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Monthly Economic Indicators

Analysis

Economic data released through August point to a continuation of steady, moderate growth in the economy, in line with the Treasury’s expectations in the 2017 Pre-election Economic and Fiscal Update (PREFU).  Retail spending picked up in the June quarter and momentum is likely to have continued into the September quarter, although the softening housing market may pose some risks to this.  There is evidence of some Lions tour effects in the retail trade, electronic cards and visitor arrivals data, which could cause some timing related volatility in the national accounts.  The merchandise trade balance improved, reflecting lifts in commodity export prices, while annual tourism export revenues were unchanged in June.  Capacity pressures appear to be increasing in the construction sector, with input costs increasing at their fastest rate in six years.  The number of new dwelling consents issued fell for the second month in a row.

Retail spending picked up in the June quarter...

Both the volume and value of retail trade picked up in the June quarter, increasing by 2.0% and 1.6% respectively on a seasonally adjusted basis.  Core retail (excluding motor vehicles and fuel) volumes were up a similar amount (2.1%) and values increased 2.0%.  Volume growth was strong across the more tourism-influenced industries, with accommodation, food and beverage services, and liquor industries recording gains of 6.1%, 4.2% and 7.8% respectively in the quarter (Figure 1).  Collectively, these three industries accounted for half the increase in core retail sales volumes and three fifths of the increase in core retail sales values.

Figure 1: Retail trade volumes by category
(June quarter seasonally adjusted percentage change)
Figure 1: Retail trade volumes by category.
Source: Statistics New Zealand

The relatively high New Zealand dollar likely helped sales in a number of import-oriented industries.  Electrical and electronic goods volumes rose 5.2% in the quarter but values were only up 3.5%, and volumes and values for recreational goods and clothing, footwear and accessories both increased by 1.5%.

Hardware, building and gardening supplies was the final driver of core retail growth, lifting 2.8% in volume terms and 3.0% by value. 

Growth in motor vehicle and parts volumes slowed to 1.7% in the quarter, following increases above 4% in the two preceding quarters.  Meanwhile, fuel volumes rose 1.3% in the quarter, following on from two quarters of contraction.  Falling fuel prices in the quarter was likely a contributing factor.

The retail sales outturn points to annual real private consumption growth of around 4.5% in the June quarter, suggesting a little upside risk to the PREFU estimate of 4.0% (Figure 2).  That said, there is a higher degree of uncertainty than normal around how much of the retail sales total is attributed to non-resident expenditure (i.e. tourists) versus domestic households given the Lions tour straddled the June and September quarters.  In the national accounts, tourist expenditure is recorded when the visitor departs New Zealand, so activity related to Lions tourists may end up concentrated in the September quarter.  This attribution effect (and any future revisions as better information becomes available) may have an influence on private consumption in both quarters.  In the July visitor departure figures there were 16,000 more departures by UK citizens than in July 2016.

Figure 2: Retail trade and private consumption
Figure 2: Retail trade and private consumption   .
Source: Statistics New Zealand, Treasury

…and momentum is likely to have continued into the September quarter

Total seasonally adjusted electronic cards transaction values fell 0.7% in July, chiefly on a 6.1% fall in fuel expenditure.  However, the value of core retail transactions was virtually unchanged in July, up just 0.1% in the month on a seasonally adjusted basis to $4,421 million, following a 0.8% increase in June.  Seasonally adjusted hospitality spending across June and July was around $20 million higher each month than in previous months, perhaps evidence of a Lions tour effect.  This may mean August hospitality spending falls by a similar amount. 

One of the key drivers supporting consumer spending has been high net permanent and long term (PLT) migration, which reached another record high in July.  Annual net migration increased slightly to 72,400 (from 72,300 in June) despite a decline in the monthly seasonally adjusted figure to 5,800.  The rate of increase in net migration has been gradually slowing.  PLT arrivals continue to increase at a fairly steady rate but are starting to be offset by increasing departures (Figure 3).  In PREFU, we assume PLT migration will peak a little above the current level in the September quarter and then gradually decline as Australian economic conditions improve and as changes to immigration policy settings reduce New Zealand’s relative attractiveness.

