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Monthly Economic Indicators

Analysis

Activity indicators are signalling moderate GDP growth over the June quarter, according to the NZIER Quarterly Survey of Business Opinion (QSBO). There is a risk that growth could be even weaker given the negative impact of the drought which is not picked up directly in the QSBO. The drought will likely lead to a negative contribution from net trade to GDP growth, although a partial offset is expected from stronger consumer spending.  However, surveys show that optimism is still prevalent amongst businesses, which points to a solid base for growth in the second half of this year. Although optimism remains centred in the construction sector as the Canterbury rebuild gathers pace, growth is expected to become increasingly broad-based across sectors. The pick-up in activity in the second half of the year will see annual CPI inflation head back towards the middle of the Reserve Bank’s target band.

Business confidence remains elevated…

The QSBO reported that business confidence remains at high levels, with a net 31% of firms expecting the general business situation to improve over the next six months, unchanged from the March quarter. This was in keeping with the positive tone of other business surveys such as the ANZ Business Outlook in which headline confidence lifted to its highest level since 1999. Elevated optimism amongst firms should provide a solid base for growth in the second half of 2013.

Figure 1 – Real GDP and QSBO Survey
Figure 1 – Real GDP and QSBO Survey   .
Source:  NZIER, Statistics NZ

For the June quarter, domestic trading activity eased as only a net 4% of firms experienced an increase in trading activity, down from a net 10% in the March quarter. The relationship between firms’ own activity and real GDP indicates moderate annual GDP growth for the June quarter (Figure 1). Growth may be weaker than the QSBO suggests as it does not include the agricultural sector and therefore did not capture the direct impact of the drought.

The QSBO showed that the building industry remained the most optimistic sector over the June quarter as activity levels continue to be strong, although the pace of new orders and output did ease. Growing construction activity, particularly in Canterbury, contributed to an increase in actual output for manufacturers, while their export sales declined. This was consistent with an expansion in manufacturing activity reported by the BNZ-BusinessNZ Performance of Manufacturing Index (PMI) over the June quarter. The pace of activity was uneven across regions, with Canterbury growing strongly, followed by a moderate pick-up in Auckland while the drought weighed on activity in Waikato and the Bay of Plenty.

Beyond the near-term effects of the drought, the outlook for firms’ own activity for the September quarter was higher, with a net 19% of firms expecting an expansion. While much of the expected growth is centred on the manufacturing and building sectors, sales for retail and service firms are also expected to increase, in line with robust levels of consumer confidence. This suggests that the recovery is expected to be more broad-based in coming quarters, particularly as the agricultural sector bounces back from the drought.

Healthy levels of business confidence translated into stronger hiring and investment intentions, both of which are currently above long-run averages. The labour market appears to be recovering, albeit gradually, with a net 9% of firms intending to employ more staff over the next quarter, up from a net 5% previously. Firms continue to report that skilled labour is difficult to find, much more so in Canterbury than elsewhere. This is consistent with an increase in the number of firms finding labour a constraint on output growth. This could place upward pressure on wages in the future as firms try to fill vacancies, particularly for skilled trades. Pricing intentions rose markedly in the June quarter from a net 13% of firms to a net 22% expecting to increase prices. This will partly reflect the depreciation of the NZD over the period.

...but annual inflation remains subdued…

The headline CPI rose 0.2% in the June quarter, following a 0.4% rise in the March quarter, leaving annual inflation subdued at 0.7%. Annual inflation has now been below the RBNZ’s target band of 1-3% for the fourth consecutive quarter (Figure 2). The headline figure was depressed by tradables inflation, which was -1.6% for the year, as the pass-through of a high NZD persisted. However, annual non-tradables inflation remained broadly steady, at 2.5%.

