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Monthly Economic Indicators

Analysis

Economy likely grew modestly in March…

Tentative signs of economic recovery early in the year were interrupted by a second devastating earthquake in Canterbury. Nationwide business and consumer confidence deteriorated sharply, business activity in Christchurch was severely disrupted, and tourism flows through Christchurch and the South Island were substantially reduced.  We had expected this disruption to cause the economy to contract in the March quarter.  However, partial indicators of activity over the quarter have been firm enough to suggest that March quarter GDP statistics, to be released on 7 July, will show the economy grew modestly.  

Early indications for the June quarter are that lower interest rates in the period since March, and income gains from the stronger terms of trade are gaining traction.  We expect activity will rise further in the June quarter, but within the bounds of our forecast for GDP to grow less than 1% over the first two quarters of the year.  Further impetus will come in the September quarter from the Rugby World Cup and from easing uncertainty around the Canterbury reconstruction programme.   

Retail trade starts the year solidly…

Nationally, the value of retail sales rose 2.0% in the March quarter, rising in all regions except Canterbury where the value of sales fell 2.2%.   The rise in sales values, the largest quarterly increase since June 2009, comprised a 1.1% rise in prices and a 0.9% rise in volumes.  Higher fuel prices, up 10% in the quarter, accounted for a large proportion of the price rise, while motor vehicle sales drove the rise in volumes.  Excluding motor vehicle-related spending, over half the volume rise came from internet-based trading;  this is a new category in the survey and it will be interesting to watch developments. 

Despite strong growth in the quarter, total retail sales volumes were a modest 0.8% higher than the same quarter a year ago (Fig 1).  Rising fuel and food prices, up 17% and 5.5% respectively from a year ago, have weighed on household spending, as has the general desire by households not to increase debt levels.     

Since March, consumer confidence has recovered (Fig 1), and household spending, as recorded in Statistics New Zealand’s Electronic Card Transactions, looks to have built on March’s gains.  However, household credit growth remains anaemic, up 0.4% ($760 million) in the six months since November.  

Figure 1 - Retail sales and consumer confidence
Figure 1 - Retail sales and consumer confidence   .
Source:  Statistics New Zealand, ANZ Roy Morgan

… but residential construction falls

Households’ limited appetite for more debt has been an important factor in the decline in residential construction activity, which contracted for the third consecutive quarter in March. The 2.1% fall in building activity was not exclusive to Canterbury, with Statistics New Zealand noting construction volumes also fell in the remainder of the country.  Non-residential construction also fell, down 10.4% in the quarter.

The construction outlook for June remains weak.  Building consents continued to trend down in May (Fig 2).   However, the rate of decline has slowed, to -0.7% in May, from -3% late last year, and there are signs the trend may be about to turn. Consents for new dwellings identified as earthquake-related rose to 68 in May, almost double the number of earthquake-related consents already issued, and helped consents in the Canterbury region to rise 6% from their level a year ago.  There are also signs that demand for existing homes is rising, which will likely flow through to increased construction activity. 

Property market lifts from low levels…

Stronger demand in the property market is reflected in the number of sales beating year ago levels for the first time in 17 months.   Auckland is leading growth in turnover, with sales up 16% on a year ago, although growth in other centres also rose strongly in May, contributing to a nationwide increase in sales of 11%. 

At the same time, demand for housing from recent arrivals to New Zealand is weakening.  Net migration flows have reversed since the Christchurch earthquake of 22 February.  A seasonally adjusted net outflow of 1,000 was recorded over the three months to May.  Permanent and long-term (PLT) departures from Christchurch are almost twice as high as they were last year, and there have been fewer arrivals.  Annual net migration has fallen to 4600 in the year ended May 2011 from 18,000 in the previous year, driven by increasing departures, up 22% to 79,200.  Arrivals have been relatively flat, up by 1,000 from a year ago to 83,800 in the year ended May 2011.        

Overall, housing turnover remains at a very low level (Fig 2), which helps explain why prices remain below their year ago levels (down 0.7% on May 2010) and prices are likely to remain flat over the rest of the year.  The impairment of the Christchurch housing market is also part of the story - sales in Christchurch are 30% down on the same time last year.  The government’s offer to buy severely damaged properties in Christchurch helps reduce some of the uncertainty in the market and may help to spur on the rebuilding effort.

