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Monthly Economic Indicators

Analysis

The economy appears to have maintained reasonable momentum over the first quarter of the year, although there are tentative signs of an easing in the pace of activity in the current June quarter. Retail spending grew solidly in the March quarter, supported by strong tourism inflows. The housing market strengthened in March and net migration inflows remained elevated. Annual inflation picked up a little but inflation indicators generally remain subdued.  Dairy export prices lifted in the month, as did the New Zealand dollar, dampening exporter revenues.  The merchandise trade deficit widened further.

Solid activity in March quarter but firms more cautious about the outlook…

The NZIER’s Quarterly Survey of Business Opinion (QSBO) showed business confidence in the economic outlook declined in the first quarter of the year.  Confidence fell across most sectors with the fall most marked in manufacturing, with respondents reporting falls in domestic and export sales in the quarter. Although the QSBO does not directly cover agriculture, the effects of the dairy downturn were evident in reduced confidence in the dairy-intensive regions of Waikato, Taranaki and Southland. 

Table 1: QSBO summary of key results
Net % of firms experiencing/expecting an increase in: Dec 15 Mar 16 Long-run average
General Business situation Actual 15 2 -5
  Seas. adj. 13 -1 -5
Domestic trading activity (s.a.) Past 3m 18 18 11
  Next 3m 20 6 15
Employment (s.a.) Past 3m 14 9 -5
  Next 3m 13 11 0
Ease of finding labour Skilled -32 -33 -17
  Unskilled -5 -11 14
Investment (plant and machinery, s.a.)   10 9 0
Average costs Next 3m 15 24 42
Selling prices Next 3m 9 11 31

Source:  NZIER

The number of firms reporting increased activity in the quarter was steady at a net 18%, but fewer firms expected activity to increase in the June quarter. The fall in expected activity was spread across the industries. Underlying details in the QSBO also had a softer tone with investment and employment intentions easing. The number of firms reporting increased employment in the March quarter also declined to a net 11%, but remained well above its long-term average of -5%.  Despite signs the labour market tightened further with firms reporting increased difficulty finding skilled and unskilled labour, and a pickup in average costs, pricing indicators remained soft. 

A slower pace of growth in both services and manufacturing were also evident in the BNZ-BusinessNZ Performance of Services (PSI) and Performance of Manufacturing Indexes (PMI).  Averaged over the March quarter, the PSI slowed to 55.7 from 59.2 in the previous quarter, the lowest quarterly reading since 2014Q2, but still solid (a PSI/PMI reading above 50 indicates the sector is generally expanding).  The PMI also eased in the quarter, to 55.3 from 57.5 previously. 

Activity in the primary industries is expected to weaken in the March quarter GDP, reflecting the effects of low dairy prices and the El Nino weather pattern.  Meat processing, which had been higher than normal earlier in the season as stock numbers where reduced, fell 15% in the March quarter, the largest seasonally adjusted fall since 2011Q4.  This fall was reflected in a 16% reduction in meat export volumes over the quarter. Seasonally adjusted milk production is estimated to be broadly flat in the quarter, following falls in the two prior quarters. 

…households also a little more cautious…

Retail spending, as measured by Electronic Card Transactions, rose 0.1% in March, to be up 1.2% in the quarter.  Although the quarterly pace of growth was back slightly on rises of 1.5% in the prior quarters, annual growth increased to 5.8%.  With consumer price inflation remaining low, we expect March’s retail sales survey (released 13 May) to record solid volume growth.

Figure 1: Consumer Confidence
Figure 1: Consumer Confidence.
Sources: Westpac McDermott Miller, ANZ-Roy Morgan

Consumer confidence eased a little in the March quarter according to the Westpac McDermott Miller (WMM) survey. At 109.6, the WMM index was back from 110.7 in the December quarter, and close to its long-run average (Figure 1). The monthly ANZ-Roy Morgan consumer confidence survey rose 2 points to 120 in March but the average for the quarter eased to 117 from 120 in the previous quarter.  With both surveys showing consumer confidence is around average, we expect consumer spending will continue to expand at a moderate pace.   

