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Monthly Economic Indicators

Executive Summary

  • Employment grew strongly in the December quarter, as did wages
  • Inflation will remain elevated in the short term
  • Domestic demand is easing, and this should slow both the labour market and inflation
  • Outlook is for relatively slow growth, due in part to drought and world developments

The resurgence in economic activity since mid 2006, led by a bounce back in domestic demand, has contributed to the current tight labour market and strong inflationary pressures.  Employment grew strongly in the December quarter and participation rose to a new record high (or at least since the official series began in 1986) – driven by women entering the work force.  Unemployment also reached a new record, falling to 3.4%.  Annual wage growth rose from the September quarter and is running in the 3%-5% range (depending on the measure).  Annual price growth in firms’ inputs (3.4%) and their output (4.0%) was elevated, and a survey of pricing intentions shows that the number of firms intending to raise prices is still high.

However domestic demand is slowing – a trend that has been evident since the later half of last year.  Growth in retail sales in the December quarter was soft and other consumer spending indicators show that this softness in consumer spending has persisted into January.  The weakness in private consumption has been caused, in part, by a slowing housing market, which appeared to slow further in January.  We discuss recent developments in the housing market and the linkages between the housing market and private consumption in more detail in this month’s special topic.  Given the labour market and inflation tend to lag the cycle, they should eventually moderate in line with the current slowing in domestic activity

Dry conditions, particularly in the Waikato, coupled with a slowing in the US and the Euro zone, mean the outlook for growth is subdued in the near term.  Accordingly firms have become increasingly pessimistic about the outlook for their activity and expected profits.  The retail and agricultural sectors were particularly pessimistic about their profit outlook – with the slowing in consumer spending likely to be affecting the former and the drought and the high dollar affecting the latter.  Weakness in the US dollar as a result of concerns about the health of the US economy saw the exchange rate reach US 82 cents and 74.0 on a TWI basis. 

Strong export receipts due to strong dairy receipts and exports of oil from the Tui field, coupled with slowing imports of investment and consumption goods, saw the annual trade deficit decline to $4.8 billion in December 2007 from $6.0 billion a year ago.  The ANZ commodity price index, released in February, showed that spot dairy prices declined 1.8% in world terms in February, indicating that growth in dairy receipts may slow - although contractual arrangements mean that this will take time.

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