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Monthly Economic Indicators

Executive Summary

  • Expectations of steady business activity and higher dairy prices point to the near-term growth outlook stabilising, but still weaker than in the Budget Update.
  • Inflation remains low despite some support from higher tradables inflation as a result of the fall in the New Zealand dollar.
  • Strong population growth continues to boost housing demand, with some spillover beyond Auckland.
  • A weaker outlook for global growth, particularly for emerging economies, continues to present a risk to the New Zealand economy.

Economic data released in October point to a stabilisation in the outlook, with growth in the second half of 2015 expected to return to around trend, but still weaker than forecast in the Budget Update. As indicated in the September Monthly Economic Indicators, given low growth in the first half of the year, growth of around 0.6% a quarter in the second half of 2015 means that growth in the December quarter 2015 from a year ago may fall below 2%, lower than the Budget Update forecast of 3.0%.

Business indicators point to steady expansion in trading activity in the September quarter, which is expected to continue in the December quarter, supporting employment intentions. However, investment intentions weakened as business confidence in the economy waned, reinforcing a softer investment outlook compared to the Budget Update. Reflecting previously weaker domestic demand, business capacity utilisation has fallen and near-term pricing intentions are low despite relatively steady growth in input costs.

Inflation remained low at 0.4% in the year to September and 0.3% in the September quarter, despite higher tradables inflation owing to past exchange rate depreciation. Non-tradables prices were flat in the quarter owing to softening demand and one-off reductions in health and transportation costs. Inflation is expected to pick up primarily as a result of higher tradables inflation.

Historically fast population growth continued to boost housing demand. Annual house price growth accelerated in September, driven by price increases in Auckland but also a strong pick-up in other regions, particularly in the North Island, as buyers looked for more affordable options. Auckland demand showed some easing ahead of the Reserve Bank’s regional loan-to-value restrictions due to come into effect in November and tighter taxation rules on investment properties.

Dairy prices continued to rebound in October from their post-GFC low in August owing to reduced auction volumes, although merchandise export prices are expected to fall in the September quarter owing to the earlier falls in dairy prices. Export values grew solidly in the September quarter, lifted by a lower NZD, but higher import values suggest net exports will subtract from nominal GDP growth. Services exports are expected to remain at an elevated level in the September quarter, supported by high tourist arrivals.

Soft international data in October and a weaker outlook are leading to expectations of accommodative monetary policy globally being extended further, either through additional quantitative easing, lower interest rates or later tightening. This has continued to support risk appetite, particularly for equities which have recovered somewhat since September. However, volatility in financial markets has continued.

This month’s special topic examines the international experience with fiscal targets and draws implications for fiscal rules in New Zealand.

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