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Monthly Economic Indicators

Analysis

The key data released in the month (for the labour market and retail sales) pointed to a modest increase in GDP over the June quarter (0.6%).  Forward looking indicators, including business and consumer confidence, suggest that growth is likely to continue at this slower pace (compared to the Budget Update (BEFU) forecast) over the remainder of 2015. Net migration inflows and international visitor arrivals, both of which strengthened further in July, combined with a weaker currency, are supporting growth.

Our current view is that, compared to the same quarter a year ago, growth in the December quarter 2015 may be around 2.0%, even with quarterly growth around trend (0.6% per quarter) over the remainder of 2015. Annual growth will gradually increase to around 2.5% by the second half of 2016. Risks that trading partner growth may slow markedly have intensified with increased concern that conditions in China are weaker than indicated by the official statistics.

However, most of the key drivers of growth remain intact. Accommodative monetary conditions will continue to boost activity. The depreciation in the New Zealand dollar (NZD) will support exporters and local producers, and the recent reduction in the Official Cash Rate (OCR) is expected to gradually lift domestic demand. High net migration, strong tourism expenditure and a robust level of construction activity are expected to remain the key drivers of growth.

Job growth slows as labour demand eases...

In the Household Labour Force Survey (HLFS), total employment rose 0.3% in the June quarter, following an increase of 0.7% in the March quarter. Annual employment growth eased to 3.0% from 3.2% (Figure1), with the slowdown reflecting weaker demand for labour. All the measures of labour demand in the Quarterly Employment Survey (QES) fell in the June quarter, with paid hours down by 0.6%, filled jobs down 0.9% and fulltime equivalent employees down 0.7%.

The labour force participation rate declined slightly from 69.5% to 69.3%, but remained near its all-time high. The labour force increased 0.4% despite a lower participation rate, owing to high growth in the working-age population. The HLFS unemployment rate rose 0.1% point to 5.9%, as growth in the total number of people available for paid work (the labour force) exceeded employment growth.

Migration inflows strengthened further in July and increased growth in the working age population.   If the participation rate remains high, but employment growth continues to decline, the unemployment rate could rise above 6% in coming quarters.

Figure 1: Employment growth and gross earnings
Figure 1: Employment growth and gross earnings.
Source: Statistics NZ

Despite the decline in labour demand in the quarter, total labour income continued to grow strongly as wage growth increased, possibly as a result of compositional changes. Total weekly gross earnings rose by a solid 5.3% from a year ago (Figure 1). Annual growth in QES ordinary time hourly earnings rebounded from 2.1% in the March quarter to 2.8% in the June quarter, the fastest since March 2012, and total hours paid increased grew 2.5%.

...contributing to soft consumer spending...

While labour income growth was solid, household spending showed only modest growth. Retail sales values rose 0.1% in the June quarter, as accommodation, and food and beverages spending fell following the boost from the Cricket World Cup in the March quarter. Furniture, flooring and houseware fell 3.5% in the June quarter, partly reflecting easing home sales in Canterbury. The main driver of growth in total retail values was a 3.2% rebound in fuel sales, as a rise in petrol prices led to only a moderate fall in fuel retail volumes (of 0.9%). Total core retail values (excluding fuel and motor vehicles) fell 0.2% in the June quarter, suggesting weak growth in nominal private consumption expenditure.

The seasonally-adjusted volume of retail sales rose 0.1% in the quarter (Figure 2), with overall retail prices broadly unchanged despite the rise in fuel prices. Sales volumes fell in around half of the categories, and others showed only slow growth. In addition to a fall in fuel sales volumes, tourism-related sales volumes declined sharply.

Figure 2: Retail sales and private consumption
Figure 2: Retail sales and private consumption.
Source: Statistics NZ

Private consumption may remain soft in the September quarter. The ANZ Roy-Morgan consumer confidence index dropped 4.2 points to 109.8 points in August, continuing its decline from April’s peak. Although retail card transactions values rose 1.1% in July, owing to growth in services and apparel sales, it is questionable whether this will be sustained in light of the weaker confidence backdrop.

