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Monthly Economic Indicators

Analysis

High business confidence and activity expectations indicate continued robust economic growth in the first half of 2015. Profit expectations and investment intentions have risen. Capacity constraints are emerging, but with fewer firms expecting to face cost increases over the next quarter, fewer intend to increase selling prices. Households remain optimistic, a reflection of the lower inflation, faster house price growth and low interest rates, supporting private consumption growth.

Strong activity in the economy…

The recent robust growth in the economy is expected to continue in the first half of 2015. The March Quarterly Survey of Business Opinion (QSBO) showed that businesses expect the economy to continue growing strongly, with a net 20% of firms expecting the general business situation to improve over the next six months, a similar level to September and December. Firms’ own activity expectations for the June quarter eased slightly from a net 27% to a net 25% expecting an increase. The ANZ Business Outlook survey (ANZBO) continued to show this view in April, with general confidence and own activity expectations both easing slightly. Overall, these survey outturns remain at high levels relative to history and are consistent with above-trend growth over the first half of 2015 (Figure 1).

Figure 1: Real GDP and own activity outlook
Figure 1: Real GDP and own activity outlook   .
Source:  NZIER, Statistics NZ

Hiring intentions also eased slightly in the QSBO survey, to a net 15%, although remain elevated compared to their long run average (net -1%). If firms follow through with these intentions, robust employment growth should continue over 2015. In contrast, other activity indicators showed further strength. Firms’ profitability ticked up, with both previous (net 3%) and expected (net 11%) profitability further above their long-term averages of -17% and -6% respectively, and likely to support future investment. This was reflected in firms’ investment intentions over the next twelve months rising further, with plant and machinery investment at its highest level in six years (net 24%). Building investment intentions were also stronger, with a net 18% expecting to invest in buildings, consistent with on going growth in non residential building work.

… with emerging capacity constraints…

The strong activity in the economy has resulted in capacity constraints tightening. Capacity utilisation in the QSBO increased further to 92.3%, the highest in six years. However, this was limited to certain industries, with capacity utilisation increasing for builders but dipping slightly for manufacturers. The high capacity utilisation for builders reflects the level of activity in Christchurch and Auckland, whereas the lower utilisation rate for manufacturers may reflect the high NZ dollar and/or the impact of the drought.

Capacity as a constraint remained steady, near the high levels recorded throughout 2014. Demand factors are becoming less of a constraint on business expansion than supply factors. Sales as a constraint continued to decline to a similar level to pre-GFC (Figure 2), indicative of robust private consumption growth. Labour as a constraint increased moderately to 11%, indicative of a tightening labour market. However, it is still well below pre-GFC levels of around 20%, when the unemployment rate fell below 4%.

Figure 2: Major constraints on expansion of output
Figure 2: Major constraints on expansion of output   .
Source:  NZIER

In contrast, the December quarter household labour force survey (HLFS) indicated that there is still some spare capacity in the economy, with the unemployment rate rising from 5.4% to 5.7%, a result of an increase in the participation rate. The March quarter HLFS, out May 6, is expected to show continued strong employment growth and a slight decline in the unemployment rate.

Migration figures showed a net gain of 5000 permanent and long-term arrivals in March, consistent with the average since August 2014. This resulted in a net gain of 56,300 migrants in the year to March, a new record high, after already surpassing the Half Year Update forecast in January. The net gain is a reflection of the strength of the New Zealand economy relative to other countries, and continues to be driven by both more arrivals and fewer departures. However, departure numbers have levelled off in recent months. The annual increase in arrivals was driven by student visas (up 8,700 to 25,500 people), but the number of work visa arrivals in the year to March 2015 is also solid (up 3,600 to 34,500 people). High net migration is expected to further increase the supply of workers, alleviating capacity pressures, as well as adding to domestic demand.

...but few signs of cost pressure yet...

Signs of pricing pressure remain subdued, with these indicators easing further in both surveys. The March QSBO showed selling price expectations declined, with only a net 6% of firms expecting to increase selling prices (Figure 3), moderately down on the December quarter, but well below the long-run average and early 2014 results of over 30%. This is consistent with fewer firms expecting average costs to increase over the June quarter (net 19% vs. 21%). This fits with Treasury’s recent business talks (see March MEI Special Topic).

Consistent with the QSBO, the April ANZBO showed a net 23% (vs. 28% in March) of respondents planned to increase prices over the coming year, while expectations of inflation in a year’s time remained steady at 1.8%, although down from 2.1% in December.

