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Monthly Economic Indicators

Executive Summary

  • Growth has been more subdued than incorporated in the Budget forecasts, although partly reflecting the impact of drought conditions
  • Nominal GDP – and tax revenue – has closely matched expectations owing to higher terms of trade
  • The economies of our trading partners are set to slow in the second half of 2010
  • Outlook for New Zealand economy also dependent on domestic factors including Canterbury earthquake and tax changes

The New Zealand economy continued its gradual recovery from recession.  With real production GDP rising just 0.2% in the June 2010 quarter, economic growth has been much more subdued in the first half of 2010 than incorporated in the Budget 2010 forecasts.  Weak growth in the June quarter also means we are more confident this recovery is weaker than typical recoveries experienced previously in New Zealand.

Signs of rebalancing in the economy towards the tradable sector, which were present earlier in the year, have eased recently.  Drought conditions impacted negatively on tradable sector industries such as agriculture and primary manufacturing in the June quarter, although other manufacturing industries also weakened.  Growth in the quarter was driven by higher output in industries associated with the non-tradable sector, particularly construction and most service industries.

While real growth was much weaker than expected, the level of nominal GDP in the June quarter was similar to our expectations and thus tax revenue was also very close to forecast over this period.  A key contribution to nominal GDP growth over the past three quarters has been a large rise in the merchandise terms of trade (the ratio of export prices to import prices).  The current level of the terms of trade, driven by strong commodity prices, is an offset to stalling real output in the tradable sector and is boosting national incomes as well as the trade balance.

June quarter Balance of Payments data confirmed an expected turning point in the current account deficit.  On an annual basis, the current account deficit rose from a 9-year low of 2.4% of GDP at March to 3.0% at June, the first widening since the global financial crisis escalated in late 2008 and similar to our Budget forecast of 3.2%.  The widening of the deficit was caused by an increase in the income and transfers deficit more than offsetting a rise in the goods surplus to historic highs.

The economy will be affected by a number of one-off factors in the second half of 2010.  These include some post-drought recovery in coming quarters, the tax changes from 1 October 2010 and the Canterbury earthquake.  Another key factor will be a slowdown in the economies of our trading partners expected in the second half of 2010.  However, such a slowdown does not automatically mean growth in the New Zealand economy will slow in the second half of the year.  As it was in the first half of 2010, New Zealand may remain out of sync with our trading partners depending on the exact impact of the one-off domestic factors.

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