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Monthly Economic Indicators

Analysis

Data released over February provided a mixed view on the economy, with indicators highlighting emerging differences between sectors and a continuing gradual economic recovery.

Retail sales lift further in December quarter…

Sharp price falls across a range of store types and a marked lift in consumer confidence on the back of the improving economic outlook over the second half of last year drove total seasonally-adjusted retail volumes up 1.0% in the December quarter. The retail result points to stronger quarterly private consumption growth than assumed in the Half-Year Update (0.3%), consistent with higher-than-forecast GST receipts over this period. Volumes of motor vehicle sales rose in the quarter, consistent with a recent pick-up in car imports and registrations and indicative of a wider increase in demand for durable goods.

Motor vehicle retailing was the hardest-hit sector in the recession, with quarterly sales still around 25% lower than at the end of 2007 (Figure 1). We expect car sales to continue increasing off a very low base in coming quarters, in line with above-average consumer confidence levels and easing prices (driven by past increases in the NZ dollar and increasing availability of used cars).

Figure 1 – Retail sales volumes
Figure 1 - Retail sales volumes.
Source: Statistics NZ

Significantly lower prices for supermarket and grocery food, liquor and appliances resulted in higher volumes for each category, driving core retail volumes up 1.3% in the quarter. The discounting of retail goods was flagged in the weak outturn for December quarter CPI inflation, where the overall index fell 0.2%. Of note in the retail trade data was the 3.1% fall in appliance prices. The fall was the largest in over ten years, driven by lower prices for audiovisual, computing and recording equipment in addition to weaker prices for major household appliances. The significant discounting over the second half of 2009 has helped boost the volume of appliance sales in recent times (Figure 1). Further discounting of a range of tradable goods is expected over the March quarter, reflecting the relationship of these prices with the exchange rate, particularly for appliance retailing (Figure 2).

Figure 2 – NZD/USD and appliance prices
Figure 2 - NZD/USD and appliance prices.
Source: Statistics NZ, Reserve Bank

…despite soft sales in the December month…

Retail volumes in the December 2009 quarter were tempered by a weak outturn for values in the December month, with core sales falling 1.8%, following a strong November (when both the core and total measures rose 0.8%). Notwithstanding data volatility (particularly in liquor and department store sales), along with uncertainty around the timing of discounting in the quarter, core sales were genuinely soft in the December month. Supermarket and grocery store sales fell 2.1% (despite food prices falling just 0.3% in December), while bars and clubs, recreational goods and other food retailing all fell by at least 5% in the month. Strong outturns for the auto-related industries ensured total sales recorded a flat outturn in the month, as automotive fuel and motor vehicle retailing rose strongly (with the recovering vehicle industry recording the strongest growth in over a year).

…and are expected to slow in coming quarters

Retail indicators for January were mixed, with household credit subdued and electronic card transactions pointing to another weak month. An estimated 2.7% increase in fuel prices pushed up electronic card transactions in retail industries, which rose 0.5% in January. Fuel aside, outturns for other store types were flat-to-negative, resulting in a 0.1% fall in core retail transactions. While further discounting in January may have affected transactions of durables (-0.3%) and apparel (-1.9%), it did not explain the flat outturn for consumables, given a rebound in food prices in the month. With the Reserve Bank’s credit card billings proving a more reliable indicator of core retailing recently, the reported 1.5% increase in January is likely a better reflection of sales in the month. Even so, after accounting for the large fuel and food price increases in the month, volumes are likely to have been weak.

The monthly Food Price Index rose 2.1% in January, in part explained by higher fruit and vegetable prices, as above-normal rainfall in most regions led to poor growing conditions. All subgroups rose in the month, with grocery food prices up 1.8%, driven by higher prices for dairy products. While food prices are generally expected to be subdued over the recovery, the outturn for the March quarter will be strong given the higher starting point resulting from the January outturn and further positive contributions from dairy, as previously sharp increases in commodity prices continue flowing through to higher retail prices (Figure 3).

