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Monthly Economic Indicators

Analysis

Positive momentum in the economy

Data released in the past month point to a continuation of the positive momentum seen in the New Zealand economy in the September quarter of 2013, although that 1.4% quarterly growth was boosted by a rebound in agricultural output from the drought earlier in the year.  Employment and labour incomes continued to expand firmly in the December quarter and goods exports surged; high visitor arrivals point to an increase in net services exports, and increasing net external migration gains will have boosted aggregate demand.  Other data, including building consents and consumer confidence, show ongoing momentum in the economy in early 2014.

Employment continued to expand...

Firms hired more staff in the December quarter, increasing the number of filled jobs by 0.4% and taking the annual increase to 1.9% (32,200), according to the Quarterly Employment Survey (QES) (Figure 1).  More than half of the increase was in two of the largest industries: professional, science, technical, administration and support services (9,100), and health care and social assistance (7,700).

Figure 1: Filled jobs and employment growth
Figure 1: Filled jobs and employment growth.
Source: Statistics NZ

The number of people employed increased by 1.1% (24,000) in the December quarter, taking the annual increase to 3.0% (67,000) on seasonally adjusted figures (Figure 1), according to the Household Labour Force Survey (HLFS) which has wider coverage than the QES. 

...and unemployment fell slightly...

The number of people actively seeking and available for work (i.e., unemployed) fell slightly (down by 2,000 to 147,000 seasonally adjusted) in the December quarter.  As a result of the rise in employment and small fall in unemployment, the total number of people in the labour force rose by 22,000, taking the participation rate to 68.9% – its second highest level in the 28-year history of the HLFS.  The fall in the number of unemployed resulted in a fall in the unemployment rate from 6.2% in September to 6.0% (Figure 2), although the rate for females rose slightly to 6.9%.  Increased numbers of females seeking work may be a result of welfare reforms which encourage beneficiaries to seek part-time work.

Figure 2: Unemployment and participation rates
Figure 2: Unemployment and participation rates.
Source: Statistics NZ

...and combined with moderate wage growth to produce higher labour incomes

Wage growth picked up in the December quarter on an annual basis, but remained moderate.  Average hourly earnings (for ordinary time) increased by 2.9% in the year to December, up from 2.1% in June and 2.6% in September.  Wage growth was stronger in the private sector (at 3.2%) than in the public sector (1.6%).  Average weekly paid hours (per full-time equivalent employee) increased only marginally from a year ago, but taking the increase in the number of people employed into account, total weekly gross earnings increased 5.2% from a year ago.  The annual rate of growth was similar to the previous quarter, but up from 3.9% in the June quarter.

Employment growth in the December quarter was stronger than in our Half Year Economic and Fiscal Update (HYEFU) and followed growth of 1.2% in the previous quarter.  While a lot of the increase in employment was a result of the Christchurch rebuild, employment growth was positive elsewhere as well.  We expect employment to continue to grow in 2014, although at a slower rate than in the second half of 2013.

Higher export values...

The value of merchandise exports was up 18.3% in the December quarter from a year ago as the rebound in dairy production from the drought earlier in the year flowed through to higher export volumes.  Export prices also increased for dairy products, with the value of milk powder, butter and cheese exports up by 62% from a year ago to $5.1 billion.  Export volumes of these products were up by only 10%, implying a near 50% increase in export prices.  The terms of trade (due for release in early March) are expected to record a further increase from the September quarter’s 40-year high.  Increased dairy product exports to China (particularly whole milk powder) and higher world prices made China New Zealand’s largest goods export market in 2013, accounting for 21% of total goods exports ($9.96 billion).  China is also taking an increasing share of forestry and meat exports (Figure 3).

Figure 3: China’s share of New Zealand’s top three goods export categories
Figure 3: China’s share of New Zealand’s top three goods export categories.
Source: Statistics NZ

...and lower growth in imports...

