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Monthly Economic Indicators

Executive Summary

  • March quarter GDP was weaker than expected and more recent indicators point to slower growth over the coming year, although underlying growth drivers remain intact
  • The Reserve Bank reduced the Official Cash Rate to 3.25% on lower terms of trade and a weakening inflation outlook
  • Risks associated with Greece continue to build while international developments elsewhere were generally positive

Key economic data releases over the past month point to a slower growth path over the coming year.  Real GDP growth was low in the March quarter, below Treasury and market expectations.  This was partly as a result of temporary factors such as the drought which should at least partially unwind in coming quarters.  However, based on more recent indicators, private consumption and residential investment may make less of a positive contribution to growth over the year ahead than expected in the Budget forecasts.  That said, on an annual average basis GDP growth remains solid supported by high migration, healthy investment activity and solid labour income growth.  Nominal GDP growth in the March quarter was stronger than anticipated on higher-than-expected terms of trade.

The current account deficit was smaller than expected reflecting the higher terms of trade in the March quarter.  However, ongoing falls in dairy prices and higher oil prices mean the terms of trade are likely to resume their downward trend over the coming quarters. The current account deficit is expected to widen further over the coming year.

The Reserve Bank reduced the Official Cash Rate (OCR) from 3.50% to 3.25% on lower terms of trade and a weakening inflation outlook.  The Reserve Bank maintains an easing bias, dependent on data developments, and market analysts expect the OCR to fall further this year.

The New Zealand dollar depreciated over the course of the month in response to the OCR reduction, weaker than expected domestic data outturns, expected US monetary policy tightening and a rise in investor risk aversion.  Together with the fall in interest rates, this should act to offset some of the reduction in national income from the falling terms of trade.  As a result, the Reserve Bank MPS and Treasury BEFU forecasts for real and nominal GDP growth are not significantly different (although the composition of growth differs). 

Greece remains a concern, as the country failed to make its debt payment to the IMF due on 30 June, its recent bailout expired and its banks closed to limit the withdrawal of deposits.  Economic developments in advanced economies generally have been more positive, contributing to an upward trend in global bond yields and inflation.  Closer to home, recent Australian activity has been more upbeat.  However, China eased monetary policy further on a weaker outlook.

Overall, these recent developments highlight the risks of weaker economic growth than forecast in the Budget Economic and Fiscal Update (BEFU) which was finalised on 10 April 2015 and released on 21 May 2015.  Data releases in coming months will provide further indication of how the combination of factors affecting the economy will unfold.

This month’s special topic examines recent developments in international tourism and its impact on New Zealand’s travel services exports.
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