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Monthly Economic Indicators

Commentary

Declining activity from firms, weakening domestic demand and slowing merchandise exports all indicate weak economic growth over the March quarter. Firms’ profit expectations have fallen as business confidence and activity levels dropped off in March. A larger number of firms face cost increases and intend passing these to consumers. Households are also coming under increasing pressure as rising prices for food, fuel and housing, in addition to high interest rates, continue to reduce discretionary spending.

Business conditions have deteriorated...

The Quarterly Survey of Business Opinion (QSBO) showed that firms' own activity was down in the March quarter. On a seasonally adjusted basis, the net balance of firms reporting a decrease in activity was 7% compared with 6% reporting an increase in the December quarter. The outlook for firms also deteriorated since the previous survey. On a seasonally adjusted basis, 8% of firms were expecting a decrease in their own activity in the next three months - a large decline from the previous survey when a net 12% of firms expected an increase.

Figure 1: Real GDP and Own Activity Outlook
Figure 1: Real GDP and Own Activity Outlook.
Source: NZIER, Statistics NZ

The relationship between the outlook for firms' own activity and real GDP (Figure 1) - in addition to sharp falls in business confidence - suggests economic growth slowed in the March quarter. The weaker outlook for activity, combined with higher costs (discussed below), led to a sharp fall in profit expectations. A net 33% of firms surveyed expected a decline in profitability in the three months ahead - the most negative for twenty-five years. The National Bank Business Outlook (NBBO) in April also reported firms' profit expectations were deteriorating.

... and investment intentions are down...

The weaker outlook for activity and profits and high interest rates appear to have affected investment decisions as the net balance of firms intending to increase investment over the next twelve months fell considerably in the QSBO. Investment intentions were also weak in the NBBO this April as the net percentage of firms expecting to increase their investment in the next twelve months turned negative.

Employment intentions eased in the QSBO as the net proportion of firms intending to increase staff over the next three months fell from 14% in the December survey to 0% in the March survey. There were also some signs of easing shortages in the labour market. Firms reporting it had become harder to find skilled labour fell 10 percentage points to a net 36%, with a similar drop for those reporting difficulty finding unskilled labour. The falls in both employment intentions and difficulty finding employees suggest job growth may be starting to moderate. However, these falls do not necessarily mean labour market pressures have eased, as the QSBO also showed that shortage of labour was the main constraint on expansion for 23% of firms, a 3-year high.

... despite capacity utilisation being high

Given the decline in activity, it perhaps came as a surprise that capacity utilisation increased further in the March quarter according to the QSBO. The 92.6% figure was the highest-equal recorded since the series began in 1961. Many firms are finding capacity constraints to be an obstacle to expanding their business and this is adding to inflationary pressures (Figure 2).

Figure 2 - Capacity Utilisation, Pricing Intentions
Figure 2 - Capacity Utilisation, Pricing Intentions.
Source: NZIER, Statistics NZ

Inflation is high…

Annual consumer price inflation lifted from 3.2% in December 2007 to 3.4% for the year to March 2008. The main contributors to the higher inflation were food, transport (both reflecting rising international commodity prices) and housing. Within the food group, grocery prices increased 3.6% in the March quarter chiefly because of increases in cheese, bread and butter. Within the transport group, large quarterly increases in fuel prices (4.0%) dominated seasonal falls in international and domestic airfares given the higher weighting of fuel in the CPI. The quarterly increase in the housing group (up 1.0%) came about largely due to a rise in rents. Rents increased 1.2%, which was more than the rise in construction costs, as the housing market eased and investors sought to cover increasing borrowing and maintenance costs.

There were some offsetting factors as the groups which include apparel and household items recorded decreases in the quarter. Despite the offsets, the headline measure remained above the top of the medium-term target range of 3% this quarter.

Figure 3 - CPI Inflation
Figure 3 - CPI Inflation.
Source: Statistics NZ

… in both non-tradables and tradables

Non-tradables inflation was 1.1% in the March quarter and steady at 3.5% annually (Figure 3). The largest contributions to the quarterly increase came from the housing group, education costs (with annual adjustments to secondary and tertiary fees in the March quarter) and cigarettes and tobacco (as a result of the excise duty adjustment on 1 January each year).