Figure 2 - Consents and house sales
Figure 2 - Consents and house sales   .
Source:  REINZ, Statistics New Zealand

More generally, while housing market activity remains weak we see little prospect of consumption growth reaching the rates it did over the middle of the past decade.  Even with the recent lift in consumer confidence, confidence remains low relative to its level over the past decade.  Our expectation is that high household debt and sluggish income growth will constrain private consumption to an annual growth rate of around 2% over the year ahead. 

…as do wholesale trade and manufacturing

With household spending growth remaining modest the business sector is expected to be the major driver of growth in 2011. 

Manufacturing and wholesaling firms have begun the year on an upward note.  Wholesale trade sales rose strongly, up 2.8% in the March quarter, the largest rise in four years.  Using the same classification system as the GDP accounts, and taking into account the 3% rise in March’s Wholesale Producers Price Index, we estimate volumes grew around 1% in the quarter.

The volume of manufacturing sales rose 1.9% in the March quarter, building on a 3.7% increase in the previous quarter.  Excluding meat and dairy product manufacturing, the volume of sales was up 2.5% in the quarter, and back to the same level it was a year ago.   

Exports of machinery, equipment and appliances have performed rather better, with sales growing 6% over the year to March, but still 8% down from its 2008 levels.     

Manufacturing activity more generally has yet to lift appreciably from its post-financial crisis lows, but indications from the BNZ/Business NZ (BNZ/BNZ) Performance of Manufacturing Index are that activity has continued to increase in the June quarter. 

Primary industries too likely performed well over the quarter, with dairy output up as the drought towards the end of 2010 was followed by what Fonterra described as “exceptionally favourable” conditions for pasture growth.  Forestry too has performed well judging by export volumes, which rose 4.8% in the March quarter to a fresh high.

Growth in services, other than retailing and wholesaling, has been modest according to the BNZ/BNZ Performance of Services Index (PSI).  Property and business services, and health and community services expanded at a reasonable clip in the March quarter.  Other service industries, particularly hospitality, transport and communication are likely to be among the most disrupted by the earthquakes; however, the methods chosen by Statistics NZ to assemble other data have shown surprisingly little impact to date.  Assuming this pattern continues, we expect quarterly growth of around 0.3% in March.       

Business confidence consolidates

Business confidence in their own activity outlook was at a high level prior to February’s earthquake and dipped sharply, but temporarily, immediately after.  Gains made in May’s National Bank Business Outlook (NBBO) have held in June with similar levels of optimism being recorded for firms’ own activity outlook, profit expectations, investment and employment intentions.  Current levels of business optimism are consistent with accelerating growth over the year ahead (Fig 3).  Whether that is realised or not will be influenced by way the global recovery story develops and how events in Greece unfold.

Figure 3 - Business confidence and growth
Figure 3 - Business confidence and growth   .
Source:  Statistics New Zealand, ANZ/National Bank

Exports and earthquake drive external accounts

The country’s trade with the rest of the world yielded a surplus of $2.8 billion in the year to March 2011 - the second largest surplus in almost 20 years.  Notably, the current surplus is not the product of a weak exchange rate (Figure 4), but is driven by firm export demand and relatively low import values.

Figure 4 - Goods balance and the exchange rate
Figure 4 - Goods balance and the exchange rate   .
Source:  Statistics New Zealand, ANZ/National Bank

Import prices rose strongly in March as oil and other commodities moved sharply higher, but prices have retreated since then.  In contrast, export commodity prices have continued to rise - likely leading to a fresh peak in the country’s terms of trade in the June quarter. With the pace of world growth expected to slow over the second half of the year we are not expecting export commodity prices, or the terms of trade, to lift further. 

Export values continued to rise in April, reaching a record monthly high of $4.7 billion.  However, April’s gains were reversed in May as the value of dairy exports fell for the first time in five months.  Notably, there was no offset to the 18% fall in dairy volumes from higher prices, consistent with the easing in dairy prices seen at Fonterra’s auctions since April’s peak. 

Imports of plant and machinery have continued to recover from their recent lows, up 13% in the year ended May, underpinning investment growth.    

