Monthly economic review: April 2018

11 Apr 2018

The New Zealand economy expanded by 0.6 percent in the December 2017 quarter, driven by an increase in service industries and goods-producing industries activity. This was partially offset by a reduction in primary industries output, with the hot dry weather leading to a fall in milk production. On an annual average basis, the economy expanded by 2.9 percent in the 2017 calendar year.

The current account deficit totaled $7,722 million in the 2017 calendar year, equivalent to 2.7 percent of gross domestic product. The annual deficit rose by $1,737 million from a year earlier, primarily due to an increase in foreigners’ earnings on their foreign direct investments in New Zealand. Partially offsetting this was an increase in net goods and services exports. The net international investment position, which measures the net amount New Zealand owes the rest of the world, was $155.2 billion at 31 December 2017 (equivalent to 54.8 percent of GDP).

Reserve Bank Governor, Grant Spencer, left the official cash rate (OCR) at 1.75 percent on 22 March. He noted that inflation is expected to weaken over the near term due to “softness in food and energy prices and adjustments to government charges”. This was the last OCR decision with Grant Spencer as Governor. Adrian Orr took over as Reserve Bank Governor on 27 March. The new Policy Targets Agreement between the Governor and the Finance Minister Grant Robertson retained the consumer price inflation target but also requires monetary policy to support “maximum sustainable employment within the economy”.

Fonterra has lifted its 2017/18 milk price by 15 cents to $6.55 per kilogram of milksolids, but reduced its forecast dividend payout by ten cents a share to a range of 25 – 35 cents. The company noted that milk production in February was two percent lower than a year earlier due to difficult weather conditions. However, annual milk production to the end of February was one percent higher than a year earlier. International dairy prices have fallen in each of the last four Global Dairy Trade auctions.

International financial markets have become unsettled following recent trade tariff announcements in the United States and China regarding trade between the two countries. In March, President Trump announced that the United States was looking at placing tariffs of US$50 billion worth of imports from China (including robotics, IT, communication technology), saying that it was due to “China’s unfair trade practices related to the forced transfer of U.S. technology and intellectual property”. In response, China has proposed tariffs on certain U.S. imports (such as soybean, cars and chemical products) up to a value of US$50 billion. President Trump has since instructed the U.S. Trade Representative to consider tariffs on a further US$100 billion of exports to China.

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