...while inflationary pressures remain subdued

Reflecting softer demand in the Retail Trade Survey and lower commodity prices, producer price pressures continued to be muted. Business input and output prices fell 0.3% and 0.2% in the June quarter, respectively, driven by lower prices for dairy outputs and dairy manufacturing inputs, as well as a large fall in wholesale electricity prices. Growth in input costs was moderate across retail trade, transportation and telecommunications. Excluding dairy, total input prices were flat in the quarter and output prices contracted 0.1%, still showing weak price pressures facing businesses.

The capital goods price index rose 0.6% in the June quarter, driven by residential and non-residential construction. Annual growth in building costs appears to have peaked in December at 5.3%, and has eased to 5.0% in the June quarter, where we expect it to remain over the coming year. Prices of transport equipment contracted 0.2% in the quarter, and were flat for plant, machinery and equipment. While the NZD has fallen 12.5% in trade-weighted terms since mid April, its impact on the cost of capital goods has not shown up yet, but may emerge in the September quarter.

Meanwhile, the Labour Cost Index (LCI) grew 1.6% in the June quarter from a year ago, with growth easing from 1.7% in the March quarter although continuing its trend since 2013. Overall, the LCI points to low growth in unit labour costs.

Weak growth in business costs points to lower non-tradable inflation than in the BEFU forecasts, although tradables inflation is likely to be higher owing to exchange rate depreciation. Overall annual inflation may be similar to the BEFU forecast as these two effects offset each other. Meanwhile, median household inflation expectations for the year ahead rose to 2.2% in the September quarter from 2.0%, but remain lower than 3.0% in 2014.

Business confidence falls sharply...

In the July ANZ Business Outlook, business confidence fell sharply to a net 15.3% of firms pessimistic about the outlook from a net 2.3% in June (Figure 3). The agricultural industry led the decline, reflecting large falls in dairy prices. However, firms’ outlook for their own activity remains positive at a net 19% (Figure 3). Reflecting low price pressure, firms’ inflation expectations (1.7%) are significantly lower than in mid 2014 (2.5%). The next ANZ Business Outlook is scheduled for release on 31 August.

Figure 3: Business confidence and activity
Figure 3: Business confidence and activity.
Source: ANZ

...but activity continues to expand...

Growth in business activity remained solid in July, although it continued to slow. The Performance of Manufacturing Index was at 53.5 (a reading above 50.0 indicates an expansion), down 1.6 points from June, but showed manufacturing activity expanding for the 34th consecutive month. The Performance of Services Index dipped 1.6 points in July to 56.5, but nevertheless indicated solid expansion in services. The PMIs so far suggest that GDP growth may remain at around 0.6% in the September quarter.

...and house price growth remains elevated...

Housing demand continues to be strong, led by Auckland and the surrounding regions. The seasonally adjusted number of nationwide house sales rose 6.3% in July from June, to be up 37.8% from July 2014. Growth in sales was driven by Auckland, where sales rose 11.0% in July and 41.1% from a year ago. Annual growth in sales volumes was slower in Wellington (9.5%) and Canterbury (12.2%). The REINZ stratified house price index rose 1.1% in July in seasonally adjusted terms following a 2.3% rise in June, to be up 14.9% from July 2014, driven by a 24.5% increase in the stratified median price for Auckland (Figure 4). In contrast, the median prices for Canterbury and Wellington grew at a slower rate of 4.9% and 0.8% respectively.

Figure 4: Regional house price growth
Figure 4: Regional house price growth.
Source: REINZ

Strong housing demand reflects elevated net migration gains, a fall in mortgage rates, Auckland buyers possibly bringing forward their purchases ahead of the Reserve’s Bank’s new loan-to-value restrictions in November, and spillover from Auckland to the surrounding regions. Fundamentally, fast house price growth in Auckland is the result of an underlying shortage in supply. Reflecting the divergence in regional demand, residential construction may have plateaued in Canterbury, while accelerating in Auckland. However, the supply response in Auckland is not expected to match increases in demand, pointing to continued strong house price growth ahead.

...as net migration inflows surge further

The net inflow of external migrants lifted to a seasonally adjusted 5,700 in July, the highest on record. Annual net migration also climbed to a record high of 59,640, driven by an increase in long-term arrivals and a slight decline in departures. The net migrant inflow from Australia was positive for the fourth consecutive month at 210, reducing the annual net outflow to 840 from 7,300 in July 2014.

