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Monthly Economic Indicators

Executive Summary

  • Domestic demand remains weak as households demonstrate restraint and business confidence falls
  • Despite the weaker tone of data, future activity will be supported by high commodity prices, post-earthquake reconstruction, and the 2011 Rugby World Cup
  • International policy developments took centre stage in October

In the face of significant debt and general uncertainty, households have maintained a high degree of restraint, resulting in flat retail spending growth in August. Weak spending growth in the third quarter, along with increases in the price of goods (particularly food), point to growth in consumption falling short of Budget forecasts. The extent to which consumers have adjusted their spending behaviour lately is evident in the purchases of major household items, which remain well below pre-recession levels. Meanwhile, transactions on electronic cards temporarily spiked in September as consumers waited until the last minute to bring forward spending prior to the 1 October GST and fuel excise rate rises.

Subdued consumption partly reflects the fortunes of the housing market, which, after a brief period of recovery in 2009, has softened through 2010. House sales fell 6.7% in September, translating into a 0.7% fall in the house price index, which is 1.3% lower than a year ago. The soft housing market has put the brakes on households' demand for credit, with net additions to household credit at levels last seen in the early 1990s.

The strength of New Zealand’s economic recovery was tested in September as the Quarterly Survey of Business Opinion measure of business confidence fell sharply. However, the sharp fall in headline confidence may have overplayed the degree of weakness in activity, as shown by a rebound in the more recent National Bank Business Outlook survey. Despite general weakness in data published in October, certain factors, such as high commodity prices, post-earthquake reconstruction in Canterbury and the Rugby World Cup are likely to support growth in 2011. Nevertheless, the Half-Year Update forecasts, currently being prepared, are likely to show a weaker level of economic activity over the forecast period relative to Budget forecasts.

Increases in food prices and government-related charges made significant contributions to the 1.1% rise in the September quarter CPI. The 1.5% annual rise in consumer prices represents the trough in the current cycle as further government charges, such as the GST rate rise, take effect in the December quarter. Although underlying inflation remained subdued in September, the relative stability of the exchange rate in early 2010 will reduce the likelihood that prices for imported goods will fall in the coming quarters.

Policy developments were the main focus internationally in October, with generally weaker data earlier in the month pointing to an increased likelihood that some developed countries would undertake further monetary policy easing. Positive international data released late in the month helped to increase commodity prices (the subject of this month's Special Topic) and commodity currencies such as the New Zealand dollar.

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