…despite renewed vigour in the housing market

The Auckland housing market sprang back to life in March following a hiatus as the market adjusted to regulatory measures introduced in the December quarter. The Real Estate Institute of New Zealand’s (REINZ) figures showed Auckland house sales rose 12% (seasonally adjusted) in March, although declines in prior months left sales 12% down on the same month a year ago. House sales nationally rose 4.7% in the month, to be 8.0% higher than the same month a year ago.      

The national median house price index increased 2.0% in March, led by a 3.4% rise in Auckland.  House prices in the North Island outside of Auckland continued to increase strongly, up 16% from the same time a year ago, compared to 13.3% in Auckland and for New Zealand as a whole (Figure 2).   

Figure 2: REINZ House Price Index
Figure 2: REINZ House Price Index.
Sources: REINZ

The rise in house prices is being accompanied by growth in household credit, up 7.9% in the year to February 2016 and declines in mortgage interest rates. The Reserve Bank’s measure of the average or effective interest rate fell to a record low 5.33% in February as fixed rates moved lower.  This suggests the effective interest rate will fall below 6% in the March quarter (see Figure 3, which includes data up to the December quarter). 

Figure 3: Household debt
Figure 3: Household debt.
Sources: RBNZ

Declining interest rates have helped push the aggregate share of household debt servicing to disposable income down over the past year despite the high, and rising, ratio of household debt to income.  With the Reserve Bank projecting interest rates to remain low over the next few years, and the economy expected to continue growing at a reasonable pace, the risks to households from increasing their exposure to debt appear to have eased.  Nonetheless, as the Reserve Bank’s MPS scenarios point out, the global outlook is uncertain and domestic pressures could cause inflation and interest rates to rise earlier than expected.  Under either scenario households may find their financial position becomes stressed.    

Tourism and migration continue to rise

Net migration inflows reached 67,600 in the 12 months to March and 156,000 in the three years ending March 2016.  Seasonally adjusted net inflows for the March month were down slightly from the previous month, the second consecutive monthly decline, driven by a decrease in arrivals.  Whether this marks a turning point in the migration cycle will be clearer in coming months.  

International visitor arrivals also continued their upward trend, increasing 4.1% in the March month and 3.6% in the March quarter.  Arrivals were 10.4% (307,500) higher in the year ended March 2016 than the previous year, led by increases in arrivals from Australia (up 91,500), China (up 82,300) and the USA (up 26,800).  Easter was observed a month earlier than last year which may have flattered March’s figures at the expense of reduced arrivals in April.  Nonetheless, the upward trend in visitor arrivals is continuing to grow strongly (Figure 4).  Its contribution to growth and employment should be evident in the March quarter labour market report, due for release on 4 May 2016. Resident short-term departures rose 4.9% in the month and were 5.3% higher for the year ended March 2016. 

Figure 4: International travel
Figure 4: International travel.
Source: Statistics NZ

The annual trade deficit widened further

Merchandise exports fell 1.2% on a seasonally adjusted basis in the March quarter, driven by a decline in meat volumes. Dairy export values fell 6.4% in the March quarter and are expected to fall further as weaker dairy prices continue to filter though to export prices and values. 

Dairy prices rose modestly at the two April GDT auctions, suggesting the declining trend in dairy export values may reverse later in the year.  However, with global production continuing to increase and rising European stockpiles, it would be premature to conclude that market fundamentals have shifted decisively in favour of higher prices. 

Declines in capital goods imports were the main driver of the seasonally adjusted 3.2% fall in merchandise imports in the March quarter.  Transport equipment imports were down sharply in the quarter, chiefly due to no large aircraft imports this quarter, while machinery and plant imports fell 7.4%. 

With imports falling faster than exports, the March quarter trade deficit ($944 million, seasonally adjusted) was slightly smaller than the December quarter deficit ($1,226 million).  Nonetheless, the annual trade deficit widened further to $3.8 billion (Figure 5).  Annual export values are little changed from a year ago, as falls in dairy exports have been offset by increases in other exports including meat and fruit.  Imports are around $1.4 billion higher than a year ago, despite lower petroleum imports, indicative of the solid pace of domestic activity in New Zealand.  This broad trend of declining exports and rising imports is expected to persist, leading to further widening of the trade deficit.

