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Monthly Economic Indicators

Executive Summary

  • Financial market turmoil continues in October provoking government, central bank and IMF responses.
  • Forecasters revise outlook for world economy.
  • Domestically, indicators of activity point to soft economic growth in the September quarter.
  • Annual CPI inflation reached its peak at 5.1% in the September quarter.

The financial market turmoil that intensified in September spread further in October. It is apparent the crisis is no longer confined to developed western economies, with Asia and Eastern Europe now affected. Uncertainty over the quality of financial assets owned by banks saw the cost of financing for banks rise in early October, but eased later in the month as governments and central banks moved to prevent further erosion of confidence in financial markets. Actions by governments and central banks included insuring bank liabilities, recapitalising banks, providing liquidity and acquiring troubled assets. Central banks also cut their official rates to mitigate the impacts of the crisis on the real economy, with the Reserve Bank of New Zealand cutting the official cash rate 100 basis points to 6.5%.

Concerns about the impact of the financial crisis on real economic activity saw both Consensus Forecasts and the International Monetary Fund revise down their outlooks for world growth. This month’s special topic focuses on how episodes of financial distress have affected the real economy historically. The weaker outlook for world growth saw a drop in commodity prices, including oil. This fall in commodity prices, coupled with a preference for the perceived safety of US assets in an environment of falling risk appetite, saw a sharp decline in the New Zealand dollar against the US dollar.

Domestic data pointed to continued weakness in the New Zealand economy in the September quarter. In the September Quarterly Survey of Business Opinion more firms reported their own activity fell in the September quarter (32%) than in the June quarter (19%). Nominal retail sales rose in the August month but growth in their trend remains flat – even in the presence of rising prices. Indicators of manufacturing and service sectors’ activity are consistent with both sectors contracting. Forward-looking indicators in the September Quarterly Survey of Business Opinion and the October National Bank Business Outlook were consistent with activity remaining subdued in the December quarter, with the National Bank Business Outlook’s business confidence measure recording its biggest fall in the survey’s history.

The Consumers Price Index rose 1.5% in the September quarter, bringing annual inflation to 5.1%. Falling petrol prices, following on from the drop in oil prices, mean this represents the peak in annual inflation in the current cycle. Housing data pointed to continued easing in that market, which will put downward pressure on non-tradables inflation.

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