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Monthly Economic Indicators

Executive Summary

  • The economy is currently weaker than the December Update downside scenario
  • The downturn in the New Zealand economy intensified in the December quarter, with GDP declining 0.9%
  • The annual current account deficit widened in December, but is expected to narrow in the first half of 2009
  • Real GDP growth is expected to be low in 2009 as household spending and investment remain weak

The New Zealand economy contracted by 0.9% in the last quarter of 2008, lower than the Treasury's December Update forecasts, including the downside scenario. The decline in real production GDP was due to weak domestic and international economic conditions and was broad-based. The main drivers were weakness in manufacturing, construction, wholesale trade and tourism, partly offset by strong agriculture and primary food production.

The annual current account deficit widened to 8.9% of GDP in December from 8.6% in September. The annual current account deficit is expected to start declining in the first half of 2009 due to a narrowing of the goods deficit (due to lower imports as a result of weak demand and a lower New Zealand dollar) and of the investment income deficit (due to a fall in income on equity investments in New Zealand and lower debt-servicing payments resulting from lower interest rates). The merchandise terms of trade declined 0.9% in the December quarter, although they still remain close to their 34-year highs.

The past month has also seen the release of data that point to further weakness in the March 2009 quarter. According to the National Bank Business Outlook, firms’ own activity outlook and investment intentions decreased. This is the same theme in this month’s special topic on business talks conducted by the Treasury in March. Consumer confidence is also down as deteriorating global conditions, rising unemployment, falling house prices and higher prices of food and imports are making households cautious in their spending.

The global economy continues to weaken as the IMF, OECD, World Bank and Consensus Forecasts all revised down their growth forecasts for 2009. Despite several new monetary and fiscal packages announced this month and some positive news from the US and China, the fundamentals are still weak, although the pace of the deterioration is slower than before.

Due to deteriorating conditions in the international outlook, economic growth is now expected to be lower than Treasury’s downside scenario in the December Update in both 2009 and 2010 (March years). There is a lot of uncertainty surrounding both domestic and international economic conditions, so there is a wide range of possible outcomes for growth at this time. The Treasury is currently in the process of revising its forecasts for the Budget Update in May.
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