The value of imports increased 6.4% in the December quarter from a year ago.  Capital goods imports were up by 11.2% from a year before (chiefly transport equipment), pointing to increased investment in the December quarter, while consumption goods imports were up only 3.2%.  Motor vehicle imports were up 17.5% from a year ago, possibly in response to lower prices (see last month’s special topic), but crude oil and petrol imports were unchanged from a year ago.

...positive for GDP and boosted incomes

The increase in export values relative to imports will increase the goods surplus on the balance of payments in the December quarter.  The merchandise trade balance turned around from a deficit of $766 million in the December quarter 2012, to a surplus of $534 million in 2013.  The increased volume of exports relative to imports will make a positive contribution to quarterly GDP growth, and the elevated primary product export prices (reflected in the terms of trade) will boost farm incomes in the quarter.
The outlook for the goods terms of trade remains positive in the near term, as commodity prices have remained high and it takes one quarter (on average) for spot prices to flow through to export prices.  The ANZ Commodity Price Index rose 1.2% in world price terms in January to a new record high, with dairy prices increasing strongly and forestry prices reaching a new record.  Prices at the GlobalDairyTrade auction have remained elevated in February, supporting the terms of trade until the June quarter at least.  Dairy prices may ease after that as global supply increases, although there is little sign of that so far.  The outlook for trading partner growth (discussed below) remains positive, although there were some signs of weakness in the February data.

Overseas visitor arrivals and external migration also supportive of GDP growth

Net services exports are also likely to contribute positively to GDP growth in the final quarter of 2013.  Short-term overseas visitor arrivals in the December quarter were steady in seasonally adjusted terms from the previous quarter, but New Zealand resident short-term departures fell 1.7%.  Setting aside length of stay and daily spend factors, this should result in a gain on travel services net exports in the quarter.

Figure 4: External migration
Figure 4: External migration.
Source: Statistics NZ

Net external migration registered a larger gain in the December quarter as permanent and long-term arrivals (seasonally adjusted) increased by 1,160 from the September quarter and departures fell by 520. This took the annual net gain to 22,470, a turnaround from a net loss of 1,170 in 2012 (Figure 4) and boosted annual population growth in 2013 by 0.5%-point to 1.2%.

Growth in incomes to lead to higher consumption...

The growth in labour incomes (discussed above) and in farm incomes (from high export prices) is expected to lead to robust growth in private consumption in the December quarter.  Retail sales volumes and values both increased by 1.2% in the quarter as retail prices remained unchanged overall.  The increase was less than the growth in electronic card transactions (ECT) for the quarter (1.7%) suggested.  The largest increases were for clothing and footwear (possibly in response to the good weather), recreational goods, electrical and electronic goods, and department store sales.  Non-store and commission-based retail sales (which include on-line purchases within New Zealand) fell 10% in the quarter, possibly as households sourced more on-line purchases from overseas (not included in NZ retail sales).  Those purchases may have received a boost prior to Christmas from the high value of the New Zealand dollar which was up 2.75% from the previous quarter and 5.0% from a year ago.

Figure 5: Retail sales and total gross earnings
Figure 5: Retail sales and total gross earnings.
Source: Statistics NZ

On an annual basis, retail sales increased 3.9% in both volume and value terms, ending a period of five quarters of annual price falls, and down from a growth rate of 4.7% in the volume of sales in the year to September 2013.  Growth in sales in 2013 was less than the growth in total gross earnings of 5.2% (discussed above), suggesting that household spending remains well contained (Figure 5).  However, growth in private consumption in the December quarter, as a major component of GDP, may be higher than retail sales as Statistics New Zealand now includes household purchases of goods worth less than $1,000 from overseas in private consumption.  (Note that these are netted out from GDP as imports.)  We expect real private consumption growth of around 1% in the final quarter of 2013.

...with momentum flowing into 2014

Indicators are positive for private consumption growth in the March quarter.  Although ECT fell 0.5% in January from December, they remained at a high level.  ANZ-Roy Morgan consumer confidence increased to a seven-year high in February in seasonally adjusted terms from January’s already high level.  ANZ Job Ads increased 2.8% in January from December, a positive indicator for employment growth and a further fall in unemployment.

