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Monthly Economic Indicators

Executive Summary

  • The economy has been growing for a year but recovery more gradual than in the past
  • Economic expansion is set to continue but recent data suggest that growth over 2010 may be slightly weaker than expected
  • Global sentiment remains volatile and downside risks have increased relative to Budget
  • External indebtedness likely to increase despite recent declines in current account deficit and favourable terms of trade

The New Zealand economy expanded throughout the 2010 March year, with real GDP increasing 0.6% in the March quarter. This was slightly weaker than forecast, but the level of nominal GDP was in line with forecast. Growth in the March quarter came from the primary industries and non- food manufacturing, with services flat. On an expenditure basis, growth was relatively weak in private consumption and investment, but stronger in exports.

The recovery is expected to continue to be relatively gradual, with the level of real GDP per capita still 4% below its pre-recession level. This reflects a more cautious approach by households given high debt levels, changed perceptions about the riskiness of high debt levels and a reduction in credit availability at the more speculative end of the investment spectrum. Deteriorated fiscal positions internationally, necessitating large-scale fiscal consolidation in many countries, are also likely to constrain future growth in the global economy. European fiscal consolidation is the focus of this month’s special topic.

Early indicators of growth for the June quarter, including retail sales, suggest continued weakness in private consumption, while exports are likely to ease on the back of reduced dairy exports. Factors such as these suggest growth will be a little weaker than forecast. However, both business and consumer confidence measures point to continued growth, even with business sentiment easing a little in June. Record increases in the terms of trade over the last couple of quarters, with further gains likely in the near term, represent positive (albeit largely anticipated) influences for the New Zealand economy and incomes.

The higher terms of trade, along with a falling investment income deficit, have contributed to a sizable narrowing in the annual current account deficit to 2.4% of GDP. However, future trends are likely to see the current account deficit expand and the level of New Zealand’s international indebtedness continue to increase - a feature which makes the New Zealand economy vulnerable to shifts in investor confidence in a world less tolerant to risk. To stabilise New Zealand’s net international liabilities around current levels of GDP would require sustained surpluses on the combined goods and services balance of between 1¼% and 2¼% of GDP, well above the average of the past decade of 0%. Even with the favourable terms of trade, it is unlikely that New Zealand will achieve such surpluses without a substantial change in economic behaviour.

Overall, international and domestic developments over June lead us to believe the economy will continue its relatively gradual recovery over the year ahead. Our view as to the most likely path the economy will take remains consistent with the Budget Forecasts. However, downside risks are significantly higher and near term growth likely to be a little weaker than forecast.

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