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Monthly Economic Indicators

Executive Summary

  • Economy likely grew modestly in the March quarter.
  • External accounts reflect strong export demand and the financial costs of the two major Canterbury earthquakes.
  • Business optimism points to an acceleration in growth, but that is dependent on continued world growth.

Tentative signs of economic recovery early in the year were interrupted by a second devastating earthquake in Canterbury. Nationwide business and consumer confidence deteriorated sharply, business activity in Christchurch was severely disrupted, and tourism flows through Christchurch and the South Island were substantially reduced. Despite this, partial indicators of activity in the March quarter have been firm enough to suggest that March quarter GDP statistics, to be released on 7 July, will show the economy grew modestly.

Industries to expand in the March quarter include retail trade, wholesale trade, manufacturing and primary industries. Other service industries, including property and business services, and health and community services, are also likely to have expanded. Construction activity contracted in the quarter, with falls in both residential and non-residential construction. There are few direct indicators of activity in the communication, hospitality and transport industries, but we know that the earthquake has disrupted both supply and demand for these services. However, in line with other data releases to date, we think these negative impacts will be largely confined to Canterbury. Overall, we think the economy likely grew by 0.3% in the quarter.

The financial costs of the earthquakes are reflected directly in the external accounts via inflows of insurance from non-resident reinsurers. Statistics New Zealand’s estimate of insurance claims on overseas insurers now totals $11.2 billion for the two major earthquakes. Until settled, these claims are treated as offshore assets and have temporarily lowered New Zealand’s net international liability position to around 75% of GDP, from 86% in March 2010. The country’s trade surplus with the rest of the world, which is now close to a 20-year high, is being supported by high commodity export prices and volumes. Moderate household spending growth is providing a further boost to the trade surplus by holding down imports of consumer goods.

Early indications for the June quarter are that lower interest rates and income gains from the rising terms of trade are beginning to provide meaningful support to the level of activity. There are encouraging signs in the housing market and retail spending has likely continued to grow modestly, restrained by weak household credit demand. Export prices have increased further, contributing to record export receipts in April, and prices of imported commodities, including oil, have eased.

Current levels of business optimism are consistent with accelerating growth over the year ahead. Whether that is realised or not will be influenced by the way the global recovery story develops and how events in Greece unfold.

Our Special Topics this month look at: how exchange rate variability affects economic growth; and recent developments in Greece and their implications for New Zealand.

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