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Monthly Economic Indicators

Executive Summary

  • The outlook for both the world economy and the New Zealand economy continued to deteriorate in February
  • Domestic demand weakened in the December quarter with a fall in retail sales volumes and an increase in unemployment
  • There are pressures on both households and firms, with indicators of consumer and business confidence continuing to fall in February
  • Both advanced and emerging economies face deteriorating conditions and global growth forecasts are scaled back again

The economy continues to show typical signs of a downturn, with labour markets following declines in other economic indicators. The unemployment rate increased to 4.6% in the December quarter, as more people joined the labour force and labour demand fell. Surveys showing that employment intentions by firms are at or near record lows across many sectors indicate that the unemployment rate is likely to increase further.

Firms have been under pressure from high labour and non-labour costs, as well as weak demand. According to the National Bank Business Outlook survey, business confidence levels and investment intentions decreased further. This month’s special topic examines the outlook for business investment. As firms face challenges from weak domestic and international demand, inflation pressures decline further.

Retail sales volumes fell further in the December quarter. Weakness in labour markets and a declining housing market increase uncertainty in household budgets, leading households to be more cautious and try to reduce debt. Early data for January such as higher food prices and weak electronic card transactions suggest a weak start to consumer spending in the March quarter.

The slowdown in domestic demand was also evident in recent developments in the housing sector. House sales in January fell further, while the number of building consents also declined, implying residential investment will be lower.

Since the December Update was prepared, there has been a sharp downturn in the international outlook, including the growth of New Zealand’s trading partners. They are now expected in February Consensus forecasts to contract by 0.9% in 2009 and grow by only 2.2% in 2010 – down from growth of 0.7% and 3.3% in December 2008 Consensus forecasts.

Risks have increased that economic growth will be below Treasury’s downside scenario in the December Update in both 2009 and 2010. The December Update downside forecasts were for real GDP to shrink 0.2% in 2009 and 0.3% in 2010 (March years). There is a wide range of possible outcomes for growth at this time, with large uncertainty surrounding both domestic and international economic conditions.

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