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Monthly Economic Indicators

Executive Summary

  • The New Zealand economy is expected to record strong growth in the December quarter, as robust employment growth supported household demand.
  • High consumer confidence in early 2015 points to continued strong demand, although the drought may have a negative impact on agricultural output. The inflation outlook remains subdued.
  • Global market sentiment was more positive and concerns about Greece eased at the end of the month, but risks to market stability remain.

Data released over February reinforced the Half Year Economic and Fiscal Update forecast of strong GDP growth in the December quarter, with retail sales pointing to solid growth in private consumption and a bounceback in services exports from higher tourist spending. Retail sales volumes were supported by robust employment growth in the December quarter, strong earnings growth, elevated levels of net migration, a pick-up in tourist spending and an easing in retail prices. This month’s special topic looks at the impact of external migration on the economy.

Since then, a high level of consumer confidence, boosted by lower fuel prices and falling fixed mortgage rates, points to continued solid growth in private consumption in the March quarter. House price growth has continued to increase, partly owing to tight supply and rapid population growth, and is expected to lead to continued solid growth in residential investment in 2015, driven by Auckland and Canterbury.

That said, the drought in the South Island and dry conditions in parts of the North Island are expected to subtract slightly from GDP growth in 2015. The drought is expected to lead to a fall in meat production later in 2015, as farmers bring forward livestock slaughter to the March quarter, as well as lower dairy output, adding to the effect of lower prices. The rebound in dairy prices in February was in line with most forecasts.

Despite solid economic growth, the inflation outlook remains weak. Producer prices showed generally soft growth in both inputs and outputs in the December quarter, and labour cost growth was moderate. However, growth in capital goods prices rose owing to the depreciation of the New Zealand dollar and higher housing construction costs.

Sentiment in global financial markets improved in February, supported by continued recoveries in the US and UK economies and stronger growth in the euro area and Japan. However, weaker conditions in the Australian economy led the Reserve Bank of Australia to cut its policy rate to 2.25%, while low inflation in China facilitated further monetary easing. A moderate rebound in commodity prices also contributed to lower safe-haven demand, leading to higher long-term bond yields. A four-month extension of the Greek bailout programme was agreed, but a longer-term agreement has not been concluded, and the situation continues to pose a risk to market stability.

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