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Monthly Economic Indicators

Executive Summary

  • Real GDP grew by a stronger than expected 0.9% in the December quarter. Growth strengthened markedly in the second half of 2015.
  • Growth is expected to moderate in the first half of 2016, as subdued farm incomes weigh on business investment.
  • Lower terms of trade and low inflation dampened nominal GDP, and the terms of trade may fall further as dairy prices declined in early 2016.
  • The annual current account deficit narrowed on the back of growth in export services.

The economy expanded by a stronger-than-expected 0.9% in the December quarter 2015, the same pace of growth as in the September quarter, following 0.3% growth in both the March and June quarters. Growth was driven by increases in private consumption and residential investment, reflecting record net migration inflows and an expansion in residential construction in Auckland. In addition, continued elevated tourist arrivals following their earlier surge also supported the level of GDP.

Growth is expected to moderate to around 0.6% a quarter in the first half of 2016 as business investment and exports are expected to be subdued. Business fixed investment is expected to slow owing to lower farm incomes, which reflected a fall in dairy prices. In addition, the earlier high livestock slaughter may weigh on agricultural production and exports in coming quarters. However, the growth outlook remains solid, supported by high population growth, residential investment led by Auckland and low interest rates.

The Reserve Bank reduced the Official Cash Rate (OCR) at its March Monetary Policy Statement, primarily in response to a weaker global outlook and a fall in inflation expectations. Changes in the Reserve Bank’s forecast of short-term interest rates point to a further rate reduction in 2016.

Nominal GDP eased 0.1% in the December quarter, led by a 1.3% fall in the terms of trade. The goods terms of trade decline 3.4%, owing to further declines in dairy prices. Low inflation also weighed on nominal consumption growth, but it was held up by strong growth in consumption volumes.

Despite a lower goods terms of trade, the annual current account deficit fell to 3.1% of GDP in the December quarter from 3.3% in September. An increase in the annual services surplus, owing to strong growth in services exports, and a smaller income deficit more than offset a widening in the goods trade deficit. The current account deficit may widen in 2016 as earlier dairy price falls continue to impact on dairy exports.

Global economic data were mixed, with the US recovery continuing to some extent and activity in Australia and the euro area showing a small pick-up. However, weak inflationary pressures and uncertainty in the global growth outlook reinforced a more accommodative stance for monetary policy across the world. The New Zealand dollar fell following the OCR cut in New Zealand, but appreciated later in the month on the back of a softer policy stance on the part of the US Federal Reserve.

This month’s special topic analyses information collected in the Treasury’s March 2016 business talks. Overall, these talks suggest that current growth in the New Zealand economy may be slightly stronger than forecast in the Half-Year Economic and Fiscal Update.
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