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Monthly Economic Indicators

Executive Summary

  • June’s data releases confirmed strong momentum in the economy spilled over into 2014 with real GDP growing by a robust 1% in the March quarter.
  • The terms of trade reached fresh 40-year highs in the March quarter, contributing to a sharp narrowing in the annual current account deficit.
  • The international economy showed signs that growth has strengthened, while inflation is rising in the major advanced economies apart from Europe.

Data released in June confirmed momentum from the second half of 2013 carried on into 2014 with the economy continuing to expand at an above-potential growth rate in the March quarter.

Indicators for domestic demand, including the ongoing surge in net migration, point to a continuation of that momentum into the June quarter and - despite some easing in consumer confidence and business sentiment indicators - solid growth is forecast throughout the rest of 2014.

With our preferred estimate of the output gap now showing that the economy is operating near full capacity, inflationary pressures will continue to build over 2014 and beyond requiring further monetary tightening by the Reserve Bank. This - combined with further moderation in the housing market and easing commodity prices - will temper domestic demand somewhat.

The terms of trade reached a fresh 40-year high in the March quarter and contributed to rapid growth in nominal GDP and a narrowing in the annual current account deficit to less than 3% of GDP. That said, dairy auction prices continued to ease in June, declining further from the record levels seen in February this year, and the terms of trade likely peaked in the March quarter. Falling commodity prices will begin showing through in June quarter export values, but the annual current account deficit should remain less than 3% of GDP through the middle of this year as drought-affected quarters drop out of the annual figure.

Activity in the international economy has picked up as the transitory factors that weighed on growth in the March quarter receded. Activity in China stabilised on the back of supportive government measures while US activity recovered following the harsh winter. Meanwhile, inflation is rising in many advanced economies, driven mainly by country-specific factors. Despite rising inflation, the policy stance of major central banks remained accommodative, with the ECB easing its monetary policy as expected.

This month’s special topic looks at the interaction between fiscal and monetary policy.
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