Figure 3: Net PLT migration (annual total)
Figure 3: Net PLT migration (annual total)   .
Source: Statistics New Zealand

Consumer confidence remains relatively buoyant, with the ANZ-Roy Morgan survey showing a modest rebound in confidence in August following a small fall in July.  However, allowing for a bit of gloom associated with the short days and wet weather, seasonally adjusted consumer confidence was at its highest level since mid-2014. 

Consumers’ inflation expectations eased again according to the survey, likely reflecting a combination of lower petrol and food prices.  Petrol prices fell in the June quarter and have remained fairly flat across July and August.  The food price index fell 0.2% in July, although it remained 3.0% higher than a year ago.  On a seasonally adjusted basis food prices were unchanged, as 1.4% and 0.8% falls in fruit and vegetables and meat, poultry and fish respectively were offset by increases in other categories.  Fruit and vegetable prices pushed higher earlier in the year owing to poor growing conditions and we expect prices will continue to drift downwards as supply conditions return to normal, which should dampen overall increases in the food price index and, in turn, the Consumers Price Index (CPI).

Early indications for the September quarter suggest that private consumption growth will remain fairly steady.  Consumers remain confident, migration continues to add to aggregate demand, interest rates remain low and price increases remain fairly modest.  One risk to measured household consumption growth is the attribution of non-resident expenditure noted earlier.  That said, this is largely a statistical artefact and overall GDP would not be affected.  A potentially more material risk is the extent to which the cooling housing market spills over into household behaviour.

Tourist spending remains elevated

Seasonally adjusted visitor arrivals in July were largely unchanged from May, having surged in June with the arrival of Lions tourists.  Nonetheless, arrivals in July were 3.8% higher than a year ago and on an annual basis reached a new record of 3.66 million.  Australia remains the largest source of growth with 85,000 extra visitors over the past year, followed by the US (62,000) and the UK (32,000).  Annual Chinese visitor arrivals declined marginally (-2,000), although China remains the second largest source of visitors.  Growth in overseas departures of New Zealanders also remained strong, with departures in July 8.7% higher than a year ago and annual departures also setting a new record at 2.77 million.

The increasing volume of visitors did not translate into higher tourism revenues, with the Ministry of Business, Innovation and Employment (MBIE) estimating total annual international visitor spending to be unchanged at $10.3 billion in the year to June.  The average spend per visitor fell 8% to a little under $3,200, while median spend per visitor was 3% lower at $2,100.  The decline in spend per visitor is partly compositional, as Australian visitors, the largest source of volume growth, have a much lower spend per visitor ($1,900 average, $1,400 median).  The relatively high exchange rate, which averaged 7% higher in the June 2017 year than the June 2016 year, is also likely to have dampened tourist spending in New Zealand.  Both Treasury and MBIE expect tourism growth to remain solid over the medium term, bolstered by rising incomes in Asia, particularly China, as well as continued growth from traditional markets.

Reserve Bank leaves interest rates on hold…

The Reserve Bank left the Official Cash Rate (OCR) unchanged at 1.75% on 10 August and noted that “[M]onetary policy will remain accommodative for a considerable period”.  The economic forecasts in the accompanying monetary policy statement were similar to those in PREFU, with the growth outlook only slightly different (Figure 4).  Headline CPI inflation forecasts were also very similar.  That said, there are some different judgements in key areas including the pace of residential investment, where the Treasury sees capacity constraints in the construction sector impacting on residential investment growth to a greater extent than the Reserve Bank’s forecasts. 

Figure 4: Production GDP (annual average percentage change)
Figure 4: Production GDP (annual average percentage change)   .
Source: RBNZ, Statistics New Zealand, Treasury

…while the housing market continues to slow

The REINZ House Price Index (HPI) for New Zealand fell 0.4% (seasonally adjusted) in July, with prices in Auckland still pulling down prices nationally. For the year to July, the New Zealand HPI rose 1.2%, the Auckland HPI fell 2.1%, and in the rest of New Zealand the HPI rose 7.5%.

Sales volumes continued to fall, down 3.3% (seasonally adjusted) in July for all of New Zealand. Compared to July last year, sales were down 24.5% for New Zealand (30.6% in Auckland and 21.5% in the rest of the country).  A range of factors are driving fewer house sales including loan to value ratio restrictions, tighter bank lending criteria and credit conditions, and affordability constraints, particularly in Auckland.  

