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Monthly Economic Indicators

Executive Summary

  • Economic activity contracted in September 2008 for the third consecutive quarter
  • Key indicators point to further quarterly declines in December 2008 and March 2009
  • Global growth is expected to deteriorate rapidly over 2009 as the credit crunch hits
  • Growth appears to be developing in line with the December Update downside scenario, at least in the near term

The economy contracted for the third consecutive quarter in September, highlighting ongoing weakness in external and domestic demand. As a result, annual average growth in production GDP fell from 2.7% in June to 1.7% in September, making this the slowest rate of growth in around nine years. While recovery from drought increased agricultural activity and higher lake levels boosted production of hydro-electricity, declines in other major industries illustrated underlying weakness in the New Zealand economy.

The December Quarterly Survey of Business Opinion indicated the weakness in the domestic economy looks set to extend into the December quarter and 2009. General weakness was evident across all major indicators, with business confidence, activity expectations and capacity utilisation falling to historic lows. Businesses also reported laying off more staff in December, while a net one in three firms expect staff numbers to decline in the March quarter, consistent with rising unemployment in 2009.

Both activity and the outlook for the global economy have deteriorated significantly since November’s Monthly Economic Indicators. While a number of advanced economies are either in or on the brink of recession, the prospects for emerging and developing economies, notably many Asian economies, have also fallen rapidly. A host of fiscal packages have been announced around the world, largely focussing on infrastructure investment and tax cuts, to generate job growth and encourage spending.

The speed with which adverse developments have occurred led the IMF to revise global growth in 2009 down from 2.2% in November 2008 to 0.5% in January 2009. New Zealand’s top 20 trading partners are now expected to grow only 0.2% in 2009 according to the latest Consensus Forecasts, lower than assumed in the downside scenario of the December Update.

Annual inflation fell from 5.1% in September to 3.4% in December. A significant reduction in the price of fuel was the key contributor to the lower outturn, with average prices falling around 20% in the December quarter. With food price inflation slowing and lower construction costs indicative of a weaker global and domestic economy, the medium-term outlook for inflation has eased considerably.

All indicators suggest the New Zealand economy will remain in recession until at least March 2009. As a result, growth appears to be developing in line with the December Update downside scenario, at least in the near term, with recent international developments pointing to further downside risk.

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