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Monthly Economic Indicators

Analysis

The New Zealand economy continues to show resilience and has not been significantly affected by shocks in the form of further earthquakes and the whey protein concentrate issue. Households and businesses are becoming increasingly optimistic about the economic outlook, with consumers in particular beginning to spend more. These factors add some upside risk to the 0.2% June quarter real GDP growth forecast in the May BEFU, although the impact of the drought could be more negative than initially expected.

The outlook for the second half of 2013 remains positive, with improving confidence, and other indicators pointing to a continuing pick-up in economic activity. However, there are risks to the outlook, including the possibility of lower demand from many of our Asian trading partners as their growth slows.

Retail sales strong in the June quarter…

Core retail sales volumes (excluding vehicle-related spending) grew a robust 2.3% in the June quarter, to be 4.5% higher than a year ago (Figure 1). The strength was broad-based, with 11 of the 13 core industries showing increases in volumes; food and beverage services (up 4.5%) and department stores (up 5.4%) were the main drivers. These two industries are suggestive of consumers becoming more willing to spend, consistent with ANZ-Roy Morgan Consumer Confidence rising strongly in the June quarter to 124.0. Consumers also believe it is a good time to purchase large household items, with the series at highs not seen since 2007, although it has eased slightly in July and August.

Including motor vehicles and fuel retailing, total volumes rose 1.7%, with fuel sales volumes – which are not seasonally adjusted but tend to decline in the June quarter – dragging down the total, falling 5.0% in the quarter.

In keeping with the June quarter Consumers Price Index (CPI) released last month, pricing pressures remained subdued. Core retail sales values rose 2.0% in the quarter, implying an overall fall in core retail prices (Figure 1). Pricing pressure has been held down by several factors, including spare capacity in the economy, strong competition between retailers, and an elevated exchange rate. However, there are some signs that these influences are beginning to fade, with some industries’ deflators beginning to increase (or becoming less negative) on an annual basis and evidence of slightly less discounting in the June CPI.

Figure 1 – Retail Sales - volumes, values and deflator
Figure 1 – Retail Sales - volumes, values and deflator   .
Source:  Statistics NZ, the Treasury

We expect this trend to continue as the economy grows more strongly, absorbing spare capacity. The impact of the elevated New Zealand Dollar (NZD) is also expected to decrease, resulting in fading downwards pressure on tradables prices. The expectation of rising inflation was supported by the Reserve Bank’s survey of expectations for the September quarter, which revealed a sharp increase in 2-year-ahead inflation expectations to 2.3%.

...supported by a strengthening labour market...

The strong retail sales outturn was supported by a modest strengthening in the labour market in the June quarter. According to the Household Labour Force Survey (HLFS), the number of people employed rose by 0.4% (8,000, Figure 2), which was a particularly positive outcome given the large 1.7% increase in the March quarter was not reversed. Annual employment growth rose to a still-modest 0.7%, but is well above the -1.4% in the December 2012 year. The Quarterly Employment Survey (QES), which surveys firms rather than households, showed a similar strengthening in the number of filled jobs. On a regional basis, Canterbury continued to provide the majority of the strength in both surveys, accounting for half of the total filled job growth in the QES in the June quarter.

It is worth noting that the number of youths in the labour force continued to decline, as job opportunities remain limited for those with little job experience. On the more positive side, the NEET rate – the number of youth not in employment, education or training as a proportion of the working-age population – fell to its lowest rate since 2008, as more youth entered education.

The national unemployment rate edged up 0.2% points to 6.4% in the June quarter, but remained below its 2012 average (6.9%). The modest increase came after a 0.6% point fall in the March quarter. The driver of the increase in the unemployment rate was an increase in the number of people returning to or entering the labour force, increasing the participation rate. This signals greater confidence in labour market conditions and increases the pool of available labour for firms to draw on.

Figure 2 – HLFS headline statistics
Figure 2 – HLFS headline statistics   .
Source:  Statistics NZ

We expect the labour market to continue to show moderate improvement over the rest of 2013 and into 2014. Business surveys indicate that firms are becoming more willing to hire workers. The Canterbury rebuild should continue to provide a strong impetus for hiring too. These factors are expected to drive a gradual decline in the unemployment rate over the next few years, as forecast in the May BEFU.

