- Global sentiment has deteriorated as the Greek debt crisis has become more serious.
- Despite this, our central BEFU forecast remains appropriate at present as it incorporated financial market volatility and below-consensus euro area growth. However, downside risks have increased.
- Domestic business and household data in May were consistent with the modest GDP growth we had incorporated into BEFU for coming quarters.
During May the Greek debt crisis became more serious, as 70% of votes in the 6 May general election went to anti-austerity parties and a government was unable to be formed, requiring another election on 17 June. These problems have resulted in talk by European leaders of Greece leaving the euro area and discussion about the ramifications of doing so. Our BEFU forecasts included volatility in financial markets and below-consensus euro area growth, making our central scenario still appropriate at present. However, downside risks have increased since we finalised the forecasts on 27 April and our downside scenario can be seen as illustrative of a situation where Greece leaves the euro area and contagion is limited.
The escalation of the debt crisis has resulted in a deterioration in global sentiment, which has impacted on financial markets both internationally and domestically. Global equities have fallen to multi-month lows, safe haven bond yields have hit all-time lows and peripheral euro bond yields have risen substantially. We have seen some negative impacts on New Zealand, although there have been offsets. New Zealand commodity prices have fallen significantly and while some of the fall can be put down to rebounding supply, deteriorating global conditions have contributed. There have been offsets through a fall in the exchange rate which has cushioned the drop in NZD commodity prices, as well as decreases in the interest rates faced by both the government and households.
Domestic data releases this month showed that both households and businesses are tracking much as we had expected when finalising the BEFU forecasts. Consumer confidence, electronic card transactions and house prices are all consistent with modest private consumption growth in the next few quarters. Households will also receive support from rising wages and an improvement in the employment rate, despite a tick up in the unemployment rate. Business activity indicators point to GDP growth of around 1/2% in coming quarters, similar to our current forecasts which are close to the average of other forecasters. However, business margins do appear to be getting squeezed as firms struggle to pass on cost increases to customers in the current subdued trading environment.
The first of our special topics this month looks at Statistics New Zealand's GDP revisions which close the gap between the levels of the production and expenditure measures of GDP. The revisions paint a slightly different picture of the recovery from recession. We are analysing the impacts they will have on our forecasts. The second special topic examines the trade-off between austerity and growth. It concludes that New Zealand is different from the USA and the euro area in that fiscal consolidation is likely to have less of a negative impact on growth.