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Monthly Economic Indicators

Executive Summary

  • A solid lift in business activity and business confidence continues to point to stronger GDP growth in the second half of 2016 than forecast in the Budget Update.
  • Demand in the economy is driven by elevated net migration inflows, housing demand and tourism spending. The export price recovery is expected to continue.
  • Annual inflation remained weak in the September quarter, owing to low petrol prices and a reduction in vehicle levies. However, inflation is expected to rise from here.
  • International data were mixed but generally positive and expectations of US monetary tightening increased.

Economic data released in October continued to point to faster GDP growth in the second half of 2016 than forecast in the Budget Economic and Fiscal Update. The Quarterly Survey of Business Opinion showed a strong expansion in business activity in the September quarter and a lift in business confidence, driven by the construction and tourism industries. Demand in the economy continues to be propelled by record net migration inflows, housing demand and tourist arrivals, while household retail spending was also solid. All told, data point to real GDP growth in the September quarter of around 0.8%.

Other indicators of activity remained positive, as key drivers of demand persisted. High consumer confidence is expected to support private consumption growth in the December quarter, and house price growth rebounded in September, following a fall in August, as the market adjusted to the Reserve Bank’s tightening of loan-to-value lending restrictions for investors nationwide. High house prices are expected to continue to support residential investment growth. A more positive outlook for real and nominal GDP than in the Budget Update forecasts supports a stronger outlook for the Government’s tax revenue over the year ahead.

Despite a retracement in dairy prices in October, export prices are expected to resume their pick-up, although a high New Zealand dollar (NZD) will continue to weigh on farm-gate milk prices. However, the annual trade deficit increased slightly in the September quarter from the June quarter, partly as lower meat exports reduced export values and the import of two large aircraft boosted import values.

Reflecting strong business activity, capacity pressures are becoming more evident, but they have not flowed through to higher prices so far apart from in construction. Annual inflation remained low in the September quarter at 0.2%, weighed on by lower petrol prices, a high New Zealand dollar (NZD) and a reduction in the ACC motor vehicle levy on 1 July. However, annual inflation is expected to rise from here as housing costs continue to grow strongly, the earlier falls in petrol prices drop out of the annual calculation, and domestic demand picks up. The market expects at least one further Official Cash Rate (OCR) reduction by the Reserve Bank to help bring inflation back up to its target range.

International economic data were mixed but generally positive in October and financial markets were more stable than in the previous month.  Expectations of interest rate rises increased in the US on signs of strengthening activity, growth in output remained stable in China and higher hard commodity prices will boost income growth in Australia.  Euro area activity remains moderate, but inflation is low; in contrast, prices are rising in the UK as a result of the fall in the pound.  The global outlook has been revised down from earlier in the year and downside risks dominate the outlook.

This month’s special topic looks at the key judgements and assumptions that will influence the Treasury’s economic and tax forecasts in the Half-Year Economic and Fiscal Update.
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