...and moderate real earnings growth

Nominal wage growth in the June quarter remained subdued, with average hourly earnings rising 2.1% in the year (QES measure). Much of this softness is originating from the public sector, with hourly wages up 1.6% on a year ago, as the government looks to restrain expenditure growth. However, growth in total weekly gross earnings was stronger, growing 1.2% in the quarter and 3.8% for the year as the total number of weekly paid hours grew.

While nominal wage growth remained subdued in the quarter, this must be kept in the context of the subdued pricing environment, as discussed earlier. With annual CPI inflation at 0.7%, real annual wage growth is around 1.4%, similar to the mid-2000s. Using weekly gross earnings, real incomes are about 3.1% higher over the year, reflecting higher wages and more paid hours (Figure 3). This is contributing significantly to the retail sales growth, especially given falling retail prices overall.

Figure 3 – Real weekly earnings and retail sales growth
Figure 3 – Real weekly earnings and retail sales growth   .
Source:  Statistics NZ, the Treasury

Higher net migration and more overseas visitors add to demand

The strong turnaround in migration continued in July, with a seasonally-adjusted net inflow of 2,000 migrants, bringing the annual total to 10,600 (Figure 5). As discussed in last month’s MEI, the turnaround in net migration over the last year has been caused by both a fall in departures to Australia as well as an increase in arrivals. The increase in arrivals has come from a number of sources, including Asian and European countries, but there have also been increasing numbers of New Zealanders returning from Australia. The July net migration figures saw a continuation in these trends. The acceleration in net migration over the past year has been faster than we had anticipated at BEFU, and is one factor contributing to the stronger domestic demand seen in the June quarter.

In addition to impetus from more net migrants, short-term visitor arrivals have also been steadily rising over 2013. The June quarter total was only about 5% below the peak in visitor arrivals seen during the Rugby World Cup in 2011 (Figure 4). The increase in visitors has come primarily from Australia and China; visitor arrivals from China are at record highs and are expected to continue to increase as incomes rise. The growth in visitors from Australia is expected to slow to some extent in the second half of 2013 as the higher NZD against the AUD takes effect. The overall increase in visitors has contributed to the strong June retail sales, in particular to the strength in the food and beverage services category, which includes restaurants and cafes.

Figure 4 – Short-term visitor arrivals (3-month moving sum)
Figure 4 – Short-term visitor arrivals (3-month moving sum)   .
Source:  Statistics NZ, the Treasury

Housing market strength continues...

Higher house prices continue to flow through to general confidence and to household spending. The REINZ stratified house price index rose 0.5% in July and is 8.6% higher than a year ago (Figure 5). In keeping with recent releases, annual price growth was strongest in the Auckland region, up 13.9%. Housing turnover at a national level has also been rising strongly, with house sales volumes up 3.9% in July and 14.7% for the year. Again, this pick-up was driven by an 8.5% increase in house sales in Auckland for the month, supported by a greater number of listings. This could be an early sign that prices are reaching levels that are encouraging more people to sell, as well as a greater supply of houses being built. Higher net migration is also likely to be contributing to increased demand in the housing market.

Figure 5 – House prices and net migration
Figure 5 – House prices and net migration   .
Source:  Statistics NZ, REINZ, the Treasury

Increasing house prices over the past year have likely been contributing to the strength in retail sales owing to a wealth effect. However, it is difficult to pinpoint how much this is contributing compared to other factors such as the labour market and migration. In addition, the increased turnover of houses will be contributing to retail sales growth, as purchasing a house is typically a time when households upgrade durable goods.

…but LVR restrictions may have an impact

During August the RBNZ announced new restrictions on high loan-to-value lending. From 1 October banks will have to restrict new residential mortgage lending with loan-to-value ratios (LVRs) over 80% to no more than 10% of the value of their new housing lending. It is estimated that around 30% of new lending this year has been in the high-LVR category. The main purpose of this policy is to improve macroeconomic and financial stability by reducing the possible detrimental impact of a housing downturn on bank balance sheets.