The seasonally adjusted number of new dwelling consents fell 0.7% in July, following on from a 1.3% fall in June.  The number of consents issued annually peaked in May at 30,600 and has since eased to 30,400.  The monthly fall reflected a large drop in multi-dwelling consents.  New housing consents rose 8.5% in the month, but have followed a similar annual pattern, peaking in March at 21,400 and easing to 21,200 by July.  Earlier in the month, Statistics New Zealand published an analytical note estimating that “in the year ended June 2017, there was potentially a shortfall of about 9,000 new homes consented compared to what was needed to meet increased demand from a larger population in the same period.[1]

There is usually a 1-2 quarter lag from consents being issued to the bulk of the work appearing in residential investment.  On this basis, the consents outturn together with falling house sales (the transactions component of residential investment) is consistent with our expectations in PREFU that residential investment activity will remain fairly flat over the remainder of 2017 (Figure 5).  Thereafter, we expect residential investment growth to pick-up in response to pent-up demand, ongoing high population growth and low interest rates.

Figure 5: Dwelling consents and residential investment
Figure 5: Dwelling consents and residential investment   .
Source: Statistics New Zealand, Treasury

The merchandise trade deficit narrowed…

July recorded an atypical, non-seasonally adjusted merchandise trade surplus of $85 million (Figure 6).  This was the first July surplus since 2012 and only the 11th since 1960.  On a seasonally adjusted basis, the goods trade balance posted a surplus of $154 million in July, a turnaround from the $58 million deficit in June. Seasonally adjusted exports rose 6.7% ($303 million), partially driven by a 2.4% ($32 million) rise in dairy values, with volumes broadly unchanged, and a 5.7% ($31 million) rise in meat, with both price and volumes contributing to the rise. Exports to China have been particularly solid.  Forestry and fruit also posted respectable gains in the month, up 3.5% and 7.4% respectively.

Figure 6: Merchandise trade balance
Figure 6: Merchandise trade balance   .
Source: Statistics New Zealand

The 2.0% rise in seasonally adjusted imports was driven by a 4.5% ($18 million) increase in petrol (which does not get seasonally adjusted). Passenger motor car imports remained buoyant, up 35.8% from a year ago, with a touch under 36,500 new and used vehicles registered in the month.  Two of the larger import categories, mechanical machinery and equipment and electrical machinery and equipment posted declines of 2.4% and 2.1% respectively.   

The annual merchandise deficit narrowed from $3.6 billion in June to $3.2 billion in July.  The trade data is a touch stronger than we were anticipating in the PREFU, although with only one month of data for the September quarter it is difficult to make firm conclusions.  The overseas trade indices will be released by the time this report is published and are expected to show a new high for the goods terms of trade in the June quarter.

…as commodity prices remain steady…

The ANZ commodity price index and GlobalDairyTrade auctions suggest that at least some of the expected strength in the terms of trade will persist into the second half of 2017.  The ANZ world commodity price index eased 0.8% in July but remains 21.1% higher than a year ago.  The rebound in the index over the past year has been broad based, although the recovery in dairy prices over the second half of 2016 has been the main driver.  GDT dairy prices have traded within a fairly narrow range this year and have remained more or less unchanged since July (Figure 7).  GDT prices usually flow through to trade prices with about a quarter lag, suggesting that dairy export prices should remain fairly stable through to the end of the year.

Figure 7: Dairy prices
Figure 7: Dairy prices   .
Source: GlobalDairyTrade

…boosting input and output prices in commodity intensive industries

The lift in commodity prices over the last year was evident in the Producers Price Index.  Overall producer output prices rose 1.3% in the June quarter and 5.2% compared to a year ago (Figure 8), with agriculture output prices up 5.0% in the quarter and 9.5% higher than a year ago.  Dairy was the main driver of the increase in agricultural output prices, with dairy output prices 53.0% higher than a year ago, chiefly reflecting the recovery in farm gate milk prices from below $4/kg MS in 2015/16 to over $6/kg MS in 2016/17.  Higher commodity prices were also evident across a number of other areas including mining (16.9% higher than a year ago) and a number of manufacturing sub-groups including meat (9.2%), dairy (35.4%) and petrol and coal (20.7%).  Construction output prices were 4.3% higher than a year ago.  Output prices were much more subdued across services industries, with annual gains mostly in the 1-3% range.