Figure 3 – Commodity and dairy product prices
Figure 3 - Commodity and dairy product prices.
Source: Statistics NZ, The Treasury

The theme of slowing consumer spending growth was also evident in recent consumer and business surveys. The Roy Morgan Consumer Confidence survey for February retreated 8 points to 123.6, while retailing recorded falls across a range of measures in the National Bank Business Outlook, with the notable exception of pricing intentions, which rose to above-average levels. Pricing intentions and inflation expectations more generally lifted in February – a development we will be watching very closely over coming months.

Housing activity also waning into 2010

A soft start to 2010 was even more evident in January’s housing market data, as reported by the Real Estate Institute of New Zealand (REINZ). After seasonal adjustment, we estimate the number of house sales fell 16% in January, while days-to-sell remained steady at 36 after creeping up over the two previous months. House prices have stabilised, growing just 0.6% in the 3 months to January, as increased activity fuelled by historically low interest rates earlier in 2009 appears to have run its course.

Weak housing activity may have been compounded by uncertainty about future changes to property taxes. As a result, we could expect a technical rebound in February sales, given the extent of the January fall. In the near term, we anticipate the housing market will be relatively steady, as a gradually improving labour market and still high population growth are tempered by rising mortgage interest rates and tighter credit. The historical lagged relationship between changes in house prices and durable goods consumption suggests spending on these items grew sharply in the December quarter but will moderate over the first half of 2010, consistent with retail activity discussed earlier (Figure 4).

Figure 4 – House prices and sales of durable goods
Figure 4 - House prices and sales of durable goods.
Source: Statistics NZ, REINZ

Construction of new housing is more positive in the near term, with residential building consents continuing to rise, up 0.7% in January excluding apartments, while activity expectations are near record highs.

Employment flat in December…

The Household Labour Force Survey (HLFS) showed mixed results in the December 2009 quarter, with a fractional decline in employment and a larger-than-expected increase in unemployment. The number of people in employment eased 0.1% over the last three months of the year, a stronger result than our forecast for a 0.2% decline and the smallest quarterly fall for 2009 (Figure 5). The relatively flat result was driven by a fall in full-time employment, with part-time employment steady in the quarter.

Figure 5 – Employment growth
Figure 5 - Employment growth.
Source: Statistics NZ

…but the unemployment rate was higher…

The surprise result in the HLFS was the increase in the unemployment rate from 6.5% to 7.3%, which was higher than we forecast (6.9%) and outside the range of market expectations. The number of people unemployed rose 18,000 (12%) to 168,000, driving the 0.8% point increase in the unemployment rate. Almost half of the rise in the number of unemployed from a year ago came from the 15-19 and 20-24 age groups, suggesting that finding a job was particularly difficult for new entrants to the labour force. However, statistical factors may have also played a role in boosting the seasonally adjusted number of unemployed - possibly the result of changing seasonal patterns of labour market behaviour.

…as labour force participation increased

The increase in the unemployment rate, combined with steady employment, resulted in a small increase in the participation rate from 68.0% to 68.1%. Participation remains at a relatively high level, possibly indicating that people expect job growth to pick up again soon. The working age population was boosted by increasing net PLT immigration in late 2009, further lifting the number of people in the labour market.

Wage growth continued to ease…

With the inherent lags between labour market conditions and wage setting, wage growth continued to slow in December 2009. The Labour Cost Index, which removes productivity-related wage increases, grew 1.8% in the year to December, down from 2.1% in September. Average hourly earnings, as recorded in the Quarterly Employment Survey, grew 4.0%, down from 5.1% in the year to September. With more people seeking work and more firms in a position to increase work hours rather than employee numbers, wage growth is likely to remain subdued for some time yet. …while other input costs also fell

Like wage growth, the cost of inputs for producers was also subdued over 2009. Inputs in the Producers Price Index (PPI) rose just 0.3% in the December quarter, with broad-based weakness across energy, freight charges and rents. In combination with falls earlier in the year, this resulted in a fall of 3.3% in the year to December, eclipsed only by last quarter’s record fall. Output prices also reflected the weak trading environment, falling 0.4% in the quarter and 3.8% in the year to December – a record fall for the series (Figure 6).

