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Monthly Economic Indicators

Executive Summary

  • Economic growth picked up over the second half of 2015
  • Inflation pressures remain weak, with annual inflation at its slowest pace since 1999
  • Low inflation together with falls in the terms of trade pose some downside risk to the outlook for nominal GDP growth
  • Financial markets have been volatile in early 2016 as the global economic outlook deteriorates

Key economic data released over December and January point to stronger growth over the second half of 2015 than in the first half. Real GDP grew by 0.9% in the September quarter and partial indicators suggest a slightly slower pace of growth of 0.6 - 0.8% in the December quarter. Improved business and consumer sentiment, reduced drought risk, and ongoing increases in migration, tourism and construction activity suggest growth over 2016 may accelerate to around 2.5%, a little higher than expected in the Half Year Update. Low inflation and low prices for key exports pose downside risks to the outlook for nominal GDP growth over the 2016 calendar year. The current account deficit narrowed in September but is expected to begin widening again in coming quarters, although the peak may be lower than previously anticipated as a result of higher services exports and lower oil import costs.

Business surveys pointed to sustained activity levels and a rebound in business confidence in the December quarter. However, the headline measures mask some important regional disparities, with confidence negative in rural regions hit hardest by falling dairy prices and dry weather. That said, employment indicators suggested some tightening in the labour market and increases in the level of domestic trading activity point to solid real GDP growth in the quarter.

The same surveys pointed to weak pricing pressures and this was confirmed in the CPI figures, with negative inflation in the quarter and annual inflation easing to its lowest rate since 1999. Although negative tradables inflation, chiefly as a result of declines in petrol and food prices, was the main driver of the lower outturn, non-tradables inflation also remains at relatively low levels. After reducing the Official Cash Rate (OCR) to 2.5% in December, the Reserve Bank remained on hold in January, but acknowledged that some further easing may be required. The inflation outturns have raised market expectations of further reductions in the OCR this year, with some calling for cuts as early as March.

The terms of trade declined in the September quarter and export prices for key commodities including dairy have remained weak since then, suggesting further falls in the terms of trade are likely. However, the direct and indirect impact of lower fuel prices on consumer spending could provide some offset to the effect of lower export prices on aggregate income.

Renewed concerns over China’s growth led to increased volatility in financial markets in early 2016. The outlook for global growth has deteriorated and monetary policy is expected to be more supportive. Oil prices have fallen significantly in anticipation of weaker demand and increased supply, with the price of Brent oil hitting a 12-year low.

This month’s special topic decomposes changes in the terms of trade, both historical and forecast, into the contribution from individual components. The topic concludes that while rising export prices have been the largest contributor to increases in the terms of trade over the past two decades, the changing composition of imports has also made a material positive contribution.

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