Figure 5: Merchandise trade balance
Figure 5: Merchandise trade balance.
Source: Statistics NZ

Annual inflation below Treasury forecast…

The Consumers Price Index (CPI) rose 0.2% in the March quarter, driven by a 1.0% rise in the price of non-tradables goods and services (Figure 6).  Partly offsetting this rise, tradables prices fell 0.9% in the quarter as lower international oil prices drove falls in petrol prices and international airfares.

Figure 6: Annual inflation
Figure 6: Annual inflation.
Source: Statistics NZ

In the year to March 2016 the CPI increased 0.4%, up from 0.1% in the previous quarter, and well below the rate anticipated in the Treasury’s Half Year Update. Non-tradables inflation increased 1.6%, with housing related prices, including rentals, up 2.3%, and prices for newly built houses (excluding land), up 5.0%, the main contributors.  Transport prices made the largest downward contributions to prices over the year, with petrol prices and international airfares contributing to the 1.2% decline in tradables inflation.  

Like the Reserve Bank, we expect inflation to remain below the Bank’s 1-3% target range over the next few quarters.  The exchange rate has appreciated over the past few months, despite reductions in the OCR, to be around 6% higher than its low point in September 2015.  This appreciation is maintaining downward pressure on tradables prices. Upward pressures on non-tradables inflation remain subdued as migration inflows contribute to labour supply and lower inflation expectations reduce wage expectations. The Reserve Bank kept the OCR at 2.25%.  

…but tax revenue exceeds forecast

Inflation is a key driver of growth in nominal GDP and tax revenue, but despite much weaker inflation outcomes than forecast in the Half Year Update nominal GDP growth has not slowed to the extent we anticipated.  To a large extent the greater resilience of nominal GDP reflects the strength of real expenditure GDP, which increased 2.5% over the second half of 2015.  The unanticipated strength of real GDP growth has more than offset the drag on nominal GDP from lower inflation outcomes.  In turn, the faster pace of nominal GDP growth is reflected in the $800 million variance in February’s year-to-date tax revenue.  The Treasury’s Budget Economic and Fiscal Update, to be released on 26 May, will take account of these developments. 

Global activity mixed, but generally softer

Economic data were generally softer in April, complementing the IMF downgrade of its global growth forecasts. The 0.2ppts that the IMF shaved off its global growth forecast (now 3.2% for 2016) indicate risks to global economic growth abound, including China’s economic transition, financial market volatility, geopolitical risks and the possibility of Brexit. This month’s Special Topic discusses the latest IMF forecasts in more detail.

US data point to weaker Q1 GDP

US data were mixed in April. Industrial production (IP) fell 0.6% in March, driven by manufacturing output. This weakness is expected to continue, as the April Markit manufacturing PMI fell to its lowest level since 2009 (50.8) and durable goods orders and inventories growth were weak. These outturns point to weaker March quarter GDP growth (due 29 April NZT), and indicate the recent USD depreciation has not yet benefited the manufacturing sector.

In a more positive vein, the fall in retail sales for March was more than offset by upward revisions for January and February. US labour market data in March were robust, with strong employment growth, an unemployment rate of 5.0%, greater labour force participation, and higher hourly earnings. Price pressures in the US in March were broadly stable, if a bit softer, supporting the Federal Reserve’s decision to keep its policy rate unchanged in April. While consumer price inflation was 0.9% in March (Figure 7), core annual inflation edged down to 2.2%. Producer prices were also down slightly. The market is not pricing a policy rate hike until December 2016.

Figure 7: Consumer prices
Figure 7: Consumer prices.
Source: Haver

China’s growth supported by stimulus

China’s annual GDP growth was 6.7% in the March quarter, in line with expectations but slightly down from the December quarter (6.8%). The outturn was supported by fiscal and monetary stimulus, alongside climbing property prices. Credit growth increased in March as February’s reserve ratio requirement cut came into effect and total social financing (lending in the economy) surged beyond expectations. Similarly, fixed asset investment (ex. rural) rose 10.6% in the year to March, led by property and state-funded infrastructure growth. However, manufacturing investment continued to slow.

