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Monthly Economic Indicators

Analysis

Ongoing signs of strong expansion in activity

Economic activity appears to have continued to expand at a similar, fast pace in the March quarter as in the December quarter. Strong net migration inflows and residential construction and the historically high terms of trade led to elevated levels of consumer and business confidence. Altogether, data released over April continued to point to strong growth in private consumption and business investment, and also rising inflationary pressures in 2014. However, the economic outlook also includes headwinds that will eventually impact on growth, including easing dairy prices, monetary tightening and an expected slowdown in house price growth. Nevertheless, recent developments appear slightly stronger than in the Treasury's Half Year Economic and Fiscal Update (HYEFU) forecasts, and reinforce expectations of slightly higher real GDP growth in 2014 and 2015. An updated set of forecasts will be included in the Budget Economic and Fiscal Update to be released on 15 May.

Buoyant business confidence and activity...

Business sentiment was buoyant in early 2014. The Quarterly Survey of Business Opinion (QSBO) showed that business confidence in the economic outlook over the next 6 months was close to a 20-year high in the March quarter, while expectations of trading conditions reached a 14-year high. Buoyant business sentiment reflects elevated export prices, higher consumer spending and the pick-up in residential construction, and points to strong GDP growth in coming quarters (Figure 1).

Figure 1: Business confidence and GDP
Sources: Statistics NZ, NZIER

The ANZ Business Outlook also showed that business confidence was high in April. Despite easing 2.5% points, a net 64.8% of respondents expressed optimism on future conditions. A rising trend in confidence was evident across most industries, particularly the retail and construction sectors, which is a sign of the strong momentum in domestic demand. However, the recent easing in dairy prices from an elevated level led to a drop in confidence in the agricultural sector.

Business activity also strengthened in March. The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) rose 1.9 points to 58.4 and has remained in expansionary territory for 19 consecutive months, while the Performance of Services Index (PSI) rose by 5.5 points to 58.3, the highest since late 2007. The two indices indicate strong growth in manufacturing and services activity.

...and ongoing labour market improvement...

There were also further signs of a stronger labour market. ANZ job advertisements increased 1.1% in March to be up 13.2% on a year ago, with the growth in adverts picking up since late 2013. In addition, improvements in the employment series in the BNZ-BusinessNZ PMI from the middle of last year, and greater difficulty in finding both skilled and unskilled workers (according to the QSBO), both reflect solid growth in the demand for labour. Overall, recent data suggest continuing strong employment growth in 2014. March quarter labour market data will be released on 7 May.

...in addition to elevated consumer sentiment...

Elevated consumer sentiment reinforced expectations of an upswing in household consumption in 2014. The seasonally-adjusted ANZ-Roy Morgan Consumer Confidence Index was close to a 9-year high at 134.3 despite having eased 1.2 points in April. While total electronic card spending dipped 0.2% in March, it was still up by a solid 0.9% in the March quarter. All told, economic data continued to convey a robust near-term outlook for household consumption.

...point to price pressures in coming quarters

The annual rate of Consumers Price Index (CPI) inflation was down slightly to 1.5% in the March quarter (Figure 2), despite the positive momentum in the domestic economy. The quarterly CPI increase of 0.3% was driven by higher tobacco excise duties and a rise in housing costs, and would have been negative if these categories were excluded. Annual tradables inflation fell 0.3% points in the March quarter to -0.6%, owing primarily to the strong New Zealand Dollar (NZD) and the ongoing discounting of durable goods by retailers. However, annual non-tradables inflation was up by 0.1% point to 3.0%, reflecting higher rents and property rates, and price increases in services.

Figure 2: Consumer price inflation
Sources: Statistics NZ

Inflationary pressures are expected to increase later in 2014 and in 2015 as strong growth in domestic demand leads to increasing capacity constraints in the economy. An increasing percentage of QSBO respondents expect capacity to be the main constraint on expanding output in coming quarters, which is leading to higher pricing intentions (Figure 3).

Figure 3: QSBO capacity constraints and pricing intentions
Sources: NZIER

Rising wages, as the labour market picks up, are likely to further lift non-tradables inflation, particularly for services, while an anticipated end to exchange rate appreciation in the near term is also expected to lead to a rise in tradables inflation.

Monetary tightening is expected to continue...

In response to this rising inflationary pressure, the Reserve Bank of New Zealand raised the Official Cash Rate (OCR) on 24 April by a further 25 basis points to 3.0%, following the start of its monetary tightening cycle in March. The Reserve Bank's projections of 90-day rates in its Monetary Policy Statement released in March suggest that the OCR will be increased through until mid-2016 by an additional 200 basis points, although the higher NZD and the weaker inflation outturn in the March quarter may have an effect on future policy decisions. The market has priced in around 80 basis points of additional OCR increases (as of 30 April) to 3.8% by March 2015. Forecasters on average expect the OCR to peak at 5% in late 2016, above a widely perceived neutral rate of 4.5%.

