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Monthly Economic Indicators

Analysis

Data in April 2010 showed business and consumer confidence remained at high levels, although consumers and businesses appear quite cautious in their actual spending and investment decisions. Indicators of activity in manufacturing industries, particularly exporters, and in services industries continued to strengthen, as did trading partner growth. Overall, the data points to GDP growth in the March quarter that is similar to the 0.8% rise recorded in the December 2009 quarter.

Consumers exercise restraint...

Retail sales swung about for the first two months of the March quarter, and are expected to swing back again in the March month, yielding a net rise in quarterly retail sales, which accounts for around two thirds of the GDP measure of total private consumption expenditure.

Spending at retail outlets fell 0.6% in February (Figure 1), against market expectations of a small rise, but in line with the declines recorded in February’s electronic card transactions (ECT) and credit card billings reports. Motor vehicle sales fell around 1.0%, but should rise in March to reflect the increase in new car registrations in the month and boost total retail sales. Core retail sales, which exclude motor vehicle related categories, fell 0.9% as markedly lower food prices dragged down supermarket and grocery sales, the largest individual component in the survey. Restraint by consumers, as well as lower prices, was reflected in falling sales of household appliances, furniture and floor coverings and hardware, and spending at cafes and restaurants fell for the fourth consecutive month.

Figure 1 – Retail trade and consumption growth
Figure 1 – Retail trade and consumption growth.
Source: Statistics NZ

…but for how long?

Retail sales indicators for March are consistent with a resumption of reasonable growth, although as Figure 1 shows, annual growth rates will likely take some time to return to their pre-recession trend. Based on the ANZ Roy-Morgan consumer confidence survey, a return to trend growth may be expected by the end of the year. In the short-term however, the current conditions component of the survey suggests consumer spending will tend to grow only modestly (Figure 2). A reading of 100 indicates consumers are evenly split between those who think economic conditions are good now or will improve in the future and those who take the opposite view.

Figure 2 – Consumer Confidence
Figure 2 - Consumer Confidence.
Source: ANZ

Data supporting a decent rise in March retail sales include March’s ECT report, which showed a broad-based rise of 2.1% in the value of retail sector transactions, and both credit card billings and the retail component of the Performance of Services Index bounced back from falls in February. Some of the rise in retail sales may be due to increased purchases ahead of Easter, which fell in the first week of April, in which case June quarter sales will get off to a slow start.

Retail sales data provides information on the value of transactions, but information on prices is required to enable calculation of the volume of goods consumed, which feeds into real GDP. The Consumers Price Index (CPI) is the main source of price information and the March quarter report showed that prices for the quarter rose 0.4%. The retail component of the ECT release rose 0.9% in the March quarter and should result in a similar lift in the retail trade survey, which implies real private consumption growth of around 0.5%, well short of the 0.9% rise recorded in the December quarter. The March retail trade survey will be released on 14 May.

Demand pressures appear modest

Annual inflation rose 2.0% in the year to March, the same as in the December year, indicating that aggregate demand in the economy has stabilised. Durable goods fell in price, reflecting the rise in the New Zealand dollar over the latter half of 2009, offsetting higher food and fuel prices resulting from higher commodity prices. Education recorded a large price rise, but housing and household utility costs remained subdued, increasing 1.6% in the year. Annual inflation is expected to remain close to the current rate in June, but beyond that higher ACC charges and the start of the Emissions Trading Scheme will push inflation up.

Information on the housing market showed that conditions recovered in March. House prices rose 1.7% in the month and were 6.8% higher than a year ago, sales increased and days to sell shortened to around their average for the March month (Figure 3).

