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NZ Treasury: Monthly Economic Indicators (MEI)

Executive Summary:

* World outlook is stronger but significant challenges remain
* New Zealand's economic recovery strengthens in October
* Inflationary outlook remains subdued despite a spike in the September quarter


The outlook for world economic growth was revised up by the IMF in its October World Economic Outlook and indicators of economic activity also lifted. Credit conditions continued to ease, making it easier for New Zealand banks to borrow offshore and both commodity and equity prices continued their rise. However, significant challenges remain, which will likely restrain the extent of the recovery over the medium term. This month's Special Topic explores further the impact of recent global developments on the New Zealand economy and the challenges that lie ahead.


The recovery in New Zealand growth appears to have strengthened over the September quarter. Surveys show that activity and business and consumer confidence have recovered strongly over the past few months. However, much of this recovery can be attributed to the forward-looking components of the surveys, with many of the current components remaining weak. This dichotomy is to be expected at the trough of the cycle but there is a risk that expectations will fail to be realised so that the recovery is not as strong as the indicators suggest. The Treasury is expecting the economy to grow at an annual rate of around 2% over the second half of 2009.


The pick-up in domestic demand was also evident in recent developments in the household sector. House sales for the September quarter were higher than in the June quarter, so too were the number of building consents, implying residential investment will strengthen in coming months. Retail sales bounced back in August, following falls in June and July, but recent electronic card transactions suggest consumer spending remained subdued in September. Low interest rates and rising net immigration have been supporting demand and, as a result, we expect private consumption to grow modestly in the September quarter.


The annual inflation rate fell from 1.9% in the June quarter to 1.7% in the September quarter despite an unexpected 1.3% rise in consumer prices in the latest quarter. Prices in the tradables sector were 0.1% lower than the same time last year while non-tradables prices rose 3.0%. The surprise was that tradables inflation did not fall further given the recent appreciation of the exchange rate, which reduces the New Zealand dollar price of imports, and the fall in world oil prices from their elevated levels last year. Annual inflation is expected to rise in the December quarter before trending lower over 2010.


Export commodity prices continued to recover, although the stronger exchange rate offset much of the benefit to exporters. The overall value of merchandise exports fell in September, but not by as much as imports, leading to a further narrowing of the trade deficit.


For full Monthy Economic Indicators for October 2009 please visit the following site: http://www.treasury.govt.nz/economy/mei/oct09.

ENDS

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