...eventually leading to some moderation in domestic demand...

Rising interest rates will increase borrowing costs for firms and households, and support the high exchange rate to an extent, which will lead to a degree of moderation in economic momentum. Nevertheless, private consumption is expected to remain strong in the near term, supported by the Canterbury rebuild and strong inward migration. Also positively, long-term interest rates are likely to rise by only a small margin, although short-term lending rates are already increasing.

...especially in housing demand

The Reserve Bank's loan-to-value ratio (LVR) restrictions appear to have had a larger impact than initially expected as house sales dropped 10% from a year ago in March, according to the latest REINZ survey, led by lower-priced properties. However, the shift in the composition of sales towards higher-priced properties led to higher annual growth in the REINZ house price index in March (up 1.0% point to 9.2%). The Quotable Value measure of house prices, which adjusts for this distortion, showed that annual price growth moderated in the December quarter. There is currently a degree of uncertainty around house price data, although price growth is still expected to soften given weaker turnover in the market and rising mortgage rates.

Housing demand will be supported to an extent by the level of net migration. The seasonally-adjusted net inflow of 3,840 permanent and long-term migrants in March was the second highest monthly gain on record. Net migration in the year to March was also elevated at 31,910, driven by a lower net loss of migrants to Australia owing to its soft economic outlook. High net migration inflows are expected to support house prices and reinforce the positive momentum in domestic demand.

On the housing supply side, the number of dwelling consents surged 8.3% in March to be up 37% on March 2013. Growth in consents in the March quarter was more modest at 0.6% owing to a large drop in the highly volatile apartments component. Total consents are now at levels similar to late 2007, driven primarily by Auckland and the earthquake rebuild in Christchurch. The turnaround in consents is positive for residential investment growth over the middle of this year, and is expected to contribute to GDP growth.

Robust growth in export values in the March quarter...

High commodity prices lifted the goods trade surplus to an elevated level in the March quarter, which points to a narrowing in the annual current account deficit in the first quarter of 2014. Overseas Merchandise Trade data showed 16% annual growth ($635 million) in export values in February, and 15% ($671 million) in March. The strength in goods exports was driven by strong demand from China, with shipments to China up 54% annually compared to the March quarter of 2013. The annual goods trade surplus rose $188 million to $920 million in March as growth in exports outstripped that of imports.

Growth in services exports is likely to have been solid in the March quarter. Short-term visitor arrivals fell 3.0% in the March month, but remained 5.4% higher in the year to March owing to a 14% increase in Chinese visitors. The number of short-term visitors rose 4.3% in the March quarter overall, and will likely boost total tourist spending despite the high exchange rate.

...although dairy prices have eased

Global dairy prices have started to ease following their rise to historically high levels in 2013 (Figure 4). The GlobalDairyTrade (GDT) price index has fallen consecutively for the last five bimonthly auctions, to be down 25% in the middle of April from a 5-year high in April 2013. The ANZ World Commodity Price Index eased 0.1% in March, due primarily to a 3.6% fall in dairy prices, with a broad lift in meat and seafood prices. Signs of falling commodity prices support expectations of an early to mid-2014 peak in the terms of trade, which are expected to gradually decline in the second half of the year as dairy supply expands both in New Zealand and abroad.

Figure 4: Dairy and general commodity prices
Sources: ANZ, GlobalDairyTrade

TWI is at a post-float high

Robust growth in export values, the tightening of monetary policy ahead of other advanced economies and the generally positive outlook for economic growth have resulted in the NZD Trade Weighted Index (TWI) reaching elevated levels. The TWI was at a record post-float level of 78.7 in the March quarter, and rose a further 1.9% to a new record high of 80.2 in April. Its recent increases were owing to NZD strength against all the major currencies (Figure 5), although its level has eased slightly recently. The NZD/USD rate was at a high level of 0.86 on average in April, with the earlier weakness in US economic data and more dovish comments by the Federal Reserve in the month contributing to the USD weakness.

Figure 5: NZD vs. major currencies
Sources: Reserve Bank of New Zealand

Positive global economic developments...

Global activity was strong towards the end of the March quarter. The Australian jobs market showed a tentative recovery and China's GDP exceeded expectations, while the US economy rebounded as the effect of the harsh winter receded.

...as low interest rates supported the recovery in Australia...

Easy credit conditions continued to bolster private-sector spending in Australia. Low mortgage rates led to strong annual growth in new housing lending and new home sales in February. The modest 0.2% growth in retail sales followed a strong January outturn and maintained their upward trend (Figure 6). The NAB business conditions index rose, although confidence continued to fall from its post-election highs.