Figure 3 – Housing market
Figure 3 - Housing market.
Source: ANZ

House prices rose at a rate of around 1.5% per month over the second half of 2009, but weakened towards the end of the year and into the first two months of 2010. This weakening coincided with increased discussion of moves to tighten the tax treatment of property investment. Some of this uncertainty dissipated as the government ruled out some of the changes proposed by the Tax Working Group, which may have helped steady the market. Other
demand-side factors remain supportive of growth in the market: the net migration inflow in the year to March remained strong with an increase of 21,970, albeit down from January’s peak of 22,590; below average mortgage interest rates; and household confidence in future income growth. At the same time, the supply of new housing remains at historically low levels – the number of consents for new dwellings including apartments fell 5.3% in the year ended March 2010, the lowest annual total for a March year since 1981. In the March month residential building consents, excluding the volatile apartments component, fell 8.3% but were up 2.3% in the March quarter. Mortgage approvals remain weak suggesting these supportive factors may take some time to flow through to the market.

Business confidence rises

Business surveys showed that business confidence remained at unusually high levels, although the implications for activity are tempered by the more restrained picture for firms’ own activity outlook and actual trading conditions. March’s Quarterly Survey of Business Opinion showed that a net 36% of firms expect conditions to improve over the next six months, the highest reading since 1999. But respondents were less positive about the outlook for their own firm, which improved to a net 20% expecting trading activity to rise, a little above the long-term average. And on the negative side, a net 5% reported a fall in activity over the March quarter, well below the long run average for this measure, which tracks GDP quite closely (Figure 4).

Figure 4 – Business confidence and GDP
Figure 4 - Business confidence and GDP.
Source: Statistics NZ

The pattern of below average readings for the March quarter but above average readings for the future was also evident in other key indicators, including employment and profitability. Investment intentions in both buildings and plant and machinery moved above their respective long-run averages, a requirement for sustained growth. The number of manufacturing exporters reporting an increase in sales remained well above average. More recently, the National Bank Business Outlook, which focuses on the outlook over the year ahead, reported further broad based gains in firms’ confidence. The own activity outlook index rose to its highest level since 1999, and export intentions in the manufacturing sector rose to an eight year high. The outlook for residential construction was particularly buoyant, somewhat at odds with the current low levels of building consents issued, and both employment and investment intentions rose to levels that are around their long-run average. The relative softness of these latter indicators leads us to be a bit more circumspect about the pace of recovery over the year ahead than some other forecasters.

Further support for a pickup in growth came from gains in both the Performance of Manufacturing Index (PMI) and the Performance of Services Index (PSI). The PMI strengthened for the seventh consecutive month, reaching its highest level since 2007. Indicators of production and deliveries support ongoing growth, but this has yet to feed through to the employment indicator, which remained in neutral territory. The PSI also rose to its highest level since late 2007, and here too the employment indicator, which was a little above the neutral mark of 50, trailed behind indicators of new orders and sales, which were pointing to solid growth.

Overall, we interpret the business surveys and confidence measures as pointing to a return to growth rates that are around the long-run average by the end of the year.

Commodity price strength lifts export sales

Commodity prices continued to rise over the past month. Prices for logs, aluminium, meat and seafood all recorded large rises as demand strengthened. Dairy prices eased slightly in the month, but prices for the delivery of milk powder in the future surged 21% in Fonterra’s April auction. Supply constraints in Australia, Europe and, to a lesser extent, New Zealand have combined with growing demand from China to push prices up.

Commodity prices are now at record levels in both world and domestic prices. Consequently the terms of trade through 2010 are likely to be substantially higher than forecast in December’s Economic and Fiscal Update (Figure 5). This implies stronger growth in nominal incomes in the New Zealand economy over 2010. In the dairy industry, Fonterra announced an increase in the expected payout to farmers, which will help boost spending on and off the farm and help reduce high levels of debt.

Figure 5 – Terms of trade and commodity prices
Terms of trade and commodity prices.
Sources: Statistics NZ, ANZ Bank

The improved outlook for commodities should also help the rural property market recover from its slump. QVNZ figures for the six-months to December 2009 show that sales of farm units were less than one-quarter of sales 18 months ago. The fall in sales is particularly pronounced for dairy units and fattening/stud units (Table 1).