Figure 6 – Producers and capital goods prices
Figure 6 - Producers and capital goods prices.
Source: Statistics NZ

Prices for capital goods also weakened

A rising exchange rate over the second half of 2009 and weak pricing pressure in the domestic economy drove the Capital Goods Price Index down 0.2% in the December quarter. The second consecutive decline resulted in the lowest annual increase since 2003 (0.9%) – a significant downward shift since the record 4.9% of March 2009 (Figure 5). Much of the weakness in the overall decline came through lower prices for plant, machinery and equipment, in part reflecting a 4% lift in the TWI since the previous survey.

The lack of demand for commercial building (also evident in the PPI) came through strongly in the non-residential buildings index, with all sub-indexes falling for the fourth consecutive quarter. Respondents cited lower labour costs and contractor margins, along with falling material prices, as the main reasons for the falls.

Business confidence surprisingly strong

The National Bank Business Outlook (NBBO) reported business confidence at a 10-year high in February, with a net 50% of respondents expecting better economic times over the next 12 months, up 11% points on December 2009. While very high confidence levels somewhat reflect the starting point of the economy coming out of the recession, the sharp increase came as a surprise, given declines over the previous three surveys. Firms’ activity outlook also lifted, up 5% points to a net 42%. The two hardest-hit sectors in the recent recession drove the increase (construction and manufacturing), while the subdued retail sector (discussed earlier) bucked the trend.

As expected, employment intentions rose, now lying above the long-term average with a net 9.3% of businesses expecting to be hiring over the year ahead. While investment intentions weakened slightly, the retracement is not inconsistent with the depreciation in the dollar so far this year. On the whole, the results were consistent with the economy continuing to expand over 2010.

International developments were mixed

While the global outlook remains one of a gradual normalisation in activity, key data and events in February pointed to some difference in the outlook for the major economic regions, with developments in the US generally more positive than those across the Euro area.

The US economy expanded much more than expected in the December quarter, recording 5.7% annualised growth. However, with over half of the growth attributable to inventory rebuilding, underlying growth remains tepid. Labour market data out of the US showed weakness abating in December, with the unemployment rate dropping from 10.0% to 9.7% (against expectations of no change) and non-farm payrolls falling only 20,000, down from 150,000 the previous month. In a bid to decrease banks’ reliance on funding from the central bank, the Federal Reserve raised the discount rate (the rate charged to banks for direct loans) by 25 basis points to 0.75%, emphasising that the lift does not signal any change in the outlook for monetary policy. However, it does show that the Fed is starting to consider the withdrawal of monetary stimulus.

Themes emerging from the Eurozone in February raised uncertainty around the strength of the economic recovery. Economic activity increased just 0.1% in the December quarter, following a 0.4% lift in the previous quarter, while the unemployment rate continued to rise, up 0.1% points to 10.0% in December. Concerns over fiscal positions in the Euro area, particularly Greece, weighed on financial markets in the month, with European equities generally down and the Euro slipping a further 2% against the US dollar. This month’s special topic takes a closer look at the interplay of various countries’ fiscal positions with economic activity in the recent downturn.

Locally, markets were surprised earlier in the month by the Reserve Bank of Australia’s decision to pause in its tightening cycle at 3.75%, with the decision largely based on a wait-and-see approach to previous increases. This decision, combined with a rise in the New Zealand unemployment rate and some shading of risk appetite in the global economy, drove around a 1% decline in the Trade Weighted Index over February.

March 2010 will see key releases on the external position and economic growth in the December quarter. Following a 0.2% rise in September, we expect the economy grew at least ½% in the three months to December, with the retail, construction and finance sectors making a strong contribution.

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