Figure 6: Australian retail sales and employment growth
Sources: Haver, Australian Bureau of Statistics

The recovery in spending and activity may be starting to support the labour market (Figure 6). Employment rose 0.2% in March, sustaining its upswing in February and beating expectations of a flat outturn. The unemployment rate fell 0.3% points to 5.8%. Analysts expect jobs growth to strengthen as activity recovers, but many still predict a rise in the unemployment rate over 2014. Annual inflation rose to 2.9% in the March quarter, but below expectations (3.2%), which – together with the recent AUD appreciation – reinforces the RBA's stated intention to hold its policy rate at a low level for some time.

...and China's Q1 GDP beat expectations...

The Chinese economy grew 7.4% from a year ago in the March quarter, above analyst expectations, but still historically soft and reflected slow growth in industrial production (IP), retail sales and investment, and low PMIs. Exports and imports plunged 6.6% and 11.3% from a year ago in March, respectively, which negatively affected global equity prices. However, export data were distorted by false export invoicing last year (to hide illegal capital flows) and should not be taken at face value.

The Chinese government provided limited support to ensure that growth meets the 2014 target of 7.5%. Authorities introduced a small fiscal stimulus package and cut the required reserve ratio for selected rural banks. The PBoC has room to ease monetary policy, as annual inflation in March (2.4%) was below target (3.5%) and measures in the housing market appear to have been effective at dampening housing demand.

...while US activity rebounds...

Growth in the US economy was only 0.1% at an annualised rate in the March quarter as a result of the harsh winter, but activity has picked up as the effects of the bad weather receded. The ISM manufacturing PMI (53.7) and the non-manufacturing PMI (53.1) indicated solid growth in activity in March. IP rose 0.7%, retail sales rebounded 1.1%, and consumer confidence improved in April. Non-farm payrolls grew by a solid 192,000 in March, although were lower than expectations, and the unemployment rate was steady at 6.7%. However, the housing market remained soft, with a sharp drop in home sales, and the annual growth in house prices has started to slow.

Fed Chair Yellen restated the need for monetary accommodation after her earlier comments were perceived as less supportive, and the Fed's March meeting minutes were seen as dovish. These releases supported the low USD and the strong US equity market. The Fed pared monthly asset purchases by US$10 billion to $45 billion starting in May.

...but Japan's outlook softens after tax rise

While activity in Japan appeared solid in the March quarter, the outlook is weaker. Retail sales surged 6.3% in March ahead of the sales tax rise on 1 April, and the manufacturing PMI was strong (53.9). Growth in IP was strong over the March quarter at 2.9% and continued its rising trend. Looking ahead, the BoJ remains upbeat on the economic outlook and expects low interest rates to boost investment. However, firms in the March Tankan survey expect trading conditions to deteriorate in coming quarters, reflecting concerns about the tax rise and the recovery. While the sales tax and inflation have risen, nominal wage growth remained relatively weak.

Euro area recovery amidst low inflation...

Disinflationary risks are becoming more evident in the euro area. Annual inflation was low in March and April at 0.5% and 0.7% respectively, and producer prices have contracted for ten consecutive months, while some peripheral economies (e.g. Spain and Greece) experienced deflation. The ECB refrained from policy action at its April meeting, but noted the lower-than-expected inflation and that it has considered QE. Governing Council members also indicated concerns over the strong euro that is suppressing tradables inflation and exports.

Economic data were positive despite the weak inflation. IP was up 1.7% annually in February, retail sales were positive (0.4%), while the manufacturing PMI (53.3) and the services PMI (53.1) indicated solid growth in activity in April. The unemployment rate remained at 11.9% in February.

...helped by cyclical pick-up in the UK

The UK economy grew at a strong pace of 0.8% in the March quarter, as had been indicated by various business indicators: the manufacturing PMI (55.3), the services PMI (57.6), the construction PMI (62.5), and a 0.9% expansion in IP in February. The average unemployment rate in the three months to February dropped 0.3% points from the three months to January to 6.9% and real wages are beginning to rise as inflation has fallen (to 1.6% in March).

Economic momentum is set to continue

Broadly positive economic data for both the NZ and the global economy in April continued to point to an above-potential rate of growth in New Zealand in the March quarter, driven by strong external demand for commodities, residential investment and household consumption, the last two of which are boosted by elevated net migration. Buoyant business and household sentiment also reflect the current strong economic momentum. A gradually strengthening international economy is also positive for the outlook. Rising capacity constraints, the beginning of monetary tightening and slower growth in house prices are expected to merely constrain the strong pace of growth, as solid economic momentum remains.

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