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Monthly Economic Indicators

Executive Summary

  • The economy grew at a reasonable pace in Q2, rounding off a solid start to 2012.
  • The Canterbury rebuild is gathering pace...
  • ...but GDP growth unlikely to maintain the same pace in the second half of the year.
  • As expected, the annual current account deficit widened in Q2.

The New Zealand economy grew by 0.6% in the June quarter of 2012, in line with the Budget forecast and continuing on from the (revised) 1.0% increase seen in the March quarter. The largest contributions to growth on the production side came from the agricultural and construction industries, reflecting bumper milk production on the back of good growing conditions and an expected pick-up in residential construction activity.

A combination of factors should continue to support growth in the near term. The Canterbury rebuild is gathering pace, prices for our commodity exports appear to have reached a floor, and increased housing market activity should support consumer spending on big-ticket items too. However, the outlook is not without its headwinds and risks, with parts of the economy looking to have lost some momentum over recent months, the risks for agricultural production mainly on the downside, and ongoing concerns over the international economy. All told, the risks to our Budget forecast of 0.6% quarterly GDP growth in the September quarter lie on the downside.

The annual current account deficit widened to 4.9% of GDP in the June quarter, up from a downwardly-revised 4.5% of GDP in the year to the March quarter. This movement was driven by a narrowing in the annual goods surplus, reflecting lower prices for our commodity exports, as well as a widening in the investment income deficit on the back of higher profits earned by foreign-owned firms in New Zealand – predominantly banks.

Global developments during September were dominated by the ECB's announcement of "Outright Monetary Transactions" and the Fed's unveiling of its latest round of quantitative easing – dubbed "QE3". With short-term contagion risks receding, bond yields for "troubled" European countries have fallen. But with growth in Europe proving elusive, and further fiscal consolidation required across the board, financial market sentiment could change very quickly.

This month's special topic reports back from Treasury's recent round of business talks conducted with a cross-section of firms around New Zealand during September. The overall message was broadly consistent with the Budget Economic and Fiscal Update (BEFU) forecasts for 2012 to date and in keeping with the solid performance of the economy seen over the first half of the year.

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