...with low inflation outturns

Weak pricing pressures were reflected in subdued inflation outturns, with the Consumers Price Index (CPI) declining 0.3% in the March quarter, in-line with our expectations and following the 0.2% fall in the December 2014 quarter. This was the first two-quarter price fall since 1999. The decline was driven by lower fuel prices, partially offset by the rise in cigarettes and tobacco prices, but apart from this, as well as higher food prices and housing costs, low inflation was widespread.

Figure 3: Capacity utilisation and pricing intentions
Figure 3: Capacity utilisation and pricing intentions   .
Source:  NZIER

Tradables prices declined 2.2% in the March quarter, owing largely to falls in fuel prices, with petrol, and vehicle fuels and lubricants declining 10.6% and 14.7% respectively. International airfares and package holiday prices also made large negative contributions, owing to larger than usual seasonal price declines, with lower fuel prices likely contributing. Fruit price rises in January provided a partial offset, heavily influenced by adverse spring conditions increasing apple prices, and driving the 0.9% increase in food prices over the quarter.

Non-tradables prices increased 1.1% in the March quarter. Cigarettes and tobacco made the largest positive contribution, rising 12.3% (0.5% points contribution), more than the annual indexation and duty excise increase as retailers took the opportunity to lift prices. This is in contrast to last year when cigarettes and tobacco prices rose by less than the excise increase, suggesting demand for cigarettes and tobacco has not fallen significantly.

Housing cost inflation slows...

Housing cost increases continue to make significant contributions, with rents and housing construction costs both rising 0.8%. However, construction cost increases were lower in the quarter after averaging 1.2% per quarter over the previous two years, driven by Auckland and Canterbury only rising 0.7% and 0.2% respectively. This led to annual construction cost inflation in Auckland and Canterbury slowing, from 7.0% to 5.9% and from 6.3% to 5.0% respectively. Canterbury housing construction cost rises have slowed significantly from their peak of 12.2% in the year to March 2013, a result of an increase in the number of builders but possibly indicative of a slowdown in Canterbury residential construction.

While housing construction cost increases remain a significant contribution to the CPI, the annual rises over the previous eighteen months (around 5.0%) remain subdued compared to the building boom in the mid-2000s when housing construction inflation peaked at 9.0% (Figure 4). In contrast, rental inflation increased to 2.3% in the year to March, the highest increase since 2012, and only about 1.0% lower than the mid-2000 rent rises.

Figure 4: Housing construction and rental inflation
Figure 4: Housing construction and rental inflation   .
Source:  Statistics NZ

On an annual basis, inflation declined from 0.8% in December 2014 to 0.1% in March 2015. While vehicle fuels have made a large negative contribution to inflation, prices excluding vehicle fuels would have risen only 1.0% in the year to March (Figure 5). On the other hand, excluding cigarettes and tobacco, prices would have fallen 0.2% in the year to March, a reflection of how subdued the inflation environment is.

Figure 5: Annual inflation
Figure  5: Annual inflation    .
Source:  Statistics NZ

The March quarter annual outturn is expected to be the low point in the cycle, with inflation increasing from here, owing to ongoing strength in domestic demand, higher petrol prices since February and the decline in the NZ dollar from its post float high in July. However, annual inflation is expected to remain below 1.0% throughout 2015.

...but house prices increase strongly...

Housing market activity continued to pick up in March, with both prices and sales rising strongly. According to REINZ, the national stratified median house price index rose 7.7% in the year to March on a three month moving average basis (Figure 6). This was driven by the Auckland index rising 16.9%, while increases in the rest of the country remain subdued. Strong net migration, supply constraints in Auckland and lower mortgage rates have resulted in Auckland house price inflation almost back at its recent high of 17.2% in the year to August 2013. The pick up in Auckland house price growth follows the slowdown in the year to October 2014 (7.8%) as a result of the loan to value ratio restrictions introduced in late 2013 and the 100 bps increase in the OCR between March and July 2014.

Figure 6: House prices and sales
Figure 6: House prices and sales  .
Source:  REINZ

The number of house sales also picked up, with seasonally adjusted sales up 2.9% in March, to be up 20.3% in the year. This was also dominated by Auckland, where the number of sales rose 21.2% in the year.

Building consents remain at a high level, with new dwelling consents rising 11.9% in the year to March. However, new building to-date has not been sufficient to meet the strong demand.

