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Monthly Economic Indicators

Executive Summary

  • GDP showed a modest increase in the September quarter as the economy continues to slow
  • CPI inflation was higher than Treasury’s and the markets’ expectations in the December quarter and is expected to remain high through 2008
  • The outlook is for slowing growth consistent with the Half Year Update forecasts
  • But global economic developments have increased the downside risks to the forecasts

GDP recorded a 0.5% increase in the September quarter, the same as forecast in the Half Year Update, taking the annual rate to 2.7%. The services sector drove most of the growth with an additional boost from the primary sector due to an increase in Tui oilfield production.

Both private consumption and residential investment growth slowed in the September quarter. There are clear signs that household spending growth has slowed as households feel the effects of interest rate increases, lifts in fuel prices and a slowing housing market.

Net exports subtracted from growth and the current account deficit widened to 8.3% of GDP in the September quarter. We expect the current account deficit to narrow and net exports to add to growth in the December quarter, and through 2008, as dairy export volumes recover and high world dairy prices continue to flow into export receipts.

CPI inflation was 1.2% in the December quarter, taking the annual rate to 3.2%. Although the headline figure was higher than generally expected, non-tradables inflation was weaker than in the year to September, indicating some softening in domestic demand.

We expect inflation to remain elevated for most of 2008 as price, labour market and capacity utilisation indicators remained tight in the December quarter. The Reserve Bank noted that inflation pressures remain high and kept interest rates steady at 8.25%.

The outlook is for slowing growth due to high interest rates and fuel prices as well as a slowing housing market. At this point, we expect the slowdown to be minor by historical standards with the strong labour market and high dairy incomes underpinning growth.

Global share markets have fallen during January, largely on concerns about the state of the US economy. Expectations of a global slowdown have increased the downside risks to the Half Year Update forecasts.

However, the New Zealand economy is well placed to meet potential challenges with its sound fiscal position, the prospect of tax cuts and the Reserve Bank’s ability to cut interest rates, if growth and inflation drop more quickly than expected.

This month’s special topic discusses recent equity market developments, the outlook for the global economy and implications for New Zealand. Next month’s Monthly Economic Indicators will focus on labour market and industry costs data as well as the usual sector releases.

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