Figure 8: Producer price inputs and outputs (annual change)
Figure 8: Producer price inputs and outputs (annual change)   .
Source: Statistics New Zealand

Producer input prices rose 1.4% in the June quarter in aggregate and 4.7% compared to a year ago.  Many of the same commodity intensive manufacturing industries saw large increases in input prices.  Similarly, input price growth was more subdued across services industries.  Construction costs have risen sharply over late 2016 and the first half of 2017, with input prices 2.9% higher than a year ago.  This is the fastest rate of annual increase since the end of 2011, when the Canterbury earthquake rebuild was gaining momentum, perhaps indicating increasing capacity pressures in the construction sector. 

Overall, producer output prices grew a little stronger than input prices, consistent with improving margins and strong corporate tax revenue observed in the year to June 2017.  This was not the case in all areas however, with electricity input prices rising faster than output prices, suggesting that the electricity industry may make a negative contribution to GDP in the June quarter.

Global growth remains robust though significant risks to the outlook

The global economy continued to expand at a healthy pace over the second quarter of 2017 and that momentum is expected to continue into the third quarter. Economic activity accelerated in most advanced economies in the June quarter, led by the euro area, which grew at its fastest pace in over six years. Despite the pickup in growth, inflation and wage growth remain subdued, which is reflected in the cautious stance adopted by monetary policy makers in their approach to monetary policy normalisation. Furthermore, the risk bias shifted to the downside over the month on the escalation of tensions between the US and North Korea, discussions around the US involvement in the North American Free Trade Agreement (NAFTA), and the looming US debt ceiling debate. These events have led to increased financial market volatility (as observed through movements in the VIX) and a ‘risk-off’ sentiment with rising prices for gold and the yen.

The annual conference on monetary policy at Jackson Hole took place in August with the title of “Fostering a Dynamic Global Economy”. The focus from policy makers, including Federal Reserve Chair Janet Yellen and ECB President Mario Draghi, was to stress to politicians the importance of maintaining financial regulations that were put in place after the GFC and the importance of free trade for continued economic growth. Markets were quiet in anticipation of the conference though reaction following the event was limited given that neither Yellen nor Draghi substantively discussed monetary policy.

Strong data in the US does not change expectations of monetary policy stimulus

In the US, GDP grew 0.8% in the June quarter, up from 0.3% in March. This brought full year growth up slightly to 2.2% in June from 2.0% in March.

Non-farm payrolls showed a net gain of 209,000 new jobs in July. This was down from an upwardly revised 231,000 in June but above market expectations of around 180,000.  The unemployment rate fell to 4.3%, its lowest level in more than 15 years and the participation rate increased slightly. Annual wage growth was steady at 2.5% and is unlikely to provide a significant boost to inflationary pressures.

US consumer price inflation edged up to 1.7% in July, from 1.6% in June. Core inflation remained unchanged at 1.7% percent, its slowest rate since January 2015.

The subdued wage and inflation data were in line with the Federal Reserve’s expectations. July’s Federal Open Market Committee (FOMC) minutes showed members expected inflation to remain subdued, but to gradually rise over the next few years. The minutes also supported expectations that balance sheet unwinding would be announced at the September meeting.

Figure 9: Global inflation downturn takes a breather
Figure 9: Global inflation downturn takes a breather   .
Source: Haver

Other US activity indicators were mixed. The University of Michigan consumer sentiment index rose in August to 97.6 (up 4.2pts), and the Markit services PMI lifted from 54.7 to 56.9, its highest level since April 2015. However, the Markit manufacturing PMI edged down from 53.3 to 52.5.

Hurricane Harvey has caused substantial damage in Houston with further damage still possible. The total impact is not yet known however some analysts have suggested it could take 0.2ppts off GDP growth over the second half of the year. The US debt ceiling also remains a risk politically, but a government shutdown appears less likely given the urgent need for support in the states affected by Hurricane Harvey. Credit rating agency Fitch noted that while a government shutdown would not have a direct impact on the US’s AAA rating, failure to raise the debt ceiling “in a timely manner” could affect the rating.

Weak growth and inflation keep monetary policy outlook subdued.

