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Monthly Economic Indicators

Executive Summary

  • Inflation in June was weaker than expected, but will rise in coming quarters
  • Domestic demand may be weaker than forecast in the Budget as consumers exercise restraint
  • The continuing recovery in the world economy is supporting export prices and volumes
  • On balance, we maintain our assessment that GDP growth will remain broadly in line with our Budget forecast

Inflation in June was weaker than expected with the Consumers Price Index rising 0.3% in the quarter to be 1.8% higher than a year earlier. Excluding the effect of the increase in the tobacco excise rates in late April, quarterly inflation would have been only 0.1%, highlighting that domestic demand remains subdued.

Headline inflation is set to increase in coming quarters as one-off government charges, such as the 1 October GST rate rise, flow through to final prices. Firms’ pricing intentions have lifted sharply in recent months, reflecting these government-related charges, but firms are likely to face difficulties passing on price rises in an environment of weak demand.

Business surveys revealed a pull-back in firms’ outlook for their own activity, but are still consistent with ongoing, moderate growth.

In the face of high debt levels and weak income growth, households continue to exercise spending restraint. Consumers are holding back on discretionary spending, suggesting that private consumption will fall short of our Budget forecasts in the June quarter. Moreover, a softening housing market in the first half of 2010 will act as a drag on the pace of the recovery in residential investment in the second half of the year.

High international commodity prices and demand for New Zealand’s main exports are supportive of ongoing growth in the export sector. A rise in the value of merchandise exports in the June quarter contributed to the second consecutive quarterly trade surplus, driven by higher volumes and prices for most of New Zealand’s main export products.

World data released in July show that the pace of the world economic recovery may be easing, indicating a potential risk to NZ’s export-led recovery. However, with NZ’s trade being oriented towards Asia and Australia, strong economic growth recorded in these countries will help to boost exports over 2010. This month’s special topic examines the recent growth of China and its implications for New Zealand.

While data released in July shows some downside risks to domestic demand, indicators point to ongoing strength in the exporting sector. Strong export growth is consistent with a reorientation of growth from consumption towards production and the tradables sector. We maintain our assessment that GDP growth will remain broadly in line with our Budget forecast.

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