...with consumer confidence continuing to lift

A pick-up in the housing market leading to an increased wealth effect, coupled with solid employment growth and low interest rates, is reflected in higher consumer confidence. The ANZ-Roy Morgan consumer confidence survey showed consumer sentiment rose again in April, up 1 point to 127.4 on a seasonally adjusted basis. This is largely owing to a lift in optimism about current conditions and a net 49% of respondents thought now was a good time to buy major household items, a reflection of weaker durable goods prices as seen in the CPI. However, consumer confidence has fallen slightly from its recent peak in early 2014, but it remains upbeat, pointing to robust private consumption growth in the middle of 2015.

Robust real consumption growth expected for the March quarter...

Solid spending on electronic cards combined with weak price increases lead us to expect robust real consumption growth in the March quarter. Total electronic card spending rose 1.0% in the March quarter, tempered by lower petrol prices, with fuel spending down 9.8% over the quarter. In contrast, core retail sales were up 2.7%, reflecting strong growth in hospitality, consumables and durables spending. Hospitality spending partly reflects a further increase in tourism spending, with 4.5% more visitors (seasonally adjusted) arriving in the March quarter than in the December quarter. This is likely a reflection of the Cricket World Cup, with visitors from Australia (5,200), United Kingdom (1,900) and India (1,100) all increasing markedly from a year earlier.

…and the Reserve Bank remains on hold

The Reserve Bank kept the OCR at 3.50% at it 30 April OCR review, adopting a slight easing bias. The Bank stated it is currently not considering any increase in interest rates and that the timing of future adjustments will depend on how inflationary pressures evolve. On release, the NZ dollar TWI fell 60 points to 78.4, but this movement likely also reflected Fonterra’s downward revision of their 2014/15 season Farmgate Milk Price forecast from $4.70/kgMS to $4.50/kgMS.

Dairy prices continue to fall...

Dairy prices continued their recent decline at the GDT auctions in April, with average prices down 10.8% at the first auction and 4.6% at the second auction. The average GDT auction price has fallen to US$2,620/mt, the level recorded at the end of December. The price declines were expected, given the weak euro, higher auction volumes, upwardly revised Fonterra milk production forecasts and Fonterra season-to-date production figures up 1% on last year. Looking ahead, these price falls will weigh on dairy export values, likely contributing to a further widening in the annual merchandise trade deficit in the middle of the year. Prices so far are in-line with our Half Year Update forecasts, but further increases are needed to achieve the recovery in dairy export prices that we forecast in the second half of this year.

...pulling down export values

Seasonally adjusted dairy export values fell 9.7% in the March quarter, largely offset by an oil drilling platform leaving, with merchandise export values declining only 0.6% to $12.2 billion. The fall in dairy values continues to be price driven, with quantities declining only 2.1% in the quarter. Meat and edible offal prices rose a modest 2.2% on higher volumes (1.4%), reflecting the slightly earlier slaughter pattern in response to the drought.

Seasonally adjusted import values fell 3.3% to $12.6 billion in the March quarter, with crude oil and petrol, capital goods (influenced by an aircraft delivery in December) and other intermediate goods values leading the falls. On the other hand, consumption goods values and passenger motorcars both increased significantly in the quarter, reflecting strong private consumption growth.

Figure 7: Annual merchandise trade
Figure 7: Annual merchandise trade  .
Source:  Statistics NZ

Overall, the seasonally adjusted trade balance for the March quarter was a deficit of $0.5 billion, smaller than the December quarter deficit of $0.9 billion. The annual deficit widened from $1.2 billion in December to $2.4 billion in March (Figure 7). As the merchandise trade balance continues to adjust to lower dairy prices, the current account deficit will continue to widen.

Soft real and nominal activity across the globe

International data point to soft growth across the major economies. China’s growth slowed to the government’s 2015 target, and weaker Chinese demand is expected to weigh on the Australian terms of trade and nominal GDP. Low global inflation provides room for continued monetary accommodation.

Slow US growth with the harsh winter...

US GDP grew just 0.1% in the March quarter (Q1), less than expected and down from 0.5% in the December quarter (Q4). Growth fell as the harsh winter dampened activity, a weaker petroleum sector weighed on investment, and USD appreciation and the West Coast port strike affected exports. Reflecting soft output, non-farm payrolls growth fell to 126,000 in March from 264,000 in February, and the average payrolls growth in Q1 (197,000) was lower than Q4 (324,000). House starts remained subdued in March, although housing demand showed some recovery.

