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Monthly Economic Indicators

Executive Summary

  • A range of indicators point to business conditions improving in the near term…
  • …but this is tempered by weak consumer confidence
  • Inflation expectations lift markedly, driven by the expected Christchurch rebuild

A range of indicators point to business conditions improving over the year ahead. In the May National Bank Business Outlook, business confidence and the key own activity expectations measure lifted back to around levels seen prior to the February earthquake. In addition, profit expectations, investment and employment intentions all rose above their long-term averages. Business credit expanded for the seventh consecutive month in May, following a marked decline over the recession which reflected investment plans being postponed or cancelled. Unlike in early 2010, when expectations were not matched by activity, the factors expected to drive the economy over the year ahead appear more certain: the Rugby World Cup is scheduled to take place in the second half of the year and the earthquake rebuild is expected to gather speed from early 2012.

In contrast to business confidence bouncing back in recent months, consumer confidence has failed to rebound. The headline consumer confidence measure comprises a mix of current and forward-looking questions and, in the May survey, the former declined while the latter rose. With consumer confidence having a close relationship with private consumption (over 60% of expenditure GDP), the result tempers some of the forward-looking business indicators.

Inflation expectations lifted markedly in May, registering the largest percentage point increase and the highest outturn for more than 20 years. Over the past decade, inflation expectations (and inflation) have trended up, with the two-year-ahead measure now at the top of the Reserve Bank’s 1 to 3 percent target range. In the Budget, we forecast annual inflation to peak over 5% in the current quarter, before falling to 2.5% in June 2013, ie, two years out. The Reserve Bank’s next Monetary Policy Statement is due for release on 9 June.

There was a loss of momentum in the world economy during May, with data releases generally weaker than market expectations. The softer data, concerns around China’s growth and increasing inflationary pressures have all contributed to the slowdown. However, the international outlook remains unchanged from our Budget forecasts, although the balance of risks has shifted slightly towards our downside scenario.
May’s data reveal a domestic economy that is currently fairly flat, but both consumers and businesses are confident that better times lie ahead. The relatively stronger forward-looking outlook from businesses is likely a reflection of a more robust environment for tradable industries, with agriculture and manufacturers benefitting from high world commodity prices and exposure to the Australian economy. All up, these data suggest the recovery will continue to be business-led, with households following as employment and income growth lift.

The first of our special topics looks at labour market participation and finds that the stabilisation of participation during the recession was largely driven by increased participation of older age groups. The second special topic discusses global fiscal consolidation, noting the impact on the world and the New Zealand economies has already been incorporated in the Budget 2011 forecasts.
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