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Monthly Economic Indicators

Executive Summary

  • Subdued recovery continues, in line with Budget forecasts
  • Retail volumes suggest consumption grew strongly in June but levels remain low
  • Labour market reinforces gradual recovery underway
  • Weaker investment and manufacturing outlook highlights downside risk in near term
  • Concerns over strength and sustainability of global recovery rise, but Australia and emerging Asia continue to grow strongly

The performance of retail sales and the labour market suggest the economy grew around 0.8% in the June quarter, in line with the Budget forecasts. Retail volumes lifted sharply in June, with another strong contribution from motor vehicle retailing, lower food prices and discounting of a range of largely-imported durable goods.

The outlook for consumer spending is for a gradual recovery, apart from the effect of the increase in GST on 1 October, with the contribution from motor vehicles waning and prices rising. Total consumer spending on core retail is about the same now as a year ago, suggesting future strength will require support from key drivers, namely household wealth (mainly housing) and income.

House prices have been trending down since late last year, following a mini-recovery in mid-2009. The housing market is expected to be weak in the near term, with short-term mortgage interest rates increasing, net migration easing and investor confidence down. A softer housing market is feeding through to fewer building consents, posing downside risk to our near-term forecasts for residential investment and limiting support for consumer spending. This month’s special topic looks further at the impact of housing on households’ balance sheets.

Wage growth looks to have troughed in the June quarter following a year and a half of declines. Restraint in government spending has led to the lowest growth in public sector wages since 2001. Income growth is expected to continue rising, with an improving job market. Both full-time employment and hours worked rose in the June quarter, confirming that the labour market recovery is underway and will support consumer spending in the near term.

The growth in employment and wages is in line with high business confidence earlier in the year, following the end of the recession. However, optimism has eased across a range of business indicators recently, posing downside risks to our Budget forecasts for market investment. Growth in manufacturing may also ease, consistent with falling new orders and deliveries of raw materials, along with a moderation in the outlook for the international economy.

Concerns around the strength and sustainability of the global recovery rose in August, with advanced economies looking particularly vulnerable and risk aversion rising. As a result, equity markets reversed some of the gains from July, while the New Zealand dollar exchange rate fell against the US dollar and on key cross rates. However, Australia and emerging Asian economies continue to grow strongly, providing reasons for optimism about the New Zealand recovery.

This report was finalised prior to the Canterbury earthquake on 4 September. Treasury is currently evaluating the economic impact.
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