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Monthly Economic Indicators

Executive Summary

  • Real GDP fell by 0.3% in the March 2008 quarter
  • Terms of trade boosted further by higher export prices for dairy products
  • Current account deficit reduces only slightly despite terms of trade boost
  • Real GDP growth to stay subdued in 2008 as household spending remains weak and due to the lingering impact of the drought

The New Zealand economy contracted by 0.3% in the first quarter of 2008 (measured through real production GDP), slightly more than expected in the Budget Update.  This weakening was driven by a number of factors influencing the economy in early 2008.  Drought conditions across much of the country negatively affected agriculture production and exports, while consumer spending and housing investment were subdued by high food and fuel prices, slowing net migration inflows and high interest rates.

Despite the fall in real GDP in the quarter, annual average growth was robust at 3.0% in the year to March 2008, reflecting growth in previous quarters.  With hours worked falling slightly, economy-wide labour productivity growth rose to an 8-year high of 3.1% in the year to March 2008.  The rebound partly reflected the recent economic upturn (productivity tends to be pro-cyclical) and recent strong growth in plant, machinery and equipment investment.

Although real GDP fell, GDP measured through nominal expenditure rose 0.5% in the March quarter and 7.4% in the year to March 2008.  Price growth was again greatest in exports, reflecting the strong prices being received for dairy exports, which flows through to higher national income.  The merchandise terms of trade rose 4.1% in the March quarter, above the 3.5% Budget Update forecast.  The increase in the terms of trade to a 34-year high was due to higher export prices more than offsetting higher import prices.  However, the terms of trade is likely to be at or near a peak as import prices will have risen further in the June quarter as a result of the sharp rise in oil prices.

The annual current account deficit narrowed only slightly to 7.8% of GDP in March from 7.9% in December, despite the large boost to the terms of trade, compared to a Budget Update forecast of 7.4%.  One cause of the smaller narrowing was a wider investment income deficit due to lower earnings by overseas subsidiaries of New Zealand companies, a reflection of the current tougher international trading environment.

The past month has also seen the release of data that point to further weakness in the June 2008 quarter.  There is a possibility that the economy has experienced a technical recession in the first half of 2008 (when real GDP declines for two consecutive quarters).  Although some notable positive factors remain, economic growth in the year to March 2009 is expected to be around ½ percentage point weaker than the rate of 1.5% we forecast in the Budget Update, particularly if oil prices remain at current elevated levels.  This month’s MEI includes a special topic on oil prices.


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