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Monthly Economic Indicators

Executive Summary

  • Business sentiment slipped in the June quarter and, along with other indicators, points to growth around trend over the coming year
  • Inflation was weak in the June quarter, apart from housing costs and petrol prices, and inflation pressures remain subdued
  • Dairy prices fell further in July, pointing to lower terms of trade
  • International data were generally positive, but risks around Greece and China were elevated early in the month

Key economic data releases over the past month point to growth slowing faster than expected in the Budget Update. Business confidence and firms’ activity expectations eased from earlier levels, although both remain around historical averages. Indicators of private consumption also slipped and it is now expected to make a less positive contribution to growth over the year ahead. That said, GDP growth is expected to be around trend in 2015, supported by high migration, robust construction activity and solid labour income growth. 

Weak inflation outturns continued in the June quarter, with annual inflation of only 0.3%, below market expectations. Aside from continued rises in housing costs and a large quarterly increase in petrol prices, other parts of the economy – including both tradable and non-tradable sectors – are showing weak price increases. Similarly, QSBO indicators of pricing pressures remain subdued, pointing to continued low inflation over the rest of 2015.  

Dairy prices fell sharply at this month’s GDT auctions, with the index down 41% since March 2015. This, along with other weak commodity prices, points to lower terms of trade than expected in the Budget Update. However, easier monetary conditions will act to offset some of the reduction in national income from the falling terms of trade. 

The Reserve Bank reduced the Official Cash Rate (OCR) from 3.25% to 3.00%, owing to a softer growth outlook (the Canterbury rebuild appears to have peaked and dairy prices have fallen sharply) and low inflation.  The Reserve Bank noted that further easing seems likely and market analysts expect at least one more 25 bps reduction in the OCR by the end of 2015. 

Overall, recent developments point to a weaker outlook for the New Zealand economy than forecast in the Budget Update. However, positive factors will support growth at around trend.

International economic developments were positive on balance, but risks were heightened. The recovery in the US was sustained, while activity and inflation continued to pick up from a low level in the euro area, and domestic activity was stronger than expected in Australia. Risks around Greek debt and the Chinese equity market receded slightly over July, but remain elevated. Monetary policy is expected to tighten in the US and the UK, but was eased in China and Canada. Lower global demand and increased supply drove commodity prices lower, including dairy, iron ore and crude oil.

This month’s special topic discusses recent risks in Greece and China and the impact any financial crisis arising from those risks might have on the New Zealand economy.
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