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Monthly Economic Indicators

Executive Summary

  • Softening domestic demand and labour market indicate GDP contraction in March
  • However, labour market weakness likely overstated and positives such as tax cuts and high dairy payout to support economy in second half of 2008
  • Inflation will be higher than forecast with inflation pressures remaining intense
  • Worst of financial market turmoil possibly over but real economy effects still relevant

Treasury’s Budget Update forecasts were released in May and predict that real GDP growth will fall to 1.5% in the year to March 2009.  Factors behind the slowdown in growth include pressure on households from high interest rates, rising food and energy prices and falling house prices.  Drought also negatively affects agricultural production over this period.

Weak retail sales growth in the March quarter suggests that consumption growth may be a little slower than forecast, contributing to the likelihood that real GDP will contract slightly more than the 0.1% we forecast for the March quarter.  Private consumption growth is likely to remain weak in the June quarter but positive factors such as tax cuts, a high dairy payout (which is likely to remain elevated into next year) as well as continued labour income gains should help stimulate moderate private consumption growth later in the year.

March quarter labour market data were noticeably weak, with the fall in employment, measured by the Household Labour Force Survey (HLFS), the largest since 1989.  The unemployment rate increased to 3.6% while the participation rate fell to a 3-year low of 67.7%.  The degree of weakening in the HLFS is likely to be overstated and partly reflects data volatility.  Data volatility has particularly affected the results for women in the past year.  Wage growth remains elevated and is unlikely to ease significantly in the near future, providing support for consumption growth during a time of rising prices elsewhere in the economy.

Continuing price pressures were apparent in the retail sales, capital goods price index, and producer price index releases in May.  With input prices rising faster than output prices, firms’ margins are being squeezed and profits coming under pressure.  A net 36% of firms in the May National Bank Business Outlook expect to increase prices over the coming year, including a net 55% of retailers.  Recent increases in oil and petrol prices mean that inflation will almost certainly be higher than forecast and annual CPI inflation will likely exceed 4% in September.

Despite a particularly high near-term inflation outlook, the Reserve Bank kept the OCR on hold in its June Monetary Policy Statement as it expects a prolonged period of weak economic growth.

With the possibility that the worst of the international financial market turmoil is over and March quarter growth in a number of countries a little ahead of expectations, central banks have become increasingly concerned about rising inflation.  Interest rates have started to increase in the US as the Federal Reserve is considered to be on hold, with a rate increase expected by year-end.

This month’s special topic examines the economic performance of Australia.


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