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Monthly Economic Indicators

Executive Summary

  • Recent data point to weak domestic demand in the June quarter, in line with forecasts.
  • The outlook for the second half of the year is more positive, but still weak.
  • Net migration is expected to provide near-term support for the housing market.
  • International outlook improves, with risk appetite driving the New Zealand dollar higher.

The outlook for the economy continued to unfold in line with the Budget Forecasts in July. Firms reported declining activity in the June quarter, but to a lesser extent than in the previous quarter and expect a further small decline in September. The results are consistent with Budget Forecasts of the economy contracting 0.4% in June and 0.2% in September. Import values declined by more than exports, suggesting the current account deficit fell to around 7.5% of GDP in the June quarter, as in the Budget Forecasts.

June quarter retail sales volumes are expected to have been flat despite a surge in May, much of which reflected consumers bringing forward purchases of winter apparel. Coupled with flat services activity indicators, we expect private consumption weakened further in the June quarter. The outlook for private consumption remains weak, with risks emerging on both the negative side (a lower dairy payout) and the positive side (a sustained recovery in the housing market).

While house prices in March were identical to our most recent forecasts, housing activity more recently appears to be stabilising following a bounce from extremely low levels as borrowers took advantage of historically low mortgage interest rates earlier in the year. The recent pick-up in activity is expected to flow through to increased residential investment later in the year, consistent with the Budget Forecasts.

The intensification of the global financial crisis late last year sharply affected confidence in job prospects offshore, leading to a sudden drop-off in long-term departures. Coupled with steady arrivals, net permanent and long-term migration reached 12,500 in the 12 months to June, higher than forecast (4,000) and posing upside risk to housing activity in the short term. However, we expect departures to increase in the medium term as the outlook for Australia improves along with confidence that the global economy looks to have avoided a major depression.

The international outlook stabilised over the month, with business surveys in major economies pointing to growth resuming in late 2009 or early 2010. The New Zealand dollar tested highs of 66 cents during the month, barely affected by Fitch’s negative outlook for New Zealand’s sovereign rating in mid-July.

Inflation fell from 3.0% to 1.9% in the June quarter, once again in line with the Budget Forecasts. Annual non-tradables inflation fell to a 7-year low of 3.3%, reflecting weak economic conditions. This month’s special topic looks at non-tradables inflation in more detail.
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