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Monthly Economic Indicators

Executive Summary

  • GDP growth in the June quarter rose a softer than expected 0.4%. The underlying pace of growth slowed markedly over the first half of 2015.
  • Treasury expects an around trend pace of growth over the second half of 2015 (i.e. around 0.6% a quarter).
  • Further declines in business sentiment and consumer confidence across the September quarter show that risks to the near-term outlook are to the downside.
  • That said, monetary conditions have continued to ease and this will support a pick-up in growth further out.

Key economic data releases over the past month showed that economic activity rose a softer-than-expected 0.4% in the June quarter, following the 0.2% rise in the March quarter. Growth slowed significantly from 2014 with sub-trend growth being reflected in increasing spare capacity as evidenced by the unemployment rate rising and weak non-tradables inflation. We expect annual growth to be around trend of 0.6% a quarter (or 2.5% per year) over the second half of 2015. Given the low growth recorded in the first half ofthis year, growth in the December quarter of 2015 from a year ago may fall below 2%.

Leading indicators such as consumer confidence and business sentiment continued to ease through the September quarter. In addition, concerns around the international outlook have increased with recent bouts of market turbulence highlighting the downside risks to the near-term outlook.

That said, monetary conditions have eased, with a further 25 basis point OCR cut at the September MPS and a continued depreciation of the trade-weighted exchange rate index (TWI) through the September quarter. This will support a pick-up in demand further out.

The terms of trade rose (reflecting the temporary rise in dairy prices through the March quarter), supporting strong growth in nominal GDP in the June quarter. They are expected to fall in coming quarters as the dairy price falls since March flow through into the trade data (notwithstanding the recent rises on the GlobalDairyTrade auction), reducing nominal GDP growth. This, in combination with a lower interest rate outlook, is expected to lower tax revenue growth in the 2015/16 fiscal year relative to the Budget Update.

The annual current account deficit widened to 3.5% of GDP in the June quarter, from a revised 3.4% in the prior quarter. The annual current account deficit was considerably narrower than forecast (-4.6%) in the Budget Update given the terms of trade have not fallen as quickly as anticipated, travel services exports growth has been stronger than forecast and the upward revisions, particularly to education exports.

The outlook for the international economy weakened in September as concerns increased about growth in emerging market economies, particularly China.  The US Federal Reserve kept its Funds Rate on hold at its September meeting, mentioning recent global developments. Financial market volatility eased from August, but remained relatively high.

This month’s special topic looks at the relationship between mortgage and wholesale interest rates. The topic concludes that the increase in the spread between wholesale and retail interest rates since the GFC is largely a result of changes in funding costs for banks arising from market and regulatory changes. With the regulatory change being permanent, the increase in spreads is likely to remain.

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