Housing market cooling...

One possible headwind for private consumption growth is a slight cooling in the existing home market as the loan-to-value restrictions continue to have an impact.  Sales continued to fall from a year ago in January, down 4.3%, and prices now appear to be impacted, with the REINZ house price index falling slightly in January in seasonally adjusted terms (Figure 6).  The annual growth in the price index slipped from 9.2% in December to 7.7% in January.  However, median price increases remained robust in Auckland (14%) and Christchurch (10%).  A slowdown in the housing market may weigh on private consumption growth in 2014, especially for consumer durables.

Figure 6: House prices and house sales
Figure 6: House prices and house sales.
Source: Real Estate Institute of NZ

...but residential investment looks up

However, support for durables consumption may come from increased residential investment in 2014.  The total number of dwelling consents increased 14.6% (seasonally adjusted) in the December quarter from September (+3.8% if volatile apartments are excluded), and up by a third from a year ago.  The pick-up in consents points to a further acceleration in residential investment in 2014 as the Christchurch rebuild gathers pace and building expands in Auckland.

Robust growth expected in December quarter

Overall, we expect robust growth in real GDP of around 1% in the December quarter, with positive contributions from all the main expenditure components, partially offset by some recovery in stocks.  Production GDP growth is expected to be similar.  The ANZ Regional Trends survey, which estimates GDP growth on a regional basis from secondary data, showed a 0.9% increase in nationwide activity in the quarter.  The official figures will be released on 20 March.

Firms positive about current activity...

Firms remain very positive about their current activity.  The BNZ-Business NZ Performance of Manufacturing Index (PMI) stood at 56.2 in January (seasonally adjusted), just below December’s 56.4, but equal to the average for the previous six months and indicating rapid expansion.  New orders remained above 60 and production increased 1.8 points to 59.5.  The Performance of Services Index (PSI) rose to 58.1 in January, up 0.5 points from December and the highest monthly figure since November 2007 before the global financial crisis hit.  New orders stood at 66.1 and activity/sales at 63.2. 

The Performance of Composite Index, which combines the manufacturing and services indices, points to high GDP growth (Figure 7).  The first reading from the ANZ Business Outlook survey, due for release on 28 February, is expected to maintain the high level of business confidence and activity outlook from late last year.

Figure 7: Performance of Composite Index and GDP
Figure 7: Performance of Composite Index and GDP.
Source: Statistics NZ, BNZ-Business NZ

...and face limited inflation pressures...

Firms do not appear to be facing generalised inflation pressures so far.  Private sector wage and salary costs, measured by the Labour Cost Index (which measures the cost of a fixed unit of labour), increased 1.7% in the year to December 2013, their lowest rate of increase in three years.

Firms’ input prices fell 0.7% on average in the December quarter, with price falls across the board but especially large falls for electricity with increased hydro generation.  On an annual basis, input prices were up 2.8%, with dairy commodity prices being a large influence.  Firms’ output prices fell 0.4% in the quarter, led by wholesale electricity prices, but with only moderate increases elsewhere.  Output prices increased 3.8% from a year ago, but were skewed by dairy farming and dairy manufacturing prices.

Capital goods prices increased only 0.5% in the quarter and 1.4% for the year.  Increases were concentrated in residential and non-residential building costs (up 4.5% and 3.2% respectively from a year ago), and land improvements (up 2.0%), reflecting the pressures emanating from the Christchurch rebuild.  Prices for plant, machinery and equipment (including transport equipment) fell on both a quarterly and annual basis, reflecting the high value of the NZ dollar.

...and inflation expectations broadly unchanged

The Reserve Bank’s latest survey showed that firms’ expectations of one-year-ahead consumer price inflation rose slightly from 1.9% to 2.0%, while two-year-ahead expectations were unchanged at 2.3%.  Respondents expected 90-day interest rates to be 3.0% by the end of March, slightly above current levels.  The Reserve Bank is widely expected to increase the Official Cash Rate by 25 basis points to 2.75% on 13 March as spare capacity is absorbed in the economy.

