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Monthly Economic Indicators

Executive Summary

  • Economy weaker than we expected in mid-2010 even allowing for extraordinary events
  • Recession likely to be avoided as real GDP is expected to rise in the December 2010 quarter, but could also be weaker than previously forecast
  • Outlook for 2011 more positive than 2010, largely owing to the Rugby World Cup, earthquake reconstruction and high commodity prices

The recovery in the New Zealand economy stalled in the middle of last year as real GDP fell in the September 2010 quarter for the first time since the 2008/09 recession ended.  The recovery from this recession has undershot our expectations, only partly due to events such as the earthquakes in the Canterbury region.  Domestic demand has been softer than we expected, despite the incentive for a pre-GST spend-up, owing to greater caution being shown by households, farms and firms.

We expect that technical recession – where real GDP contracts in two consecutive quarters – was avoided in 2010 with positive growth in real GDP during the December 2010 quarter.  However, this growth is likely to be lower than the Half Year Update’s forecast of 0.9%.  Actual indicators of activity for the December 2010 quarter released to date have been soft and any bounceback in the last quarter of 2010 will be limited by further aftershocks in Canterbury delaying reconstruction and a La Nina weather pattern leading to drought conditions in that quarter. 

Despite the fall in real GDP in the September quarter, nominal GDP grew slightly as higher prices for our commodity exports boosted the merchandise terms of trade.  Commodity prices have continued to rise since then, with ongoing demand from emerging markets such as China and supply issues, so will continue to boost national incomes.  The increase in the terms of trade, and reinsurance inflows related to the Canterbury earthquake, also limited the increase in the current account deficit to 3.1% of GDP in the year to September.

As the Treasury prepares its Budget Economic and Fiscal Update, there are a number of issues that will influence the New Zealand economy in 2011 that we will need to consider.  Key amongst these is the global economic and financial environment, which will remain an important determinant of New Zealand's fortunes.  In particular, inflation concerns have begun to develop worldwide, sovereign debt and banking sector concerns remain in the Euro area, and weak housing and labour markets are constraining consumption growth in many advanced economies, particularly the US.

In New Zealand, key issues for the economy in 2011 include one-off events such as the hosting of the Rugby World Cup, earthquake recovery work, and the current La Nina weather pattern.  Uncertainty surrounds other key influences such as saving behaviour and the exchange rate.  At this stage, the outlook for real economic growth in calendar year 2011 is looking better than what was experienced in 2010.  Price developments, particularly the terms of trade, will also be important.  As a result, although data have been weaker than expected, the overall outlook for 2011 may not be materially different from that presented in the Half Year Update 2010.


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