However, the growth outlook for the remainder of 2015 remains upbeat. Consumer confidence remains at an elevated level despite a dip in April, supporting household spending. Increasing job vacancies and labour demand point to a rebound in employment growth.

...and tepid activity in Japan and the UK

In Japan, retail sales data point to a decline in household demand and consumption growth in Q1, which partly reflects low wage growth. Annual inflation (excluding the April 2014 tax rise) is low at 0.2%. The recovery in the UK also slowed, as GDP growth fell to 0.3% in Q1 from 0.6% in Q4. This reflects a fall in construction activity and soft growth in industrial output.

Weak demand from China as growth eases...

The Chinese economy expanded 7.0% in Q1 from a year ago, down from 7.3% in Q4 and the slowest in six years. Reflecting low annual inflation (1.4% in March), nominal GDP growth dropped below real GDP growth, to 5.8% from 7.7% (Figure 8). The housing market slowdown continued, leading to subdued credit growth. Export values fell from a year ago in March, distorted by the Chinese New Year, while further falls in imports reflected weak domestic demand and lower commodity prices. Data suggest that the historically slow pace of growth has continued into April.

Figure 8: Chinese real and nominal GDP
Figure  8: Chinese real and nominal GDP  .
Source:  Haver

GDP data for other Asian economies were mixed so far. The South Korean economy grew 0.8% in Q1, up from 0.3% in Q4, led by household consumption and a rebound in construction. However, Singapore’s GDP growth fell to 0.3% from 1.2% in Q4.

...will likely dampen Australian terms of trade

Global hard commodity prices remained at a low level despite some recovery, as markets weighed up weak Chinese demand with a tighter outlook for supply. Brent crude oil prices increased 15% over April, but are still 40% lower than a year ago. Iron ore prices rose moderately over April, but are down 4.6% from Q1 and 20% from Q4. Lower iron ore prices are expected to lead to a further drop in the Australian terms of trade in Q1 (Figure 9).

Figure 9: Australian merchandise terms of trade
Figure 9: Australian merchandise terms of trade  .
Source:  Haver

Domestically, the Australian labour market showed some improvement, and the unemployment rate eased 0.1% point to 6.1%. Housing demand continued to be robust on the back of low interest rates, boosting construction. However, the rebalancing in investment towards the non-mining sectors remains slow. Many forecasters expect real GDP growth of around 0.5% in Q1, while nominal growth is expected to be lower as a result of subdued annual inflation (1.3% in Q1) and a likely fall in the terms of trade.

Euro area activity picks up amidst Greek risks

Conditions in the euro area economy improved. More jobs led to a 0.1% point fall in the unemployment rate, to 11.3% in February. Higher jobs growth and low interest rates supported retail spending. Inflation remained negative at -0.1% in March, partly owing to lower petrol prices.

The Greek government is likely to run out of cash without an extension of external funding, as it faces debt obligations and ongoing operating expenses over the coming month. Negotiations between Greece and the EU concerning further funding and reforms have been inconclusive so far. Greek 5-year bond yields have traded in a 15-20% range since mid March, higher than 4.2% in the middle of 2014. The EUR depreciated over April as investor concerns rose.

Accommodative global monetary policy...

Global monetary policy remains highly supportive of demand. The People’s Bank of China (PBoC) eased policy by sharply cutting its benchmark interest rates and reducing the minimum reserve ratio of all banks by 1.0% point to 18.5%. These measures are intended to stabilise the housing market and growth, and reduce pressure on the financial sector from large capital outflows.

The Reserve Bank of Australia left its policy rate at an all-time low of 2.25%, but continued to note that further easing may be forthcoming. The European Central Bank indicated that risks to the economy and price stability remain skewed to the downside, and QE will be maintained until a sustained recovery is evident. The US Federal Reserve (Fed) left its band for the Fed Funds Rate at 0-0.25% at its April meeting. Market pricing for the first rate rise by the Fed has been pushed back to December 2015 from October, owing to soft US data.

...contributes to NZD strength over the month

The NZD TWI rose to an average of 79.2 in April from 78.3 in March. The NZD appreciation was driven by a weakness in the AUD, EUR and the USD. The NZD/AUD averaged 0.98 in April, rising close to parity in the middle of the month before falling later. Equity prices in the major advanced economies remained near their all-time highs over the month, despite some volatility owing to the Greek debt situation, geopolitical risks around Yemen and movements in commodity prices.

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