Tradables inflation was 0.2% in the March quarter and 3.4% in the year to March. Greater discounting of durable items such as appliances, clothing and footwear (end of summer sales) and electronic goods led to the lower-than-expected outturn. Price discounting for durables is consistent with weaker consumer demand as the effects of higher food and fuel prices and higher interest rates reduce discretionary spending.

Core inflation has eased…

In some OECD countries a distinction is made between headline and core inflation; headline inflation includes all items, whereas core excludes food and energy. Core inflation (Figure 4) has eased over the past twelve months and is now only 1.7% on an annual basis, showing that food and fuel are currently the main drivers of higher headline inflation. Prices for dairy products and petrol have both risen more than 20% in the past year due to unprecedented global demand for commodities, combined with reduced supply in some cases. The main reasons for excluding food and energy prices are that they tend to be more volatile and are set in world markets. Recent trends in world commodity prices and impacts on the New Zealand economy are the focus of this month’s Special Topic.

Figure 4 - CPI Inflation and Core Inflation
Figure 4 - CPI Inflation and Core  Inflation.
Source: Statistics NZ

… although headline inflation is expected to remain high in the near term

Inflationary pressures look set to remain firm over 2008. The proportion of firms reporting increased selling prices in the QSBO rose from a net 28% in the December survey to a net 42% in the latest survey – the highest figure since March 1987. In addition, the net balance of firms intending to increase prices in the next three months rose to the highest point in more than twenty years. The Reserve Bank left the Official Cash Rate (OCR) on hold at 8.25%, balancing high inflation pressures against the weak outlook for growth. However, the market interpreted a softer tone in April than in the previous review.

Spending growth is slowing…

Increases in food and fuel prices were reflected in February retail sales easing 0.7% for the month as sharp falls in motor vehicle retailing (-5.8%) more than offset increases in supermarket and grocery sales (1.6%). Motor vehicle retailing has fallen for the third consecutive month as rising food and fuel costs and higher borrowing costs squeeze spending on big ticket items. The less volatile core retail series (retail sales ex-auto) rose just 0.2% in February reflecting an easing in sales of consumer durables due to lower volumes and/or price discounting.

Electronic card transactions in March fell in both total (-0.3%) and core retail stores (-0.1%) while total domestic credit card billings also fell, down 2.7%. These weak data indicate that retail sales may have been flat or even slightly negative in the quarter once we remove price increases. (Figure 5). March quarter retail sales figures will be released in mid-May.

Figure 5 - Electronic Cards and Retail Sales
Figure 5 - Electronic Cards and Retail  Sales.
Source: Statistics NZ

Other indicators also suggest that consumer spending has softened since last year. Car registrations fell sharply in March as they did in February, while the latest ONE News Colmar Brunton poll continued to show deteriorating consumer confidence. After we account for flat retail sales, we are anticipating private consumption in the first quarter to be weaker than forecast in the Half Year Update.

… leading to weaker domestic demand

Other economic factors are also leading to a slowing in domestic demand. These other factors include lower net migration inflows and higher interest rates, both of which are leading to a marked slowing in the housing market. Permanent and long-term net migration to New Zealand rose slightly to 4,700 in the twelve months to March from 4,600 in the twelve months to February, but remains at low levels compared with recent history. Mortgage rates continue to rise. The average 2-year rate is currently around 9.7% - up more than 50 basis points since the most recent increase in the OCR in mid-2007 (Figure 6).