Figure 2 – Annual CPI Inflation
Figure 2 – Annual CPI Inflation   .
Source:  Statistics NZ

The housing and household utilities group provided the largest positive contribution to the quarterly growth in the headline CPI, adding 0.3% points. This was partially offset by a negative contribution from the transport group, which detracted 0.2% points as the price of fuel and imported cars fell, largely reflecting the ongoing pass-through of the elevated NZD. Within the housing and household utilities group, seasonally higher electricity prices as well as the price of newly-built houses were the main drivers. In Canterbury, the price of building a standard new house rose 2.9% in the quarter, stronger than the 1.7% rise nationally, but there are signs that price pressures are beginning to spread.

…although headline inflation is expected to pick up beyond the June quarter

On the whole, the CPI result for the June quarter showed limited price pressures across the wider economy, although it is expected to mark the low point for annual inflation. Recent falls in the NZD, if sustained, are expected to flow through to higher tradables inflation beyond the June quarter.  This has already contributed to the recent increase in petrol prices while the pass-through for other tradable goods may take longer.

However, the outlook for the NZD remains uncertain with recent volatility being chiefly driven by international factors. Previous gains in commodity prices, particularly for dairy, could also contribute to higher food prices later in the year (Figure 3). 

Figure 3 – Commodity and Retail Dairy Prices
Figure 3 – Commodity and Retail Dairy Prices   .
Source:  GlobalDairyTrade, Statistics NZ

The medium-term outlook is for non-tradables inflation to begin to accelerate, as the Canterbury rebuild and housing shortages in Auckland reduce spare capacity in the wider economy. While the RBNZ kept the OCR unchanged in July, it confirmed that monetary stimulus will likely need to be removed in the future, acknowledging that growth is expected to pick up and become broad based across sectors. Most analysts now anticipate the first OCR hike to occur in the March 2014 quarter. Less certain is the pace of OCR hikes which may be influenced by the impact of macro-prudential measures, if enacted by the RBNZ.

Retail spending growth picks up…

Stronger-than-expected retail spending will provide a partial offset to the negative impact of the drought in the June quarter. Electronic card transactions data reported a 1.6% rise in the value of core retail sales (retail sales excluding auto) for the June quarter, to be up 4.1% in the year. Within this group, electronic card spending on consumer durables gathered further momentum, in line with the ongoing increase in housing market activity (Figure 4). The result, combined with the weaker-than-expected CPI outturn, points to solid volume growth in retail spending for the quarter.

Beyond the June quarter, robust consumer confidence, along with wealth effects associated with rising house prices, will continue to underpin retail spending growth. The ANZ-Roy Morgan Consumer Confidence Index eased slightly in July to 119.8 from 123.9, with petrol price increases contributing to the fall. However, the positive trend in the index remained intact, in keeping with the optimism expressed by services firms in the QSBO and BNZ-BusinessNZ Performance of Services Index.   

Figure 4 – Electronic Cards and House Prices
Figure 4 – Electronic Cards and House Prices   .
Source:  REINZ, Statistics NZ

...and pressure on housing market remains …

According to REINZ, there were 6,135 houses sold in June, a 7.0% drop from May after adjusting for seasonal variations and equal to the number sold in June 2012. The growth in house sales has flattened out since the start of 2013, with a similar trend seen in the number and value of mortgage approvals (Figure 5). However, indicators of demand appear robust with the number of days to sell (33) well below the historical average (39), suggesting that sales are partly constrained by low listings. While the growth of mortgage approvals has also slowed, the annual growth in housing credit, as measured by the RBNZ, gathered further momentum, rising 5.4%.

Figure 5 – House Sales and Mortgage Approvals
Figure 5 – House Sales and Mortgage Approvals   .
Source:  RBNZ, Statistics NZ

The REINZ Median Housing Price Index lifted 0.3% in June on a seasonally-adjusted basis, with annual growth falling to 8.4% from 8.7% in May. In contrast, house price growth in Auckland increased further, rising 19.8% annually. In recent months, the annual net inflow of permanent and long-term migrants has risen significantly, currently standing at 7,900 for June. Most migrants are moving to Auckland but Canterbury has seen the strongest growth in net migration over the past year (see Special Topic: Recent trends in external migration). On the whole, the ongoing shortage of listings in parts of the country and the rapid turnaround in net migration is expected to maintain house price inflation in the near term.

