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Monthly Economic Indicators

Executive Summary

  • The near-term growth outlook for the New Zealand economy has stabilised, although weaker than expected in the Budget Update.
  • The Treasury expects GDP growth of around 0.6% per quarter in the second half of 2015, driven by private consumption, residential investment and tourism.
  • New Zealand dollar depreciation is starting to contribute to higher price increases.
  • The US is expected to raise its policy rate in December 2015 while other major economies are expected to remain on hold or to ease further.

Key economic data released over November continued to point to a pick-up in GDP growth over the second half of 2015 to around 0.6% per quarter from weak outturns in the first half of the year. Growth is expected to be supported by private consumption, residential investment and an historically elevated level of services exports. That said, the outlook has weakened since the Budget Update, and a higher unemployment rate, falling terms of trade and a retracement in dairy prices are a reminder of the risks to the outlook.

Steady growth in real incomes, despite a fall in employment, boosted spending by New Zealand households in the September quarter, pointing to solid growth in private consumption. Since then, a rebound in consumer confidence and transactions data suggest healthy consumption growth in the December quarter. For now, households are maintaining their consumption levels despite the drag on incomes from lower terms of trade.

Housing demand slowed sharply in October as the market adjusts to regulatory changes. House sales and house prices both fell, driven by weakness in Auckland, as tighter government property taxation rules came into effect on 1 October and the market anticipated the Reserve Bank's investor loan-to-value restrictions for Auckland which began on 1 November. Elsewhere, housing demand appears to have held up, partly as buyers continue to look for more affordable options outside of Auckland.

The earlier depreciation in the exchange rate flowed through to higher business prices in the September quarter. Business input and output prices showed faster increases than previous quarters, driven by agriculture, petrol and imported capital. Exchange rate depreciation is expected to continue to flow through to higher tradables inflation in coming quarters. However, continued low growth in labour costs suggests that non-tradables inflation is likely to remain weak.

The terms of trade declined 3.7% in the September quarter owing to the earlier falls in dairy prices, while both export and import prices were boosted by the lower exchange rate. Commodity export prices showed some pick-up in the October month as dairy prices rose, but GlobalDairyTrade auction prices retraced in November, pointing to risks of dairy prices taking some time to recover from their lows.

Global data released in November reflected the divergence between the sustained recovery in the US and slower growth in the other major advanced economies. Accordingly, expectations for a rate hike by the US Federal Reserve in December have increased, while the other major advanced economies are either on hold at an accommodative level or are expected to ease further. The Half-Year Economic and Fiscal Update, to be released on 15 December, will provide an updated assessment of the outlook for the NZ economy.

This month's special topic examines the recent history and the near-term outlook for tax revenue. The topic concludes that, while tax revenue has been running close to its Budget Update forecasts, weaker growth than forecast in the first half of 2015 and lower-than-expected interest rates may gradually impact on tax.

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