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Monthly Economic Indicators

Executive Summary

  • GDP records second quarter of negative growth in June.
  • Global financial market developments intensified in September.
  • Domestic demand indicators point to continued weakness, with Treasury’s Pre-election Update forecasts predicting a protracted downturn.
  • Reserve Bank lowers official cash rate by 50 basis points with market participants predicting a similar-sized cut in October.

Data released in September confirmed that New Zealand GDP declined in both the first two quarters of 2008, with a further contraction in the September quarter also probable. Considerable uncertainty surrounds the outlook for the world economy with significant financial market turmoil to the fore. We still expect the New Zealand economy to evolve broadly in line with the Pre-election Update forecasts which are much weaker than the Budget Update forecasts. However, given recent global financial market developments, considerable uncertainty exists around this outlook, with the risks increasingly moving to the downside.

Real production GDP fell 0.2% in the June quarter following a 0.3% decline in March. The fall was led by the construction and wholesale and retail trade industries, reflecting weak domestic demand. Drought affected activity in the agricultural, primary food manufacturing and electricity industries. Nominal GDP fell 1.0% as a decline in real expenditure GDP was compounded by higher import prices and lower prices for exports and residential investment.

The current account deficit widened to 8.4% of GDP as export receipts were affected by drought and imports increased, with the purchase of an oil rig and floating platform a major contributor. With New Zealand’s net international debtor position equivalent to 89% of GDP, there is likely to be limited scope for reductions in the investment income deficit, and consequently the current account deficit in the short term, given increasing debt servicing costs.

Other data point to continued weakness in domestic demand due to rising living and debt servicing costs, falling housing and financial wealth and lower job security. Retail sales fell again in July and net migration eased in August. REINZ data showed the weakest monthly house sales in 26 years, while building consents fell further.

Both consumer and business confidence spiked up in September as positive factors such as lower petrol prices and the 1 October tax cuts boosted morale. However, most responses to these surveys were provided before the recent intensification of problems in world financial markets.

The Reserve Bank cut the official cash rate by 50 basis points to 7.5%, with market participants now predicting a similar cut to follow in October.

This month’s special topic focuses on developments in global financial markets.

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