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Monthly Economic Indicators

Executive Summary

  • GDP growth in the June quarter is expected to be around 0.6%, lower than the BEFU forecast. Annual growth in 2015 may fall to 2.0% as domestic demand softens.
  • Weakness in retail spending as employment growth declined points to softer private consumption growth in the June quarter than previously expected.
  • However, a buoyant housing market, elevated net migration gains and exchange rate depreciation are expected to continue to support growth.
  • Dairy prices remained low in August, pointing to further falls in the terms of trade.
  • Volatility in financial markets reflected concerns over China’s growth slowdown.

Key economic data released over August continue to point to a weaker growth outlook than forecast in the Budget Update (BEFU). Employment growth continued to slow as businesses reduced their demand for labour, while the labour force expanded solidly owing to population growth, together leading to a lift in the unemployment rate. Despite steady growth in labour incomes, weak retail trade data for the June quarter suggest that private consumption growth will be significantly lower than forecast in the BEFU.

GDP growth in the June quarter is expected to be around 0.6%, lower than its 0.7% forecast in BEFU. A decline in consumer confidence and a slowdown in employment growth are expected to dampen private consumption growth in the September quarter, which would weigh on GDP growth.

That said, most of the key drivers of GDP growth remain intact, with domestic demand supported by accommodative monetary conditions, high migration, robust construction activity and a steady expansion in business activity. The depreciation of the exchange rate is expected to partly offset the negative impact on export revenues from lower dairy prices. 

The inflation outlook remains weak. Prices fell further for both business inputs and outputs, driven by a large fall in dairy and dairy-based products. Even excluding dairy, input prices were flat and output prices dropped slightly. Growth in capital goods prices continued to be driven by construction, and price growth remained slow in most other categories, although prices for imported capital may lift in coming quarters owing to a lower exchange rate.

Dairy prices fell further in August despite a rally late in the month, to be down 39% from their recent peak in March 2015. Low dairy prices reflect a high level of inventory in China, increased global milk supply and concerns around the Chinese growth outlook. The sharp fall in dairy prices points to declines in the terms of trade over 2015 and 2016, and is expected to weigh on export revenues and widen the trade deficit.

Reflecting a softer growth outlook, the market has priced in an 80% probability of a further 25 basis point reduction in the Official Cash Rate at the Reserve Bank’s next policy announcement on 10 September.

Internationally, concerns have increased about the impact of the slowdown in China’s growth on the world economy, which impacted on financial market sentiment. Output declined in Japan in the June quarter, growth was below expectations in the euro area and Australia’s outlook was revised down. However, the US and UK recoveries remain on track, although the Federal Reserve and the Bank of England remain cautious about raising their policy rates.

This month’s special topic looks at the implications of the recent changes to China’s exchange rate.

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