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Monthly Economic Indicators

Executive Summary

  • The economy grew much more than expected in the March quarter and from a higher base owing to revisions
  • There was little measured negative impact from the Canterbury earthquake
  • High headline inflation, but underlying pressures more subdued for now

Economic growth was much stronger in the March quarter 2011 than expected. A number of industries showed significant expansion in the March quarter, with the 0.8% quarterly growth rate driven by manufacturing production, as well as retail and wholesale trade. However, some the details of the release were not as strong as the headline suggested, with the majority of the growth in expenditure GDP coming from a large fall in imports and a rise in exports, accompanied by a rundown in stocks. The growth was from a higher base, with upward revisions to manufacturing and wholesale trade lifting December quarter growth to 0.5% from an initially reported 0.2%.

The expected significant drop in household spending and business output in Canterbury as a result of the 22 February earthquake did not eventuate, with the majority of large businesses able to either resume operations quickly or relocate to other premises. Households seemed to be able to switch their spending from closed outlets to those in other locations and lost spending was offset by replacement of belongings damaged in the earthquake. Positive impacts from the earthquake were picked up through increased government activity by Civil Defence and the Earthquake Commission.

Growth in the previous two quarters is expected to have continued into the June quarter and over the rest of 2011. Partial indicators of GDP in the June quarter point to growth around 0.5%. Retail sales and services indicators suggest private consumption will continue to grow at its recent 1.5% annual growth rate and merchandise trade figures point to another strong contribution from net exports. Manufacturing production also looks like adding to its recent expansion. Improving business confidence indicates that annual economic growth will continue to pick up in coming quarters, following on from the flat period in the middle of 2010.

While headline inflation is at a 21-year high of 5.3%, the majority is from increases in government-related charges and the large international commodity price increases. Removing the effects of these items gives underlying inflation of around 1.4%, below the mid-point of the Reserve Bank 1-3% target band. Although the headline rate is expected to drop back into the target band around the middle of 2012, as these temporary impacts fade, an improving economy, rising business pricing intentions and high inflation expectations should result in rising underlying inflation. There will be some offset from the recent appreciation in the New Zealand Dollar (NZD).

The strengthening recovery is balanced against a softening international outlook and uncertainty over sovereign debt problems. Growth appears to be slowing in Australia and in the US the recovery is subdued and the government's fiscal situation is causing heightened uncertainty. Counteracting these negatives are strong growth in China and positive progress in euro area sovereign debt. These developments have been positives for the NZD, reaching post-float highs on bilateral bases.

Our Special Topic this month looks at the effect of the internet on household spending.

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