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Monthly Economic Indicators

Executive Summary

  • New Zealand economy expected to remain in recession until late 2009
  • A softening in the labour market over the past year forecast to continue
  • Further signs of stabilisation in global markets

The Treasury's Budget forecasts were released in May and show a much weaker outlook for the economy than previously forecast in December. With lower export and domestic demand, real GDP is expected to fall 0.9% in the March 2009 year and 1.7% the next year before staging a hesitant recovery. On a quarterly basis, real GDP is expected to fall in the first three quarters of this year, with growth resuming in late 2009. This profile is in line with the recent recovery in forward-looking indicators such as business confidence.

An important driver of the downturn in 2008 was a contraction in consumer spending and the latest retail figures suggest this continued in early 2009. The volume of retail sales fell 2.9% in the March quarter, more than double the previous largest fall recorded. Motor vehicle sales were the largest contributor to the fall, but there was also weakness in areas associated with housing and discretionary spending. Consumer spending is set to remain subdued due to factors such as falling house prices and rising unemployment.

The downturn in the economy has seen the labour market weaken over the past year. A fall of 1.1% in the number of workers in the March quarter was the largest since 1989 and led to a rise in the unemployment rate to a 6-year high of 5.0%. The rise in unemployment would have been larger if not for a fall in the labour force participation rate as some people were discouraged by the difficulty in finding work. Unemployment is forecast to rise further in the year ahead, even as economic growth resumes, as the labour market tends to lag the wider economy.

The deterioration of job prospects overseas has discouraged people from leaving New Zealand and encouraged more New Zealanders to return home, thereby lifting the net gain of permanent and long-term migrants. Net migration inflows have risen much more quickly in early 2009 than expected in the Budget forecasts. The resulting higher population growth poses upside risks to property and construction activity, which remain at low levels but have shown signs of recovery in recent months.

A weaker outlook for New Zealand's trading partners was the main factor behind the downward revisions to the Budget forecasts. For many of our trading partners, real GDP fell sharply in the March quarter and unemployment has continued to rise. However, global financial markets and forward-looking indicators of economic activity have stabilised in recent months and the average Consensus forecast for trading partner growth in May was unchanged for the first time since early 2008.

This month’s special topic examines how this recession compares with previous recessions in New Zealand. It highlights the degree of uncertainty around how deep this recession could be and how quickly the economy could recover

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