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Monthly Economic Indicators

Executive Summary

  • GDP decline largest since 1992 as global financial crisis affects economy
  • Weak demand sees imports fall and current account deficit narrow to 8.5% of GDP
  • Pace of contraction to ease in June quarter as the world and domestic outlook stabilises

The effects of the global financial crisis on the New Zealand economy were evident as production fell by 1.0% in the year to March, the largest annual decline since 1992. The production measure of Gross Domestic Product (GDP) fell 1.0% in the March quarter, following a downwardly revised 1.0% fall in the December quarter, led by a 7.3% fall in manufacturing sector output.  Uncertainty about future prospects saw business investment decline 7.3% in the quarter, and led the private sector to cut back on consumption spending to a degree last seen in 1991.

The external sector provided some offset to the weakness evident in the domestic economy contributing over 3 percentage points to GDP.  However, most of this strength arose from a 9% fall in import volumes, which are now down over 20% from their peak in June 2008.  Export volumes rose a modest 0.6%, indicating that the economy still has some way to go before the forecast export-led rebalancing of growth takes hold.

The large fall in imports also drove the fall in the current account deficit to 8.5% of GDP from 9.0% in the December quarter.  With the trade surplus continuing to grow in April and May, further reductions in the deficit are expected over the year ahead. The Budget Update forecast the current account deficit to fall under 7% of GDP by the end of the year.  Substantial headwinds in the form of a rising currency, rises in oil prices and in international interest rates caution against expectations of a larger gain.  In addition, the import-driven nature of the reduction raises questions about the sustainability of the contraction in the deficit.  A recovery in domestic demand will likely see imports recover and, unless export earnings rise, the current account deficit will widen again.  New Zealand’s net international debt position rose to 98% of GDP in the March quarter as the value of international assets fell, a direct consequence of the international financial crisis.

Recent surveys of business and consumer confidence have shown rises, although they continue to suggest that the economy will contract further in the June quarter but not by as much as in the two most recent quarters.  The recent pick-up in net inwards migration will help underpin the stabilisation evident in the housing market and retail sales.  Moreover, risks to the international outlook are now more balanced and forecasts of global growth have stabilised, which should reduce some of the uncertainty facing businesses.  The Quarterly Survey of Business Opinion, released on 7 July, will provide some further pointers to growth prospects over coming quarters.

The New Zealand dollar continued to move higher over June.  With world growth weak, the risk is that exports do not rise as expected, frustrating the projected recovery in growth.

The Australian economy has weathered the financial crisis much better than many other developed economies.  Our Special Topic looks at the reasons why.

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