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Monthly Economic Indicators

Executive Summary

  • Greater strength in domestic demand contributed to stronger GDP growth over the first half of 2011 than forecast in the Budget
  • Historical measures of external indebtedness have overstated vulnerability
  • Global sentiment becoming increasingly downbeat, posing risks to New Zealand’s outlook

Despite a fairly flat outturn in the June quarter, real GDP growth over the first half of 2011 has been stronger than anticipated, boosted by stronger domestic demand as consumers have proven more resilient. The February earthquake had less of a negative impact on March quarter GDP than we had estimated but there was a degree of payback that flowed into the June quarter contributing to the volatility in the quarterly outturns. The level of nominal GDP for the first half of 2011 was in line with forecast.

Improvements to official statistics show that New Zealand’s level of net international indebtedness has not been as severe as previously thought. New Zealand’s net liability position is now reported as around 70% of GDP. The peak in the net liability position is now thought to have been around 85% of GDP compared to earlier estimates closer to 95%. The latest measures still show that net liabilities increased over most of the 2000s but the more accurate picture that emerges further distinguishes New Zealand from countries facing substantially larger economic and fiscal problems. This is a welcome development given the increased focus that may be placed on vulnerabilities in light of the deteriorating global outlook.

The outlook for the global economy deteriorated in September as concerns around Greece being unable to meet its debt obligations increased and risk aversion reigned in financial markets. The actions of policy makers have been insufficient to quell fears about the euro area and US growth. Extensions to the European Financial Stability Facility have been proposed but are yet to be ratified by all members; the European Central Bank has continued to purchase Italian and Spanish bonds in an attempt to keep funding costs down; and the US Federal Reserve has enacted “Operation Twist” aimed at changing the composition of its balance sheet to reduce longer dated borrowing rates. Both Consensus and IMF growth forecasts have been revised down with the IMF also developing a downside scenario.

The impact on New Zealand of the deterioration in the global outlook has been relatively mild so far, with indicative bank funding costs increasing and demand for New Zealand government bonds weak earlier in September before returning later in the month. Should conditions deteriorate further, New Zealand’s banks are better placed to withstand issues in global financial markets than they were prior to the global financial crisis. While the global environment increases risks associated with the economic outlook, we expect the New Zealand economy to remain supported by an elevated terms of trade as well as domestic factors including the Canterbury rebuild. Our exposure to Australia and Asian economies is also a relative positive.

Global weakness is yet to show any significant impact on confidence with consumers remaining relatively upbeat. We conducted our business talks ahead of the Pre-election Update in early September and while fortunes vary by sector, business conditions have generally improved since our previous round of interviews in March. This month’s special topic outlines the key messages from these talks.

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