Net migration may be slightly higher than forecast in BEFU over the next couple of years. The net impact of higher migration on domestic demand is positive through its support on private consumption and the housing market. However, migration would also contribute to additional capacity in the labour market in the near term.

Meanwhile, international visitor arrivals were up 5.7% in July from July 2014, driven by increased arrivals from China, Australia and the United States. Solid growth in visitor arrivals and tourist spending, supported by a weaker NZD, point to strong outlook for growth in services exports.

Dairy prices remain weak in August...

The ANZ commodity price index declined 11.2% in July in US dollar terms, led by a 23% drop in dairy prices. Prices for other commodities experienced smaller declines or were flat. Commodity prices in NZD terms fell by a smaller 6.7% in July, with dairy prices down 19%. NZD prices rose moderately for other commodities, reflecting the depreciation in the exchange rate boosting prices faced by exporters.

Since then, export prices have fallen further. Dairy prices plummeted 9.3% in the first GlobalDairyTrade (GDT) auction in August to their lowest level since December 2002, but rallied 14.8% at the second auction in August, the first rise since March.  Nonetheless, the average GDT price index remained 8% lower than in July. Weakness in dairy prices reflects high inventories in China, and concerns about increased global supply and a weaker outlook for Chinese demand.

Largely as a result of the dairy price decline, New Zealand’s merchandise terms of trade are likely to decline over the remainder of 2015 and early 2016 as export prices fall, following a small pick-up in the March quarter. This contrasts with forecasts of a gradual recovery in BEFU from around mid 2015.

...and may gradually dampen export revenue...

The impact of the fall in dairy prices on export values is yet to flow through fully. Dairy export values were broadly unchanged in July from July 2014, owing to higher volumes, while meat exports rose 24.4%, supported by higher beef prices. Total export revenue was up 14% from a year ago, as NZD depreciation offset part of the pressure from a decline in key export prices. Import values rose 4.8% from July 2014, supported by a lower exchange rate, with the annual trade deficit decreasing slightly from $3bn to $2.7bn. However, the merchandise trade deficit is expected to widen over the coming year as the goods terms of trade fall.

...and markets expect further OCR reductions

Market participants have priced in an 80% probability of a third consecutive reduction in the OCR by 25 bps in September, with just under two OCR cuts priced in by mid 2016. The Reserve Bank will announce its next policy decision on 10 September. The NZD was broadly steady over August in trade-weighted terms following the OCR reduction in July. The NZD/USD was volatile, driven by international developments, but remained around a trading range of 0.65 to 0.67, as financial markets pared back their expectations of a start to US monetary tightening in September (see the international section below).

Concerns increase about a slowdown in China

Concerns have increased that growth is slowing in China and that this will affect the world economy.  These concerns are being transmitted through financial markets, particularly for equities, commodities and foreign exchange.  Further deepening of the Chinese slowdown is a risk to New Zealand and key trading partners.

Output declined in Japan in the June quarter, growth was below expectations in the euro area and Australia’s outlook was revised down. However, the US and UK recoveries remain on track, although the Federal Reserve (Fed) and the Bank of England are cautious about raising rates.

Chinese economy slowing...

Data from China indicate that growth is slowing: trade data were softer than expected, with exports falling 8.3% in the year to July; industrial production grew 6.0% in the year to July, down from 6.8% in June; retail sales grew 10.5% in the year to July, below expectations; CPI inflation remains low at 1.6% in the year to July, and producer prices fell 5.4% and have been declining for more than 3 years, indicating deflationary pressures in the economy; the preliminary August PMI fell further after reaching 2-year lows in July, indicating the economy may slow further.

There were further falls in China’s share market in August following the volatility in July, and in a surprise move the People’s Bank of China (PBoC) changed the way the value of the currency is set in the foreign exchange market, allowing it to fall in value.  These changes fuelled further speculation that the economy is slowing more than official figures have indicated to date. See the special topic for further discussion of the changes to the exchange rate.

Following large falls in the share market towards the end of August, the PBoC announced a 0.5% point reduction in banks’ reserve requirement ratios (freeing up capital for lending), a 0.25% point reduction in 1-year lending and deposit rates, and removed the ceiling on rates for deposits of more than 1 year.  These moves brought some stability in the share market.

