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Monthly Economic Indicators

Executive Summary

  • Increased employment has reduced spare capacity in the labour market...
  • ...but weak price pressures have reduced the prospect of interest rate increases over the year ahead   
  • Growth in the advanced economies remains uneven

The deepening dichotomy between growth in economic activity and prices was evident in the labour market and even more so in the retail industry.  Demand for workers increased at a brisk pace in the September quarter - employment rose 0.8% in the quarter to be up 3.2% for the year - while wages increased moderately, up 2.3% in the year.  In the retail industry, the difference between growth in activity and prices was stark - retail sales volumes increased 1.5% in the September quarter but prices fell 0.6%.  Elsewhere, dairy export prices continued their downward trend as did international oil prices; the firmer exchange rate, up 2.5% on a TWI basis, reinforced the downward price pressures.

The unemployment rate fell to 5.4%, still a little above its post-2000 average, suggesting that, all else equal, wage growth will rise towards its 15-year average of 3.4% over the next year or so.  However, inflation (or cost of living adjustments), which is a key ingredient in wage negotiations, has been weaker than expected so far this year, indicating that the rise in wage growth over the year ahead is also likely to be more gradual than expected.  The Reserve Bank’s Survey of Expectations shows that market analysts expect annual CPI inflation to be around 1.6% in September 2015, down from around 2.0% at the time the Pre-Election forecasts (PREFU) were completed.  Reflecting the weaker price pressures, surveyed expectations of short-term interest rates in 12 months time were also lowered.

In sum, domestic inflation has been more subdued, and dairy export prices have fallen more sharply, than the Treasury and other forecasters assumed earlier in the year.  As a consequence, growth in expenditure on goods and services and in farm incomes is likely to be weaker than forecast, resulting in lower tax revenue.  In addition, lower interest rates will impact on tax revenue collected from Resident Withholding Tax on interest income.  Full details will be available in the Treasury’s Half Year Economic and Fiscal Update (HYEFU) to be released on 16 December.

Internationally, growth remains uneven in the advanced economies, with the recovery continuing in the US and in the UK, while activity in the euro area and Japan remains weak. Further macroeconomic policy stimulation is expected in the euro area and Japan. Chinese activity showed broad weakness in October, partly owing to the housing market slowdown, and monetary policy support has been limited. 

This month’s special topic summarises the recently released independent report on the quality of the Treasury’s fiscal policy advice.
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