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Monthly Economic Indicators

Executive Summary

  • International data point to an improved global outlook, but still fragile recovery.
  • Stronger recovery in New Zealand likely, due to improved global conditions, higher migration, and increasing confidence.
  • Composition of growth likely to be unfavourable for the unwinding of imbalances.
  • Unemployment increases and will continue to do so into next year, although peak lower than we previously predicted.

The overall tone of international data released over the past month was of an improving global outlook.  GDP figures for the June quarter surprised on the upside, with positive growth recorded in Australia, Germany, France and Japan.  Forward looking indicators of manufacturing activity generally increased with some at expansionary levels.  There are also tentative signs of stabilisation in the US housing market, although risks remain.

The Chinese economy is playing an important role in supporting global activity and is becoming an increasingly important destination for Australasian exports.  However, the recovery remains fragile with concerns about how sustainable it will prove once monetary and fiscal stimulus begins to be removed.  Such doubts impacted on the Chinese share market over August with nervousness spreading to other markets in early September.

Falling imports, reflecting weak domestic demand, were a key driver of a narrowing in the annual merchandise trade deficit from $3.1 billion in June to $2.5 billion in July.  The growing importance of China was also apparent in these figures with Chinese demand helping to support exports.  The value of annual exports to China has grown 61% over the past year with China now New Zealand’s third largest export destination.

A broad-based increase in business confidence was seen in the National Bank’s Business Outlook survey, with expectations about businesses’ own activity levels increasing to a near five year high.

Continued rises in the exchange rate over August meant that the New Zealand dollar over July and August was around 21% higher than in the Budget Forecasts, limiting the gains from the recovery in overseas demand.  There are also signs that domestic spending may be increasing with retail sales volumes recording their first quarterly increase in seven quarters in June.  Together these factors suggest that imbalances such as the current account deficit and household indebtedness are less likely to unwind significantly.

Net migration has risen, and is likely to rise further, as departures have fallen.  Stronger population growth is one factor helping promote a recovery in the housing market, the subject of this month’s special topic, with house prices having grown modestly over much of 2009.  It is also one factor, alongside the improved global outlook and higher confidence, which will lead us to revise up our economic forecasts for the Half Year Update.  However, the composition of growth may mean that stronger growth will prove unsustainable.  In addition, with tax revenue behind forecast, a stronger economic outlook may have a more limited impact on the fiscal position.
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