Higher investment flowed through to stronger IP, which was up 6.8% in the year to March from 5.4% in January-February. Strong credit growth fuelled property prices, which rose 7.4% on average in the year to March, and retail sales, which grew 10.5% in the same period. Export and import volumes also increased. Consumer price growth in China was unchanged at 2.3% in the year to March (Figure 7), while core inflation rebounded to 1.5% for the year. Producer prices increased 0.5% in March (-4.3% annual) due to higher global commodity prices.

Australian outturns mixed

Some Australian outturns disappointed this month. The trade deficit was revised higher due to greater services imports, and retail sales were flat in February, the third weaker-than-expected outturn in a row. However, other data were more positive. Australia’s unemployment rate dropped to 5.7%, down from 6.0% in January and the NAB business survey improved, with firms reporting higher sales, profits, employment, and confidence. House prices levelled off, with prices in the capital cities falling 0.2% in March and residential building approvals were up 3.1% in February (although down 9% in the year).

The Reserve Bank of Australia held its policy rate unchanged at its April meeting, noting there were “reasonable prospects for continued growth”. March quarter inflation was 1.3%, well below expectations (Figure 7), increasing the likelihood of easier monetary policy, possibly as soon as the RBA’s meeting on 3 May. 

Mild euro area growth, no ECB changes

Growth in the euro area has been moderate. Euro area retail sales growth increased slightly to 2.4% in the year to February, and unemployment continued its slow decline to 10.3% in February. IP fell 0.8% in February, partly reversing January’s spike of 1.9%. Finally, both the euro area trade surplus and current account surplus narrowed in February.

The European Central Bank (ECB) left its policy rates unchanged in April, noting no change to their perceived balance of risks, which was weighted to the downside. Consumer prices in the euro area fell by 0.1% in the year to March (see Figure 7), while core prices edged up by 1.0% and producer prices fell 4.2% (driven largely by low energy prices). The ECB’s bank lending survey showed credit conditions eased in the first quarter of this year, supported by March’s monetary accommodation. Markets are not currently pricing a further policy cut in 2016.

United Kingdom growth moderating

UK growth continued to moderate in the March quarter to 0.4%, softer than the quarter prior (0.6%). Commentators suggest that concerns around Brexit are already weighing on sentiment. Activity was relatively subdued in March, with retail sales volumes falling more than expected (up only 2.7% in the year), and slightly softer labour market outturns for the three months to February. Although unemployment remained at 5.1%, employment growth slowed and total earnings only rose 1.8%. Weaker manufacturing led to a surprise fall in IP (down 0.3% in February, and down 0.5% annual), although PMI surveys of manufacturing and services sectors were slightly more positive.

Consumer prices rose more than expected, by 0.5% in the year to March (Figure 7), with core inflation up 1.5%, mainly due to a spike in airfares. The Bank of England (BoE) held its policy rate stable at 0.5% in April. Markets are currently pricing for a downward move in policy rates, despite BoE intentions of a hike.

Japanese outturns remain weak

Outturns for Japan last month were poor. Two large surveys of manufacturers, the Tankan index and the Nikkei manufacturing PMI, fell more than expected, and the trade surplus increased in March, but only because exports declined less than imports (6.8% and 14.9% respectively). Wages growth remained low, underpinning weak retail sales growth. Weak foreign demand and the recent Kyushu earthquake indicate growth is likely to remain subdued in the near future. These weak outturns will be taken into account at the Bank of Japan’s meeting on 28 April. Further easing of policy is expected, if not at this meeting.

Market sentiment improves

Markets showed greater stability in April, with the VIX (a measure of share market volatility) hitting a low for the year of 13.1 in the month. Commodity prices were generally higher, with the CRB (an index of commodity prices) up 7% in the month. Oil prices rallied in anticipation of supply restrictions and lower US production, to be up 19% in the month, while iron ore and copper also saw gains. All equity indices (except the Chinese Shanghai Composite) were up in the month, and German and US 10-yr bond yields rose 14 and 7 basis points respectively, suggesting market risk aversion began to tail off in April.

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