Monday, 10 June 2019

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Executive Summary

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• The Government released its first Wellbeing Budget

• Retail sales maintained momentum in the March quarter

• Annual trade deficit narrows and terms of trade improve

• Trade tensions escalate and weigh on global economic activity

• RBNZ and Reserve Bank of Australia ease monetary policy

The 2019 Budget Economic and Fiscal Update was released on Thursday, 30 May. The budget included net new operating spending of $15.2 billion and net new capital expenditure of $10.4 billion over the forecast period, compared with Budget 2018. This new spending is prioritised to support improved provision of mental health services, improved child wellbeing, Māori and Pasifika aspirations, investing in infrastructure, and improving productivity. Real GDP growth is forecast to average 2.6% per year across the forecast period to June 2023 while the unemployment rate is expected to decline to 4.0 in 2020 before gradually rising to 4.3% by 2023. A tight labour market adds to wage pressures over the forecast period and supports household spending.

Strength in retail sales carried through to the March quarter, with sales volumes increasing 0.7% in the quarter, following a 1.8% increase in December, and 3.3% over the year. Growth was broad-based across most storetypes, although falls were recorded in accommodation and pharmaceutical and other store-based retailing (which includes duty-free stores) that may reflect recent falls in visitor arrivals in February and March.

Auckland house prices continued their downward trend, falling 2.0% in April, to end up 4.4% down over the year to April. House prices outside of Auckland continued to rise, with national house prices up 1.3% on April last year. Building consents have fallen back over the past two months, but remain at historically high levels, 3.6% above the same time last year, that will support growth in residential investment through the rest of the year.

Business confidence lifted slightly in May, with a net 9% of firms now expecting their own activity to increase, although a net 32% still expect general business conditions to deteriorate in the year ahead. Consumer confidence fell slightly in May, although it remains close to its historical average level.

The annual trade deficit narrowed slightly in April, with strong dairy exports leading to exports growing faster (up 11.7%) than imports (up 7.3%). The terms of trade rose 1.0% in the March quarter as the 3.5% fall in import prices more than outweighed a 2.6% fall in export prices. Dairy prices fell 7.5% over the quarter, reflecting weaker GlobalDairyTrade auction prices in the latter part of 2018. Lower fuel prices were the main contributor to the decline in import prices, reflecting lower crude oil prices.

As widely expected, the Reserve Bank of New Zealand (RBNZ) reduced the OCR by 25 basis points to 1.5% in May, citing slower domestic and international growth, and weakening inflation pressure as reasons for the cut. It left loan-to-value ratio (LVR) restriction settings unchanged in its latest Financial Stability Report.

International trade tensions escalated this month, with the US government announcing new tariffs on China and Mexico. Trade tensions have weakened growth in many Asian economies over the first quarter of 2019 and continue to weigh on economic activity in both the US, China and Asia.

The Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points to 1.25% at their June meeting, in line with market expectations and amid weakening economic data. Partial indicators of March quarter GDP were weak in Australia, with retail sales, construction activity and private capital expenditure all falling in the quarter.

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