…but supply is responding

The supply of new housing is increasing as dwelling approvals excluding apartments (which can be volatile) rose 8.4% in the June quarter, following a 4.7% increase in March, to be up 30% in the year. The growth in the quarter was led by Auckland, which recorded a 28% lift on a seasonally-adjusted basis, to be up 54% annually, although the level of consents is currently 20% below historical averages. The large-scale supply response required in both Auckland and Canterbury will continue to underpin the positive trend in consent issuance.

Export volumes decline owing to drought...

The merchandise trade balance posted a $414m surplus in the June month, contributing to the annual trade deficit narrowing further to $777m from $902m in May. For the June quarter, the NZD value of goods exports fell 4.7% as the effects of the drought flowed through, while the corresponding value of imports rose 1.0%. This result reinforces the Budget Forecast of a sizeable negative contribution from net trade to quarterly real GDP growth in the June quarter. It is also consistent with an expected narrowing of the annual goods trade surplus as measured in the current account. [1]

The decline in export values in the June quarter was driven by a 6.8% fall in dairy exports, with the volume of dairy exports down 18.2% following the drought. Meat exports were also down a sharp 11.6% in the quarter following the drought-induced early slaughter of stock.

...but outlook for coming season upbeat

Looking to next season, the dairy industry is expected to bounce back as pasture growth has recovered faster than anticipated and elevated dairy prices saw Fonterra upgrade its initial forecast payout by 50 cents to $7.50 per kg of milk solids. Average dairy prices at the GlobalDairyTrade auction rose 4.7% over July, following decreases in May and June, to be 75% above year-earlier levels. The lift in prices is partly a result of constrained supply in Australia, while the demand for inventory, particularly out of Asia, remained firm. Prices are likely to be maintained before the seasonal increase in production later in the year.

Global markets stabilise as growth rebalances towards the developed world

Developments in July reinforced the rebalancing of global growth towards developed economies. At the same time, comments from the US Federal Reserve (Fed) on the tapering of quantitative easing (QE) took a more dovish turn, leading to more stability in the market.

IMF revises down world growth forecast, driven by cut to emerging market growth...

The IMF cut its world growth forecast for 2013 and 2014 by 0.2% points to 3.1% and 3.8% respectively, driven largely by the softer growth outlook for emerging economies. The IMF pointed to some common factors that underpinned the slowdown, including capacity constraints after previous strong growth and soft external demand growth from developed economies. In addition, tight monetary policies in emerging economies have led to currency appreciation against the USD, reducing competitiveness.

Consensus forecasts for most emerging Asian economies were also lowered throughout May to July, leading to a fall in NZ’s trading partner growth of 0.1% points in both 2013 and 2014, to 3.3% and 3.7% respectively. These latest forecasts are 0.1% points lower than our Budget 2013 forecasts for both 2013 and 2014.

...as growth slows in China...

China’s annual GDP growth in the 2013 June quarter was relatively soft at 7.5%, continuing its gradual decline (Figure 6) and owing in part to weak export growth in the June quarter. However, the market was relieved that the slowdown was not sharper.  Annual industrial production (IP) growth eased to 8.9% in June, a post-GFC low, in line with subdued external demand.

Figure 6: China's quarterly GDP and IP growth
Figure  6: China's quarterly GDP and IP growth   .
Source:  Haver

Earlier comments from policymakers raised concerns that the government is less committed to maintaining growth, but Premier Li’s confirmation later in July that 7.5% remains the growth target calmed markets. The government also initiated a small-scale stimulus package, including tax cuts for firms and infrastructure investment. One of the special topics explores the impact on New Zealand if a sharp slowdown in China’s growth were to occur.

