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Monthly Economic Indicators

Executive Summary

  • Treasury’s Half Year Update forecast strong growth in activity but subdued inflation and therefore relatively weak growth in nominal GDP and tax revenue.
  • Official data show that the economy grew strongly in the September quarter of 2014, although revisions and improvements to measurement mean earlier growth was slightly weaker.
  • Sharp falls in oil prices have translated into lower petrol prices and annual CPI inflation below the Reserve Bank’s target band. A further drop is expected before price pressures exert themselves in the medium term.

Since the Treasury released its HYEFU forecasts on December 16, oil prices have fallen 40%. Consequently petrol prices are their lowest in 4 years and annual CPI inflation dropped below the bottom of the Reserve Bank’s 1-3% target band in the December quarter 2014. Prices have continued to fall in early 2015 suggesting inflation will be even lower in the first quarter of 2015.

Low inflation, the associated low interest rates and weak international commodity prices have combined to leave nominal GDP and Crown revenues lower than would otherwise be expected in a strongly growing economy. Indeed, the economy is growing strongly. Despite downward revisions to history (discussed in this month’s special topic), activity in the New Zealand economy is estimated to have grown 2.9% in the year to September 2014. Boosted by a strong construction sector and increasingly confident businesses and households, the economy’s spare capacity is being absorbed.

High levels of net inward migration have offset some developing capacity constraints until now, although the composition of migrants is changing. The main driver is now international students who may deliver more of a demand impulse, and likely a smaller increase in labour supply, than the earlier surge in net migration did. Residential building consents have risen to their second highest level, and house sales are rising, especially in Auckland. Data for electronic sales are subdued, although the contribution of falling petrol prices is suppressing the total.

Dairy prices are developing in line with HYEFU forecasts, although continued appreciation is required to maintain farm incomes at projected levels. Nevertheless export values have slipped and the trade deficit and current account deficits have widened. Strong domestic growth will fuel demand for imports and – despite lower oil prices – Treasury continues to expect a higher import bill and widening deficits.

The global outlook for activity and demand remains weak, leading to continued large falls in hard commodity prices, particularly crude oil. Global inflation weakened further, leading to increased risk of deflation in some economies. Monetary policy continued to be eased in many of our major trading partners, driving bond yields lower, including in New Zealand.

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