Figure 6 - Two-year Fixed Mortgage Rate
Figure 6 - Two-year Fixed Mortgage  Rate.
Source: RBNZ

Housing market continues to deteriorate…

According to REINZ, house sales fell 31% in March (seasonally adjusted) – the fourth consecutive monthly decline, with house sales under $400,000 falling substantially. The number of residential building consents in March followed the lead of previous house sale declines, falling 9% in total and 14% excluding apartments. Although the fall in March sales and consents may have been overstated to some degree by the Easter holiday, the result is nonetheless indicative of a rapidly slowing housing market. Low annual net migration, high interest rates and diminishing confidence are contributing to downward pressure on house prices. QVNZ reported average house prices fell from $393,000 in the three months to February to $389,000 in the three months to March – a fall of around 1%.

… contributing to the slowdown

The slowing housing market is affecting economic growth in part by lowering private consumption. As house prices fall, we expect to see lower growth in spending as households feel less wealthy and choose to delay purchases of nonessential items. In addition, a direct effect of a slowing housing market is fewer sales of household durables such as home furnishings.

Merchandise trade also implies weakness

Seasonally adjusted export values eased 1.4% in the March quarter from the record level in the previous quarter. It is likely that total export volumes fell once we consider that prices (particularly for dairy products) have remained strong this year. By component, dairy product volumes fell 4.1% in the quarter due in part to the drought, while meat exports rose 5.0% as slaughtering was brought forward, again, due to the drought. Export volumes of crude oil fell sharply in the quarter, possibly due to shipment dates.

Import values grew in the first quarter, also coming in below market expectations at 0.4%, implying flat volumes. Imports of consumption goods fell 1.9% in value, providing further evidence of weakening demand. Overall, the trade balance fell to a $50 million deficit in the March month, well below market expectations of a $400 million dollar surplus. The deficit in the twelve months to March also increased from $4.4 billion to $4.5 billion (Figure 7).

Figure 7 - Merchandise Trade - 12 Month totals
Figure 7 - Merchandise Trade - 12 Month totals.
Source: Statistics NZ

Some stability returning to credit markets

Global credit markets started to stabilise in April following the heightened uncertainty in March. Credit spreads for US (and Australian) banks declined further in April, indicating lower costs of borrowing and easier access to credit.  However, the spreads are still higher than in late 2007 and well above those in the first half of 2007.

But economic data remain weak …

Economic data from the US in April were generally weak.  Consumer confidence remained soft, the housing market eased further, core retail sales were flat in March, but the initial estimate of GDP growth in the March quarter was 0.6% (annual rate), slightly better than expected.

There were also some weaker data from Europe, suggesting that the effects of the financial crisis are spreading beyond the US.  In the UK, quarterly growth in December 2007 was confirmed at 0.6% and the early estimate for March 2008 was 0.4%, the lowest in 3 years.  The UK housing market weakened further in April.

There were some signs of easing in the Australian economy, with falls in business confidence and consumer sentiment, and building approvals fell slightly in the year to February.  China reported GDP growth of 10.6% in the year to March, with no signs yet of any effects from the US slowdown.

… and inflation high

Food and energy prices contributed to higher inflation in the major economies in the March quarter.  Headline inflation in the US was 4.0% in the past year, but core (excluding food and energy prices) was 2.4%.  Headline inflation out-turns in other major economies were also elevated.

The European Central Bank held its policy rate steady at 4.0% as inflation remains high, while the Bank of England responded to the weak housing market by cutting its policy rate 25 basis points to 5.0% and increasing liquidity.  The US Federal Reserve cut the funds target rate 25 basis points to 2.0% at the end of April (Figure 8).

Figure 8 - Central bank interest rates
Figure 8 - Central bank interest rates.
Source: Datastream

Equity and financial markets fluctuate

Despite some worse-than-expected first quarter earnings reports in the US, the Dow Jones Index continued to increase over most of April.  Hawkish comments from the European Central Bank led to a strengthening of the Euro almost to US$1.60, before the US dollar recovered towards the end of April.  Oil prices reached a nominal record of US$120/barrel because of US dollar weakness and supply disruptions, but subsequently eased.  The NZ dollar traded mainly in a range from US78-80 cents in April but dipped below US78 cents at the end of the month as the US dollar strengthened and markets took account of the softer tone from the Reserve Bank of NZ and weak economic data.

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