...reinforcing the softer Australian outlook

Australia’s non-mining economy continues to be constrained by soft domestic demand. Retail sales growth was weak in March, April and May. Both the PSI and the PMI were subdued in June, which brought the June quarter averages to 43.4 and 42.0, respectively. Softness in the non-mining sectors led to low employment growth, and the unemployment rate ticked up 0.1% points to a 4-year high of 5.7% in June, which led the market to price in a high probability of a 25 bps rate cut by the RBA on 6 August. Expectations of a rate cut were reinforced by comments by Governor Stevens that the higher-than-expected June quarter inflation does not reduce the scope for easing. Positively, the interest rate-sensitive housing market appears to be responding to earlier rate cuts, with housing finance up 15.5% on a year ago in May.

US economic recovery continues...

US GDP expanded by 0.4% in the June quarter, higher than market expectation and driven by a rebound in construction. While March quarter growth was revised down (by 0.1% points to 0.3%), this was more than offset by upward revisions to earlier years.

The labour and housing markets continued to recover. Non-farm payrolls grew 195,000 in June, while the prior two months’ readings were revised up. Payrolls growth has regained its pre-GFC rates (Figure 7), although the unemployment rate remains historically high. There was a setback in housing data in June, with falling housing starts, new permits, and existing home sales, but these were attributed mainly to monthly volatility and growth on a year ago remained strong. The continued rise in house prices and solid growth in new home sales indicated that housing demand remains robust despite higher mortgage rates. Manufacturing recovered modestly from its post-sequester weakness: IP expanded 0.3% in June, while the Markit PMI and the ISM manufacturing index both rose.

Figure 7: US labour market
Figure  7: US labour market   .
Source:  Haver

...and followed to varying degrees by others...

Positive developments continued in Japan. Market sentiment was supported by June’s manufacturing PMI (+0.8 to 52.3) and strong net exports in the June quarter. There was some weakness in other data for June.

Improvements also occurred in the euro area and the UK. The preliminary euro area manufacturing PMI and services PMI both rose in July, while the unemployment rate remained at 12.1% in June, as the number of unemployed eased for the first time since early 2011. However, credit conditions remained constrained in June. Positively, UK’s GDP grew by 0.6% in the June quarter, supported by solid growth in retail spending, attributed partly to rising house prices.

...indicating a broader but uneven pick-up in the developed world

July’s developments provided further evidence of a recovery in the developed world, but the extent of this pick-up varies significantly between regions. While the euro area and the UK showed some improvement, this is from a low baseline. The pick-up in Japan was led by fiscal and monetary stimulus, which must ultimately be unwound, and structural reforms are needed for sustainable growth. Japan’s ruling coalition gained control of the upper house in a recent election, which will facilitate further reforms. For now, the US recovery remains the most salient and most strongly supported by underlying fundamentals.

While the Fed plans to taper QE stimulus...

Fed Chairman Bernanke’s comments in July on the tapering of QE were significantly more dovish compared to June, with greater emphasis on tapering being dependent on data matching the Fed’s economic projections. Still, the underlying message is unchanged: the Fed will taper so long as the economic recovery continues.

...central bank reassurance of supportive policies stabilises the market

Throughout the month, Fed board members stressed the need for accommodative policy in the recovery, and that the policy rate would not be hiked for some time after QE is removed. The Fed’s July policy statement reaffirmed this view and voiced additional concerns about the current low inflation. The BoE made no change in policy at the beginning of August and the ECB reaffirmed that rates would remain at present or lower levels for an extended period of time.

Reassurance of supportive monetary conditions led to greater stability in financial markets. US, European and Japanese equities regained much of their earlier losses. The appreciation of the USD has halted for now, as the market scaled back the expected pace of QE tapering, and there were fewer concerns about the impact of positive data on future Fed moves.

Notes

  • [1] Note that the monthly overseas merchandise trade data (OMT) reports the value of imports on a cif basis (ie, including the cost of insurance and freight). However, it is the value for duty series, which excludes the insurance and freight components, which is used for the Balance of Payments (BoP). This explains the current discrepancy between the annual trade deficit in the OMT data and the annual trade surplus in the current account of the BoP.
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