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Monthly Economic Indicators

Executive Summary

  • Rugby World Cup boosts growth in second half of 2011...
  • ...but international developments weaken the economic outlook for the year ending March 2013, despite the Canterbury rebuild

The surge in overseas visitors coming for the Rugby World Cup (RWC) contributed to a large rise in September quarter retail sales and will flow through to higher exports of services in the September quarter Gross Domestic Product (GDP) and Balance of Payments (BoP) releases later in December. In other areas of the economy, indicators of third quarter activity were generally positive.

The merchandise goods terms of trade eased in the September quarter reflecting weaker export commodity prices. That weakness, however, was offset by a rise in the services terms of trade. Although world prices for New Zealand’s export commodities continue to ease, the lower trade-weighted New Zealand dollar is also providing an offset. Merchandise goods export volumes also fell slightly in the quarter while import volumes rose as capital goods volumes surged 15%, which provides a solid underpinning for an expansion in quarterly business investment.

The annual current account deficit for the year ending September 2011, which will be published in the BoP data, is expected to remain around its June quarter level of 3.7% of GDP, with a narrower trade surplus offset by a smaller services deficit. Overall, we continue to expect quarterly GDP growth of just below 1% in the September quarter and, with the positive impacts of the RWC continuing into the fourth quarter, we expect a similar outcome for the December quarter.

Beyond the end of the calendar year, however, the outlook has deteriorated. The Treasury's pre-election forecasts (PREFU) assumed that European governments would manage the crisis without too much more damage to the real economy, but financial tensions have escalated and dragged down growth forecasts in the region and across our major trading partners. Although the outlook is still well above the indicative downside scenario outlined in PREFU, it has weakened to the extent that we now expect New Zealand's economic growth in the year ending March 2013 to be closer to 3% than the 3.4% we had forecast in the Pre-election Update.

It is likely that growth will also be lower in subsequent years, but it is too early to judge how material those impacts might be. We continue to expect the Canterbury rebuild to begin in earnest in the second half of 2012 and to provide an offset to global weakness. Easier monetary conditions, through a lower exchange rate and a potential delay to the start of expected rises in the Official Cash Rate, will also provide some offset to a weaker world economy.

In the PREFU we noted that in the downside scenario tax revenue would be around $14.5 billion lower across the four-year forecast period. Although we are still well away from the downside scenario, global economic risks have increased the chances of a downgrade to our revenue forecasts when the Treasury publishes its 2012 Budget Economic and Fiscal Update.
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