Transitory softness in international economy

Global developments were slightly weaker in February as US activity continued to be weather-impaired, while temporary factors may have dampened Chinese growth in early 2014.

A policy-neutral RBA waits for jobs to pick up

The Reserve Bank of Australia (RBA) revised up its 2014 growth forecast and acknowledged that low interest rates are leading to an improvement in the economic outlook. While the Bank expects the unemployment rate to rise, it indicated that it would hold rates steady in the near term after annual inflation in the December quarter was higher than expected at 2.7%. 

Low interest rates continued to support activity. New lending for housing was up 28.5% annually in December, and house prices were up 3.5% in the December quarter. Higher prices encouraged increased dwelling approvals and supported retail sales. The January NAB business survey confirmed rising business confidence and conditions. However, the labour market remains weak. Employment fell 3,700 in January and the unemployment rate climbed to a decade-high of 6.0%, the same as New Zealand’s. Wage growth in 2013 was the weakest on record.

China sees a soft start to the year...

Chinese data began the year on a weak note. The official PMIs and the HSBC PMIs all showed lower growth in early 2014 relative to the recent history in both manufacturing and services. Temporary factors, including the Chinese New Year, pollution control and clampdowns on spending by officials, are likely to have contributed to the weak PMIs.

...while the harsh US winter impairs activity...

The harsh winter weakened US activity. Non-farm payrolls grew by a subdued 113,000 in January, although in the separate household survey the unemployment rate fell 0.1% points to 6.6% on strong jobs growth. Retail sales and industrial production (IP) fell in January, as the ISM manufacturing PMI tumbled 5.2 points to 51.3. However, the non-manufacturing PMI rose, and the general data softness is expected to be transitory.

Figure 8: Supply of new houses in the US
Figure 8: Supply of new houses in the US.
Source: Haver

The recent softness in housing supply raises questions about the housing recovery as mortgage rates edge higher. The inclement weather played a part in the 16% plunge in January’s housing starts, but new permits, which should be less affected by the weather, fell 5.4% (Figure 8).

Analysts expect the Federal Reserve to continue to taper QE. Meanwhile, low inflation (1.6% in January) reinforces the ‘low-for-long’ guidance on the Fed Funds Rate and Congress has approved a bill extending the debt ceiling until March 2015.

...and Japan’s growth falters towards year end

Sluggish Japanese GDP growth of 0.3% in the December quarter reinforced concerns around the stimulus-led recovery, although investment continued to be robust. A strong manufacturing PMI in January (56.6) and a 0.3%-point fall in the unemployment rate to 3.7% in December suggest that growth may rebound in the March quarter before the tax rise. A large trade deficit owing to the high cost of energy imports and the weak yen led to a deteriorating external position over 2013.  The Bank of Japan (BoJ) doubled the size of two programmes aimed at stimulating bank lending and is on track to doubling the monetary base (up 52% annually in January). The BoJ left its QE programme unchanged in February.

Positively, the euro area recovery continues

The euro area economy expanded 0.3% in the December quarter, confirming a steady albeit slow recovery; rising financial market sentiment reflected the improving outlook. However, key indicators remained tepid: retail sales and IP contracted in December, while the PMIs fell in February. All told, the near-term pace of recovery will likely be modest. The European Central Bank (ECB) is confident that inflation will return to 2%, despite a low 0.8% outturn in January, but some analysts expect further ECB action to boost growth and counter disinflationary pressures.

The BoE’s new guidance becomes entrenched

The Bank of England (BoE) introduced further forward guidance as the unemployment rate edged closer to the 7% threshold for possible rate hikes. The Bank stated that a hike is unlikely after the 7% threshold is met, owing to sizable spare capacity in the economy. This new guidance was reinforced by the 1.9% inflation rate in January, the first time it has fallen below the BoE’s 2.0% target in four years.
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