In addition to improving stability, the RBNZ expects the new restrictions to limit credit growth and to relieve some pressure on the housing market, reducing house price inflation. This may also have implications for monetary policy, reducing the need to increase the OCR by as much as otherwise might have been the case. However, market rates still imply, and economists largely still expect, the first OCR rise to occur in March 2014. In the leadup to and following the announcement, the NZD fell by around one cent against the USD owing to the expected lower asset price pressure and a lower interest rate outlook. The overall impact of the LVR restrictions is uncertain and will in part depend on how banks and borrowers react and how long the policy is in place.

Real GDP growth expected to be moderate in June quarter...

All of the points above, including strong retail sales growth, supported by a strengthening labour market, higher net migration, more visitor arrivals and a strengthening housing market, point to a moderate outturn for June quarter real GDP. The ANZ regional trends release was also positive, reporting a national 1.2% pick-up in activity for the quarter. While this is not always an accurate read for the quarterly GDP outturn, it is suggestive of more economic momentum. However, the drought is expected to have its main negative impact in the June quarter, which could detract around 0.5%- 0.6% points from quarterly growth. Overall we assess a small upside risk to the BEFU forecast of 0.2% real growth for the June quarter. This comes after lower-than-expected real GDP growth of 0.3% in the March quarter.

Growth in nominal GDP (including price as well as volume changes) could be softer than real GDP in the June quarter, given the subdued pricing pressures evident during the quarter. However, we expect this will be temporary given the fading influence of the elevated exchange rate, the absorption of spare capacity in the economy, and higher commodity prices leading to higher terms of trade in the quarter.

...with outlook positive for the second half of the year

The outlook for the second half of 2013 remains positive, as the economy bounces back from the drought. Several of the trends discussed earlier are expected to continue, such as increasing net migration and more strength in the housing market, providing more impetus for growth. Other indicators are also pointing to strength: surveys for the manufacturing and services sectors rose significantly in July, while business confidence according to the ANZ Business Outlook remained elevated in August.

The terms of trade also remain on course to continue to rebound in the September quarter, which will lend support to the nominal economy. While the trade balance posted a deficit of $774m in July (from a surplus of $334m in June), this appears to be largely the result of the timing of shipments and is expected to reverse out over the coming months. Coming into the seasonal peak production period, dairy prices in NZD-terms are close to their 2008 peak and reinforce Fonterra’s recent upward revision of the milk-price payout to $7.80 per kg of milk solids.

One factor that could detract from growth in the future is the recent whey protein concentrate issue. We assess that the short-term impacts will be minimal, with the banned dairy products making up only a small proportion of total dairy exports. Further, dairy prices at the GlobalDairyTrade auctions have held up during August, suggesting the market has not lost confidence in New Zealand’s products. In addition, tests have shown that the identified products were not contaminated with bacteria that can cause botulism. Nevertheless, the issue has the potential to lower the demand for New Zealand’s dairy products in the future given sensitivity to food safety concerns.

A mixed month for the world economy

A further broadening of economic recovery in the developed world was evident in August, while China’s growth outlook stabilised, but the outlook for other Asian emerging economies weakened.

Demand remains subdued in Australia...

Household demand remained soft in Australia. The volume of retail sales and retail prices were largely unchanged in the June quarter, suggesting flat consumer demand. The lack of growth is partly attributable to weaker job prospects, confirmed by low employment growth in the six months to July (0.25%). While house prices are responding positively to historically low interest rates, this has not translated into stronger household spending. This month’s special topic examines the weaker outlook for the Australian economy and its implications for New Zealand.

...but may be helped by stabilisation in China...

Developments in August were consistent with lower risk of a sharp slowdown in China’s growth. The growth of industrial production (IP) recovered to 9.7% on a year ago in July, owing partly to renewed activity in heavy industries after earlier destocking by firms. The HSBC manufacturing PMI climbed back to a neutral reading in August, showing growth returning to trend for manufacturing, while the two major services PMIs were at above-trend readings in July. Growth is stabilising, in line with the slower GDP growth in the year to June of 7.5%.

The earlier restrictive measures by the People’s Bank of China (PBoC) seem to have led to more caution in lending, reflected in July’s slower credit growth. If modest credit growth is sustained, the build-up of future credit risks can be slowed. The PBoC lifted its restrictive policies in late July by injecting liquidity into the interbank market.