In the UK, GDP rose 0.3% in the June quarter, bringing year on-year growth to 1.7%. Private consumption spending grew modestly, up 0.1% in the quarter, as price increases stemming from the lower exchange rate hit household budgets. Government spending and capital investment growth was higher than anticipated, but business investment was flat in the quarter. Analysts expect growth to remain sluggish over the next few months.

UK headline and core CPI inflation remained stable at 2.6% and 2.4% respectively in July, but down from 2.9% and 2.5% in May. The unemployment rate fell to 4.4%, the lowest level recorded since 1975 and below the BoE’s assessment of the NAIRU. Average weekly earnings in Q2 rose 2.1% from a year ago, indicating falling real wages. Some analysts suggest weak wage growth may relate to pay restraint in the face of Brexit uncertainty.

Figure 10: GDP picks in most advanced economies in June
Figure 10: GDP picks in most advanced economies in June   .
Source: Haver

As widely expected, the Bank of England (BoE) kept its policy rate at 0.25% in August. The number of Committee members voting for a rate hike fell from three members in June to two at the August meeting, reflecting the weaker CPI inflation and GDP outturns since the last meeting. The Bank cited Brexit uncertainty as the primary cause of the downgrade in 2017 growth to 1.7% from 1.9% in the May announcement. Moderate growth, easing inflation and subdued wage growth suggest the Bank of England will hold its policy rate at 0.25% this year.

RBA sees economic risks from wage growth and house prices   

The Reserve Bank of Australia (RBA) left rates on hold in July and the Statement of Monetary Policy showed the RBA maintaining its neutral stance, in line with expectations. The forecasts for growth, inflation and unemployment were not materially changed from the May Statement. The RBA noted the persistence of weak wage growth posed a risk for inflation going forward. If wage growth remains subdued, as has been seen globally it will act as a headwind to inflation. On the other hand, “inflationary pressures could instead emerge more quickly if workers seek to ‘catch up’ after a long period of low wage growth”. Labour market trends of the past few months continued in July with falling unemployment but weak wage growth. Annual employment growth was robust at 2.0%, leading the unemployment rate to tick down to 5.6%. However, annual wage growth remained at a record low 1.9% for a fourth quarter.

The RBA’s minutes revealed other areas of concern for the Bank. In particular, the minutes noted that the housing market continued to "warrant careful monitoring", but Governor Lowe said that the RBA was not planning to intervene at this point, saying instead that “we are prepared to intervene in extreme situations but they have got to be pretty extreme”.

Market pricing currently implies that rates will be on hold for some time.

Euro area growth continues to improve

GDP growth in the euro area picked up in the June quarter to 0.6%, up from 0.5% in March, and the fastest pace of growth since 2011. This brought annual GDP growth up to 2.2% from 1.9% in March. The euro area manufacturing PMI rose 0.8pts to 57.4 in August, while the services PMI fell 0.5pts to a six-month low of 54.9. The robust manufacturing PMI is likely to continue to support growth. 

Economic momentum eases in China in July

Most indicators of China’s activity for July slowed more than expected, although they remain around the levels required for China to meet its growth targets. Retail sales growth eased from 11.0% to 10.4%, industrial production growth slowed from 7.5% to 6.4%, led by a contraction in the mining sector and slowing production in the manufacturing sector, and fixed asset investment growth slowed from 8.6% to 8.3% growth in the year to date, driven by housing and manufacturing investment. In line with this, new house price growth in China’s 70 major cities eased from 10.2% in the year to June, to 9.7% in July, with prices in Beijing falling for the second consecutive month. These outturns may relate to the Government’s efforts to restrict the real estate market and credit growth, and are consistent with expectations of a gradual and modest slowing in Chinese growth.

China’s latest IMF review estimated that China’s debt to GDP ratio would rise to nearly 300% by 2022, double that of a decade ago, if credit growth was not reined-in. The IMF indicated that reform is desperately needed, and whilst China has tentatively begun this process, it is not yet enough.

Japanese growth beats expectations

Japan’s GDP grew 1.0% in Q2, almost twice the consensus expectation, bringing annual growth to 2.1%, the strongest result since 2014, from 1.5% in March. The improvement was primarily driven by strong household spending and business investment. Japan’s manufacturing PMI rose 0.7pts to 52.8 in August, its best reading since February. This suggests that some of the strength in GDP may flow through into Q3.

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