarter.  Household spending, business investment and exports are all likely to have been cut back further in the quarter.  Overall, we estimate that real GDP fell by around 1% in the March quarter.

Falling demand and output have led to further declines in capacity utilisation and the demand for labour has weakened.  Inflation in the year to March 2009 eased to 3.0%, and is expected to continue to decline over the medium term. 

Internationally, the economic data released over the past month indicates that the sharp decline in output recorded in many countries in the December 2008 quarter has probably been repeated in the March quarter.  The IMF and other international agencies revised down their forecasts of world economic growth over 2009 and 2010, reflecting their view that financial stabilisation will take longer than previously expected.  Output in New Zealand’s major trading partners, weighted by their share of exports, is forecast to contract around 2½% in 2009.

There is now considerable economic stimulus in place in most countries, which has given market participants some confidence that the risks of either another financial meltdown, or a further precipitous drop in activity around the world, are being reduced.  Trading partner growth is expected to return in 2010, but at 2% or less, will be well below what could be considered the normal rate.

Our estimates of trading partner growth are now well below those in our December Economic and Fiscal Update, which will feed through to a much weaker outlook for the New Zealand economy in this month’s Budget Economic and Fiscal Update.

Global equities and commodities have recovered strongly over the past six weeks or so, and various macroeconomic indicators have begun to stabilise.  Nonetheless, these signs of recovery are tentative and in the short term, the fall in world economic activity will lead to a further deterioration in bank balance sheets as asset values continue to degrade.  Until banks’ balance sheets have been repaired through some combination of restructuring and recapitalisation, risks remain that banks’ problems will continue to exert downward pressure on economic activity.  The prospects for global recovery are therefore dependent on the rate of progress towards returning the financial sector to health. 

In our Special Topic we take a look at the largest component of the current account deficit, the deficit on investment income, and its likely evolution over the next few years.
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