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Monthly Economic Indicators

Executive Summary

  • GDP increases marginally in the June quarter, ending 5 quarters of contraction.
  • Current account narrows more than expected as investment income deficit shrinks.
  • Lower risk aversion and higher commodity prices continue to push NZ dollar higher.
  • Net migration and confidence expected to drive housing and consumption higher.
  • Indicators point to a slow economic recovery, with the composition of growth tilted more towards domestic factors than external factors.

The New Zealand economy grew marginally in the June quarter, ending the recession which began in March 2008 - one quarter earlier than we had anticipated. Production GDP rose 0.1% in the quarter, as increased logging and oil production offset declines in manufacturing and construction. The April 1 tax cuts boosted household disposable income, which flowed through to higher consumer spending. In addition, higher exports, coupled with lower imports, helped drive a 0.4% quarterly increase in the expenditure measure of GDP.

A reduction in income earned from foreign investment in New Zealand and lower goods and services imports drove a significant decline in the current account deficit, with the annual measure shrinking from a revised 8.1% of GDP in March to 5.9% in June. In the Budget, we expected the current account deficit to narrow to 5.3% of GDP over the next two years, though we now expect it to fall towards 5% in the coming year. Further out, however, with the dollar expected to remain strong, demand for imports will pick up while the investment income deficit will also widen, increasing the current account deficit again.

The outlook for the world economy continued to strengthen in September. As a result, risk appetites and commodity prices rose strongly, along with demand for the New Zealand dollar. The Trade Weighted Index appreciated 2.9%, as the dollar strengthened against the currencies of all our major trading partners.

Net migration continues to remain robust, with would-be emigrants preferring to remain at home. At 15,600 in the 12 months to August and expected to rise, net migration is set to provide underlying support for a recovery in residential investment and consumer spending.

Relevant indicators suggest the trough in economic activity has passed and point to a gradual recovery in the New Zealand economy, with moderate growth expected in the September and December quarters. The composition of growth is likely be tilted towards the domestic (as opposed to the external) side of the economy, which we expect will do little to unwind macroeconomic imbalances over the medium term.

This month's special topic provides further insights from business talks conducted by the Treasury.

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