Table 1 – Open market sales of farm units
Type Jun-08 Dec-08 Jun-09 Dec-09
Dairy 224 83 68 21
Pastoral fattening/Stud 144 77 32 11
Pastoral grazing/run 27 11 10 9
Arable 22 8 6 4
Horticultural 82 69 50 55
Specialist Livestock 41 22 23 25
Total Farmland units 540 270 189 125

 

Source: Quotable Value

The lift in commodity prices helped push the quarterly merchandise trade balance into surplus for the first time since late 2001 (Figure 6).

Figure 6 – Trade balance
Figure 6 - Trade balance.
Source: Statistics NZ

Exports rose 10%, the first quarterly rise since December 2008, led by a 30% rise in dairy exports and despite an easing in dairy volumes. Large increases were also recorded for exports of meat, logs and oil, reflecting both higher volumes and higher prices. Imports rose 7% in the quarter, the first rise since September 2008, led by higher oil imports. Imports of plant and machinery rose 4.3% in the quarter, the first rise in a year, a rather muted response in light of the high confidence. The annual balance was a deficit of $194 million, down from a deficit of $4,684 million in the year ended March 2009.

Offsetting these positive developments, drought conditions in some parts of the country will likely lower agricultural production but the immediate impact is not expected to be large – dairy production is past its annual peak and feed supplements appear to be readily available. In 2008 the main impacts of the drought were felt in later quarters as herd sizes fell and the overall condition of stock was lowered. Beyond agriculture, one important difference this year is that hydro lakes are high.

…as the global outlook strengthens…

Recent data indicate that the global economy has continued to expand over the first quarter of 2010 and the outlook for growth over the balance of the year has been revised up. The recovery continues to be characterised by strong growth in emerging and middle-income countries, particularly Asia, and more fragile recoveries in a number of the large developed economies. Overall, Consensus forecasts suggest trading partner growth in 2010 will be around 3.7%, which is only a little below average.

Concerns over the situation in Greece and other highly indebted sovereigns in the euro area have reignited, following a lull over late March and early April. This led to a fall in risk appetites and a weakening in global equity markets and risk sensitive currencies, including the New Zealand dollar. The euro area and the IMF are continuing to develop a response to the problems of Greece and other euro countries, but the focus on sovereign credit worthiness, and the extent of bank exposures to them is likely to persist for some time, bringing with it periodic bouts of volatility. Our Special Topic this month provides more detail on world developments and their impacts on New Zealand.

In foreign exchange markets there has been increasing speculation about the possibilities that Chinese authorities might soon allow some appreciation of the renminbi against the US dollar, which would imply a weaker New Zealand currency, other things equal. New Zealand’s trade weighted index firmed slightly in the month and was at historically high levels against the pound sterling, contrasting with the decade lows against the Australian currency (Figure 7).

Figure 7 – Exchange rates
Figure 7 - Exchange rates
Source: Statistics NZ

A strong Australian economy has been, and is expected to remain, of benefit to New Zealand’s export sector, especially manufacturing and tourism. This influence will be boosted by the relatively weak currency cross rate.
The Reserve Bank left the OCR unchanged at 2.50% in their April review, but suggested that, should economic developments unfold as expected, the OCR will soon rise.

…supporting a shift in the drivers of growth

The contrast between elevated levels of consumer and business confidence and the caution that underlies consumer spending and business investment, coupled with subdued credit growth suggests the process of debt consolidation is continuing. This is a process that we might see reflected in household savings in the period ahead, with households inclined to save a greater proportion of income and, perhaps optimistically, to be more cautious in the amount of debt they take on than was the case over the past decade. The outlook for exporters may also help drive investment spending, helping to promote a mix of growth that is oriented more toward investment than consumption. So far, however, we have seen only hints of this shift in the composition of growth rather than hard evidence.

For the March quarter at least, the Treasury expects private consumption growth to slow, although overall GDP growth is expected to be similar to growth in the December quarter with residential and business investment and exports expected to provide an offset.

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