After contracting in the March quarter 2005, the economy rebounded strongly in the June and September quarters.
While there are signs that the economy may have slowed somewhat in the December quarter, underlying growth remains sound. The two most useful data sources for monitoring short term movements in the economy are receipts of value added tax (VAT) and visitor arrivals.
VAT receipts are more closely related to the current level of economic activity than other tax receipts. In the March quarter 2005 VAT receipts were a modest 2.0% higher than in the March quarter 2004. However, receipts picked up very strongly from around the middle of the year. Between July and October 2005 (relating to economic activity in the period June to September), VAT receipts were 16.2% higher than in the corresponding months in 2004.
This indicates a very high level of economic activity over this period.
Additional flights into the country meant that visitor arrivals were very strong from March to August. In July, arrivals exceeded 10,000 for the first time ever, partly reflecting the impact of the Te Maeva Nui celebrations for the fortieth anniversary of self-government. High visitor numbers undoubtedly contributed to the very high level of economic activity.
The construction industry also contributed importantly to growth in the June and September quarters. The value of building approvals was some 21% higher than in the corresponding quarters in 2004, and sales of building supplies have been very strong. The banks also report strong growth in lending for construction, for both the commercial and residential sectors. The high level of construction activity reflects both reconstruction following the cyclones and new development.
The most recent data suggests a slowdown in economic activity. While most of this is seasonal, levels of activity appear to be slightly below corresponding months in 2004.
• VAT receipts in November 2005 (relating to economic activity in October) were 1.1% lower than in November 2004.
• Visitor arrivals have fallen slightly, albeit from a very high base. In the three months to November 2005, visitor arrivals were 3.6% below the corresponding period in 2004.
It is likely that economic growth will moderate from the levels experienced in the last couple of years. After growing very strongly since June 2004 as a result of lower airfares and additional flights, visitor arrivals are expected to grow more modestly in the period ahead. Nevertheless, and abstracting from seasonal factors, the short term outlook is for continued solid economic growth. Moderate growth in tourism and retail trade and continued strong construction activity are expected to underpin economic activity in the short to medium term.
Despite the sound underlying growth in the economy, two issues require special comment. First, economic activity appears to be becoming more seasonal. Greater reliance on visitors from New Zealand means that there is a stronger seasonal pattern in visitor arrivals, with arrivals concentrated from around March to October. This has flow on effects throughout the rest of the economy. Hence it appears that the economy is increasingly going through a flat period from around November to February. This highlights the importance of continuing efforts to attract more visitors from Europe and North America.
Second, discussions with the private sector indicate significant differences between large and small businesses. In both the wholesale and retail trade industry and the hotels and motels industry, the larger operators are generally experiencing solid growth rates and have sound balance sheets. However, many smaller operators appear to be struggling.
Despite steady growth in underlying demand, there appears to be an over-supply.
Smaller operators are finding it difficult to maintain market share and to adjust to the more seasonal nature of the economy. While such competition between operators is an inherent feature of market economies and contributes importantly to more efficient outcomes, it nevertheless imposes costs on individuals and families.
Despite these concerns, it is clear that the economy remains in a very sound position. The strength of the recovery following the cyclones highlights the resilience of the economy, and the indicators point to continued steady growth in the period ahead.
Complete report: MFEM, Half Year Economic and Fiscal Update