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Monthly Economic Indicators

Executive Summary

  • The retail sector ended 2011 on a high, helped by the Rugby World Cup
  • But the picture for the rest of the economy at the end of last year is more mixed
  • Outlook for the year ahead broadly consistent with Treasury's latest forecasts
  • Some signs of stabilisation in the global economy, but risks remain

The steady release of activity data from the December quarter has painted a mixed picture of the state of the economy at the end of last year. The retail sector ended 2011 on a high, with core sales volumes growing by a record 2.9% in the December quarter. This undoubtedly owed much to the Rugby World Cup, although there were signs of reasonably robust underlying demand too. Meanwhile, good growing conditions in the dairy industry suggest that net exports made a sizeable contribution to GDP growth in the December quarter as well.

However, other signals from much of the rest of the economy were more patchy. The terms of trade edged lower at the end of last year (albeit remaining at a very high level) and amid signs of producers' margins coming under pressure, corporate profits were largely subdued in the second half of 2011. On balance, we remain comfortable with our forecast of solid, albeit unspectacular, 0.7% GDP growth in the December quarter.

Turning our attention to 2012 and the year ahead, we expect GDP growth to take a leg down before picking up towards the end of the year. Admittedly, both business and consumer confidence made reasonably sprightly starts to the year. However, we expect consumer spending to catch its breath in the March quarter as the level of activity adjusts after the RWC. Delays to the Canterbury rebuild suggest underlying weakness in the labour market will remain a feature until rebuilding activity gathers pace into 2013. All told, the outlook remains broadly in line with Treasury's latest set of forecasts released in support of the Government's Budget Policy Statement last month.

On the international front, the outlook for the global economy has stabilised somewhat over the past month or so. An agreement on a new bailout for Greece, a second round of the ECB's Long-term Refinancing Operations, and stronger than expected economic data from the US have helped to support the recent improvement in global financial market sentiment. However, with many of the underlying structural problems remaining unsolved, we expect global economic and financial conditions to remain highly volatile for the foreseeable future.

In this month's Special Topic we examine the evidence and drivers behind the loss of competitiveness seen in New Zealand's economy over the past decade. We find that while the strong nominal exchange rate is at least part of the story, improving competitiveness and productivity in New Zealand requires an economy-wide perspective and wide ranging reforms.

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