...however, financial market volatility intensifies in emerging Asia

Falls in asset prices and exchange rates in emerging Asia intensified in late August, as the expected tapering of asset purchases by the US Federal Reserve (Fed) draws closer. Large declines in equity prices occurred, with Indonesian stocks down by 14.3% over the second half of August, and Singapore’s down 7.5%, while longer-term interest rates rose as bond prices fell. The depreciation of key currencies in the region accelerated during the same period, particularly for the Indian rupee (11.9%) and the Indonesian rupiah (6.0%), despite efforts by their central banks to stabilise their currencies.

Emerging market economies have been the main drivers of global growth in the last four years as they also benefited from the quantitative easing (QE) in the US by having access to ample liquidity and low interest rates. Now, however, the US and other major developed economies are starting to show signs of a sustainable recovery, leading the Fed to flag reductions in QE.

Anticipation of the withdrawal of this stimulus has led to some abrupt adjustments in emerging economies, not only in Asia, as some of the money invested in them earlier is withdrawn. The nature of these adjustments has led some analysts to draw comparisons with the Asian Financial Crisis of 1997/98 when similar conditions applied. However, there are key differences from that period with emerging Asian economies now having larger foreign exchange reserves and floating exchange rates. Their imbalances in terms of current account deficits and foreign debt are also not as great, making them better able to withstand the adjustment.

Continued recovery in the US reinforces expectations of tapering in September...

Recovery continued in the US labour and housing markets. July’s solid non-farm payrolls outturn maintained the 6-month moving average of payrolls growth at roughly 200,000 for the sixth consecutive month (Figure 6), in line with the Fed benchmark for labour market improvement. In the housing market, demand is under some pressure from higher mortgage rates, but is holding up for now (30-year fixed rates are 120 bps higher since early May in anticipation of reduced monetary stimulus). The Case-Shiller house price index rose solidly on a year ago in June (12.1%), although home sales data declined in July. On the supply side, July’s housing permits and starts regained some of their losses in June. Overall, the underlying housing recovery appears intact, although there are concerns that rising mortgage rates may slow demand in the months ahead.

Positive developments supported expectations of a September start to the Fed tapering of QE. These expectations were reinforced by less dovish comments from Fed leaders, and by the 2.0% annual inflation in July that eased Fed concerns of undershooting its inflation target. Market reactions in the US, Japan and Europe were modest, with longer term interest rates rising but no major moves in equities, suggesting that the prospective Fed tapering has already been priced in to a large degree.

Figure 6: US labour market
Figure 6: US labour market   .
Source:  Haver

...as the euro area leaves recession...

The euro area’s economy grew 0.3% in the June quarter, marking the end of a six-quarter recession. The stronger-than-expected growth was led by Germany (0.7%) and France (0.5%), while Italy (-0.2%) and Spain (-0.1%) contracted. The pick-up is consistent with the lift during the June quarter in IP growth and in the manufacturing and services PMIs, both of which have continued into the September quarter. Retail sales were also less negative in the June quarter, contracting at a slower annual rate. Promising developments aside, significant financial risks remain, reflected in Greece most probably requiring a third bailout, while the euro area unemployment rate is at an all-time high (12.1%). Still, developments in August provide clearer evidence of a gradual recovery in the euro area.

...while demand in Japan remains solid

Japan’s economic growth in the June quarter was a softer-than-expected 0.6%, but private consumption grew 0.8% while changes in inventories subtracted 0.3% points off growth, suggesting that underlying demand growth was more robust in the quarter. However, the latest data were weaker. IP contracted 3.3% in June to be down 4.8% annually, while leading indicators of retail sales suggest a softer sales outturn in July. There are concerns that the government’s planned sales tax hike for April 2014 may cause the stimulus-led recovery to falter.

Tensions in the Middle East continue to add volatility to global markets

The Syrian situation has led to a rise in oil prices, and some safe-haven demand for the USD. The unrest in Egypt has also led to higher commodity prices, as market participants were concerned over access to the Suez Canal. Future developments in the region and their economic impact remain uncertain.

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