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Monthly Economic Indicators

Executive Summary

  • Real GDP growth was strong in September quarter but stock build-up and downward revisions to previous quarters were of concern
  • Rugby World Cup had limited impact as activity was displaced as we expected, but full impact yet to be recorded
  • Outlook for 2012 has deteriorated since the Pre-election Update largely owing to an escalation of the euro area crisis and its impact on New Zealand

The New Zealand economy expanded strongly in the third quarter of 2011 after a subdued second quarter.  Real production GDP rose 0.8%, led by manufacturing and a positive impact from the Rugby World Cup on retail and hospitality.  Most other industries did not see such an impact, which could reflect disruption to normal activity from the World Cup, some of which could bounce back in following months.  A cause for concern was a record build-up of stocks in the September quarter.  Although strong dairy production explains some of this, how the remaining increase in stocks unwinds will be important for growth going forward.

There were also significant downward revisions to the strength of the recovery.  These revisions suggest there is a little more spare capacity in the economy than we previously thought and also that potential output is lower than we had estimated.  Revisions to previous quarters’ growth have delayed the recovery to the pre-global financial crisis level of output, with the latest quarter’s aggregate output still 0.3% below the December 2007 quarter peak.  The peak is expected to be passed in the December 2011 quarter based on our reading of the activity indicators in the QSBO, which points to real GDP growth of around 0.6% in the December quarter.

Given strong real GDP growth, nominal growth was not as high as it could have been because of weak domestic prices.  This theme was also present in the December quarter Consumers Price Index (CPI), which fell 0.3% compared to our expectation of a moderate rise.  The fall in the CPI in the quarter, as well as the majority of the impact of the 1 October 2010 GST rate rise dropping out, meant annual inflation fell from 4.6% in the September quarter to 1.8%.  Softer inflation reflects a significant fall in food prices, the appreciation of the exchange rate in mid-2011 and a higher level of discounting, perhaps as retailers sought to unwind the stock build-up. 

Further out, key domestic issues for 2012/13 include the degree of household saving, the timing of rebuilding in Canterbury, and the withdrawal of monetary and fiscal stimulus.  However, the outlook for the global economy will dominate.  As the euro debt crisis drags on and other risks to the global economy increase, international agencies such as the IMF have revised down their forecasts and have also included large downside scenarios based on a deepening of the crisis.  We are not yet near the downside scenario in the Pre-election Update for our trading partners or for New Zealand, but the risk of something as bad as it occurring has risen.  With high levels of uncertainty about the outlook, volatility in financial markets is likely to remain a feature of the coming year.

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