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Treasury sees mixed messages in economic recovery data

Tuesday 6th April 2010

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The Treasury’s monthly summary of New Zealand’s economic indicators confirms the ‘curate’s egg’ views being expressed across different surveys – good in parts, not necessarily as good in others.

“Data in March 2010 were generally stronger than expected in the Treasury’s Half Year Update, released on 15 December, 2009,” the report said. “But the impact of the recession will continue to be felt for some time.”

Part of the positive economic indicators may be as much to do with a relief that the recession appears to be over as much as real economic growth Treasury speculated.

Among positive indicators were that real production GDP rose 0.8% in the December 2009 quarter, this being the first quarter to exceed population growth in two years. Growth was more broad-based, as some industries, notably manufacturing, showed their first significant growth for several quarters.

Business confidence readings also point to an ongoing economic recovery, though March’s rate of growth may not be as strong as in December.

However, “consumer spending growth may be slightly lower this quarter as a number of negative factors, including increases in long-term interest rates and higher petrol prices, have weighed on consumers since the start of the year,” the report said. There has also been a reported jump in surveyed unemployment and households may be spending more.

“A slowing housing market may also contribute to softer private consumption,” Treasury said. “The housing market has weakened with house price growth easing and sales in the three months to February 2010 down 18% on the previous three months. However, uncertainty related to changes in the tax treatment of property investments in the upcoming Budget may be driving this weakening.”

The global economic recovery and outlook has continued to improve, and world spot prices for New Zealand’s key commodities is up by nearly half in the year to February 2010 to near the historic highs of mid-2008. The lift in commodity prices is expected to boost New Zealand’s terms of trade significantly, which began in the December 2009 quarter. For non-commodity exporters, a strong Australian economy and lower cross-rate against the Australian dollar have all been positive factors Treasury said.

“The economy may be recovering slightly more strongly than expected in the Half Year Update, but this recovery has only just begun,” Treasury said. “Real GDP in late 2009 remains 2.1% below its peak two years earlier and this peak is not likely to be reached again until the second half of 2010. The output gap, the difference between actual output and our estimate of potential output, is also around negative 2%. The spare capacity in the economy this figure represents is also reflected in the unemployment rate, which sits at a 10-year high of 7.3% and well above estimates of a non-accelerating inflation rate of unemployment of around 4.5% to 5%.”

Treasury said there are more risks in its outlook and that a more typical economic recovery would see stronger growth eventuate and confidence indicators pointing to such an upturn.

“However, this confidence has been driven by future expectations and may be more a reflection of how deep the recession was (relief factor) than how strong the recovery will be,” Treasury said.

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