...and Australian data soft on balance

Australian data were soft as the economy gradually rebalances from mining investment to other areas of domestic demand.  Weaker commodity prices and concerns about the slowdown in China are also weighing on sentiment.  Iron ore prices have fallen more than 20% over the month.  However, there is some evidence to suggest non-mining sectors are picking up some of the slack. Employment growth was solid, rising 0.3% in July (2.1% apc), but the unemployment rate increased to 6.3% from 6.1% in June, driven by higher participation. Wage cost indices show there was little pressure on private sector wages.

The RBA lowered its growth forecasts, reflecting lower export prices and population growth, and noted that global risks, particularly around China, are skewed to the downside. That said, the RBA’s inflation forecasts remain in line with the target band, which kept market pricing for a rate cut stable. However, further deterioration in the outlook associated with China has since led markets to price in a higher probability of a rate cut by the end of the year.

US momentum remains stable...

US GDP increased 0.6% in the June quarter and growth was revised up to 0.2% in the March quarter. Growth in the second quarter was underpinned by consumer spending, reflecting a solid labour market as non-farm payrolls increased 215,000 in July and the unemployment rate was unchanged at 5.3%. Industrial production rose 0.6% in July from June driven largely by increased vehicle production. Core inflation, which excludes energy and food, increased 1.8% in the year to July, largely driven by housing costs.

On balance, US data have been positive over the month. That said, while labour market outturns and other data were solid, Fed minutes from late July indicated that most members would like to see more evidence that economic conditions are consistent with the Fed’s medium-term inflation target of 2% before raising the Funds Rate. Market pricing for a September lift-off by the Fed has reduced over the month as concerns about the impact of a slowdown in China affected sentiment.

...and the euro area gradually recovers...

The euro area continues to recover at a slow pace as GDP grew 0.3% in the June quarter and was up 1.2% in the year – just below expectations of 0.4% and 1.3% respectively. Industrial production decreased 0.4% in June, but was 1.2% higher than a year ago. The decrease was largely driven by a slowdown in Germany, France, and Italy.  The unemployment rate was unchanged at 11.1% in June, and continues a very gradual decline from its peak of 12.1% in June 2013. Also reflecting a gradual recovery, core inflation remains soft, at 1.0% in the year to June. Meanwhile, Greece has concluded an agreement with its creditors, but PM Tsipras resigned, triggering an early election which could be held as soon as 20 September.

...but UK recovery may be slowing

UK GDP grew 0.7% in the June quarter, although there are signs that the recovery is easing. Industrial production fell 0.4% in June, with mining and quarrying falling 3.8% on the back of lower commodity prices. Manufacturing production increased 0.2% in June, up only 0.5% in the year. Retail sales rose 0.1% in July, up 4.2% in the year and higher than 2.8% a year ago, indicating domestic demand remains solid.

However, employment has declined recently, although the unemployment rate remained steady at 5.6%. Core inflation rose to a 5-month high, reaching an annual rate of 1.2% in July and supporting expectations of tightening. However, on balance the recovery appears to be slowing slightly and market pricing for a rate increase by the end of the year has reduced over the month as the combination of a strong pound and low commodity prices suppress inflationary pressure.     

Japan slowing, rest of Asia expected to follow

Japanese GDP contracted 0.4% in the June quarter, driven by weak exports, reflecting the slowdown in China, and weak consumer spending, following subdued wage growth and bad weather. Exports fell 1.3%, 0.4%, and 0.2% to China, the rest of Asia, and the US respectively. The slowdown in China is expected to weigh on other economies in the region and growth outlooks for the region have been revised down in the past couple of months.

Figure 5: US, euro area, UK and Japan GDP growth
Figure 5: US, euro area, UK and Japan GDP growth.
Source: Haver

Financial markets reflect weaker outlook

The economic developments for the month have been viewed pessimistically by markets, particularly equities. China’s CSI 300 declined 21% from the end of July to 26 August, falling back to its December 2014 levels, despite intervention by authorities to stem the decline. The S&P 500 has fallen 7.8% over the same period. Commodity prices dipped, with the CRB index falling to a 13- year low, led by the price of oil which has dropped 21% since late July. Consequently, appetite for safe-haven securities increased with US 10 year bond rates falling 10 basis points. There was some recovery in many financial markets following policy measures announced in China on 25 August.

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