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Monthly Economic Indicators – February 2004

Text finalised Friday 5 March 2004.

Executive Summary
February saw the release of data that showed the state of the labour market at the end of 2003. Although the unemployment rate increased slightly from 4.4% in the September quarter to 4.6% in the December quarter, the labour market continues to operate under tight conditions. Employment growth increased by only 0.1% in the quarter, but hours worked rose 0.9%. This increased demand for labour hours in the quarter was met mainly from the existing workforce, resulting in a shift from part-time to full-time employment.

Despite the tight labour market conditions, there is little sign of any sustained real wage pressure in the overall economy. Nominal wages, as measured by the LCI, rose by 2.1% for the year to December 2003. This implied a real wage increase of 0.6%. Although real wages have been on the increase since late 2000, they are still lower than the 2.1% real wage inflation witnessed in 1999. Nominal wage increases combined with higher employment growth saw total nominal earnings increase by 5.9% in the year to December.

Other partial indicators of the economy suggest that the December quarter continued to expand at a robust pace, albeit not as strong as the 1.5% recorded in the September quarter. Retail sales volumes expanded by 1.2% in the December quarter, pointing to a strong contribution from consumption. Although export receipts are still below the levels from a year ago, the pace of decline is halting, due to rising commodity prices and a recovery in export volumes. While not all the indicators of activity for the quarter have been released, indications at this stage suggest that growth is likely to be in line with the 0.9% forecast in the December Economic and Fiscal Update. This would bring annual average growth for the 2003 calendar year to 3.5%.

Despite a fall in the number of house sales in January, building consents are still at a high level but are past their peak. This suggests that there is still a pipeline of construction activity supportive of growth for the first half of this year. House prices continue to rise, recording its highest annual rate of increase in 22 years at 21.9% in the year to December. This helped boost household net worth by 5.2% in the December quarter, the largest quarterly rise since the net worth series began in 1989.

Although indications at this stage point towards strong near term momentum in growth, we continue to expect a slowdown in domestic demand growth as 2004 progresses. Climatic conditions have provided additional risks towards the downside. However, it is too early at this stage to fully assess the impact of recent flooding in the lower North Island on agricultural production and GDP. It is clear that sizable damage has been sustained on farms, households and businesses in the affected areas. Agricultural production will be negatively affected due to the loss of livestock, difficulty in collecting milk, damage to farms and loss of crops. There were also temporary transport disruptions due to road closures. However, there will be short-term offsets to GDP from increased reconstruction activity. Forthcoming data releases on agricultural production and other activity in the coming months will provide a fuller picture of the flood impact.

Read the full analysis for February at:

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