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Monthly Economic Indicators

Executive Summary

  • Solid labour demand drove growth in aggregate labour earnings, boosting household spending in the June quarter.
  • The upswing in activity continued in the September quarter, driven by high consumer confidence, elevated net migration and tourist arrivals, and strong housing demand.
  • Despite robust demand in the economy, the inflation outlook remains subdued as cost pressures are generally low.
  • Weak import values and a pick-up in key commodity prices point to a lower current account deficit than forecast in the June and September quarters.

Key economic data releases over August continued to point to stronger GDP growth than expected in the Budget Economic and Fiscal Update. Solid labour demand drove growth in total labour incomes, contributing to a surge in household spending in the June quarter and pointing to robust private consumption growth. Weakness in retail prices, particularly for fuel and many other exchange rate-sensitive goods, also boosted retail spending. Other factors underpinning strong domestic demand in the June quarter include high population growth, low interest rates, strong growth in tourist arrivals and solid housing demand.

The upswing in activity appears to have continued in the September quarter. Retail spending showed healthy growth in July, annual net migration inflows stayed at an elevated level and short-term visitor arrivals lifted strongly, all pointing to ongoing solid growth in business activity and labour demand. Meanwhile, the high level of house prices, particularly in Auckland, maintained residential building consents at a high level in July.

Despite strong demand facing the economy, the inflation outlook remains weak. Annual growth in business input costs showed a pick-up in the June quarter, but pressures were still mainly concentrated in construction. Broader cost pressures are expected to remain soft, weighed on by the annual price fall in crude oil and hard commodities, slow growth in labour costs, weak global inflation and the appreciation of the New Zealand dollar over the past year, which will continue to weigh on import prices. The Reserve Bank cut the Official Cash Rate to 2.0% in response to a high exchange rate dampening tradables inflation and persistent weakness in inflation expectations, and signalled more policy easing to come.

New Zealand’s soft commodity export prices continued to rise in July and August, with dairy prices up 20% over the two GlobalDairyTrade auctions in August, in line with the forecast increase in export prices in the Budget Update. At the same time, the annual trade balance remained more positive than expected in July, chiefly as low import prices dampened import values. All told, the current account deficit is expected to be lower than forecast in the Budget Update in the June and September quarters. This month’s Special Topic examines developments in New Zealand’s current account balance over recent years.

Global data releases create a picture of slowing world growth, with June quarter GDP growth in the US and Japan disappointing markets, and meeting already low expectations in the euro area. Indicators of activity have slowed between pre- and post-Brexit in the UK and euro area, although so far by less than expected. Most market attention, however, has been on the US Federal Reserve, whose Chair reiterated the possibility of a 2016 rate hike at the Jackson Hole Symposium. Financial markets have been fairly stable and the New Zealand dollar persistently strong over the month, supported by New Zealand’s relatively high interest rates and growth.

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