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Monthly Economic Indicators

Executive Summary

  • The February earthquake has had a large cost in human and economic terms
  • The outlook for the New Zealand economy was weaker even before the earthquake as domestic demand was soft despite income gains from high commodity prices
  • The earthquake will have a negative impact on economic activity in 2011, but a positive impact from 2012 as the rebuilding gets underway
  • Domestic developments are occurring against an international backdrop of political unrest, high commodity prices and rising inflation

This month's Economic Indicators presents our latest forecasts for the New Zealand economy, including our initial assessment of the impact of the February earthquake.  This assessment is tentative as there are many uncertainties about the economic impact of the earthquake. These forecasts will be reviewed before the 2011 Budget.

Even before the February earthquake, it was apparent that the economy was weaker in the second half of 2010 and early 2011 than we had expected in last year’s Half Year Update.  Growth in the second half of 2010 was weaker than previously expected and the recovery from the September earthquake was slower than we assumed, reflecting the extent of the damage, ongoing aftershocks and the complexity of the repairs and rebuilding.

This weakness extended into early 2011 as businesses and households exercised caution despite the income gains experienced by commodity exporters from high world prices.  New Zealand’s terms of trade stood at their highest level since the early 1970s in the December quarter 2010, but firms (especially farmers) are consolidating and not spending their additional income.  Labour demand was weak in the December quarter and private consumption appears to have fallen slightly.

It is against this background of a weaker performance of the economy in the recent past and a weaker outlook for the near term that the impacts of the February earthquake must be considered.  The earthquake will have a negative impact on activity in the near term through its direct effect on activity, ongoing confidence effects and a further delay in the reconstruction from the September earthquake.  However, it will have a positive impact on economic activity once the recovery phase gets into full swing in 2012.

We estimate that GDP growth will be around 1.5% points lower in the 2011 calendar year solely as a result of the February earthquake.  From 2012, the recovery will bring a sizeable boost to residential, commercial and infrastructure investment, placing upward pressure on prices depending on the rate of rebuilding.

Domestic events have been unfolding against a background of solid global growth, but one fraught with risks associated with political instability, high commodity prices and rising inflation.
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