In contrast to goods exports, services exports have not been fairing so well. Services exports fell to a 7-year low in the year to December, but lifted a little in the year ended March.   Tourism

(exports of travel services) has been the main contributor to recent falls in services exports as rising visitor numbers have been more than offset by a falling visitor spend.  It’s hard to see March’s gains being held in the June quarter given disruptions from the Christchurch earthquakes, ash-laden skies and a delayed ski season.  However, cooler temperatures late in June have given the September quarter a promising start. 

Across all the data, the $11 billion rise in foreign assets, triggered by insurance claims, probably best reflects the scale of damage caused by the two Canterbury earthquakes. Using information sourced from the insurance industry, Statistics New Zealand estimated the claim on non-resident reinsurers in the March quarter (for the February earthquake) to be $7.6 billion, in addition to $3.6 billion in claims for the September quarter.  When domestic insurers make claims against their reinsurance policies the value of the claim is treated as an offshore asset.  The value of the asset subsequently reduces as claims are extinguished.  As a result New Zealand’s net external debt position is temporarily reduced by $11.1 billion.  We estimate net international liabilities to be 75% of GDP, close to its cyclical lows early in the 2000s.     

Also reflecting the earthquake, falls in insurance company profits contributed to lower earnings by foreign direct investors, helping keep the annual deficit on income stable at $10.8 billion, or 5.5% of GDP.  A larger deficit on transfers, driven by greater outflows (official foreign aid) was the main contributor to a marginal widening of the current account deficit to an estimated 4.2% of GDP, from 4.1% in December.

Looking ahead, Statistics New Zealand will continue to revise their figures as more information comes to hand.  In addition, the aftershocks of 13 June may lead to more such inflows, albeit probably much smaller than either of the major earthquakes. 

In the Budget we estimated total damage from the earthquakes to be around $15 billion.  The 13 June earthquake had its greatest impact in areas already affected by the earlier quakes, complicating the task of assessing the extent of incremental damage.  At this stage, given the uncertainty involved, our Budget estimate remains broadly appropriate.  Likewise, it is too early to say whether this quake will have any implications for the Government’s $5.5 billion Earthquake Recovery Fund, which currently allows for considerable uncertainty in damage estimates. 

World growth loses momentum…

The world recovery continued throughout June, although the pace has slowed, leading to downward revisions in both Consensus and IMF forecasts for 2011. High energy prices combined with natural disasters to slow momentum in the world economy over the past few months.  Oil prices have retreated from their highs and production is recovering after the disasters, removing some of the temporary drags on activity.   

Forecasters have revised down their view of US growth over 2011 in light of weak production indicators, disappointing labour market outturns and the continuing drag from the US housing market. 

Forecasters have also revised down their views on growth in Australia and Japan; however, this is mainly due to natural disasters. Australian output contracted in the March quarter (Figure 5), driven by falls in farm output and mining production.   However, with the terms of trade the highest in over a 100 years and investment booming we expect a big bounce back in the June quarter. The Japanese economy is expected to contract for the second consecutive quarter in June following February’s earthquake.  The Japanese supply chain disruption has been evident in production and job data in the US and Canada, especially in the auto industry; we expect it to start alleviating soon.

Forecasts for Japan over the year ahead are wide ranging, reflecting the uncertainty, but growth will firm as the tsunami reconstruction process gets underway over the next year.   

China continues to be the driver of world growth, with data released during the month broadly in line with expectations. Other Asian countries such as India are also growing strongly, although not to the extent of China. The possibility of overheating remains a key risk for the region; China’s inflation rate was 5.5% for May.

Figure 5 - Real GDP for selected trading partners
Figure 5 - Real GDP for  selected trading partners   .
Source:  Datastream

… and structural drags limit its ability to bounce back

Markets remain nervous about sovereign debt issues, particularly in Greece (see the Special Topic on Greece). This is reflected in falls in equity markets and lower bond yields.  Since May the Dow Jones equity index has fallen more than 6.5%, the S&P 500 is down over 7.0%.  US 10-year Treasury yields, which had fallen from around 3.4% in May to 2.9% in June, recovered to 3.2% on news that new austerity measures had been passed by the Greek Parliament.   

Also of some concern to the world recovery are the impacts of monetary and fiscal policy tightening.  Monetary tightening, in response to growing inflationary pressures, has begun in many economies around the world. Chinese reserve requirement ratios were increased for the sixth time this year in June.  India has hiked its policy rate one percentage point this year; more hikes are expected. The European Central Bank is expected to raise rates in July, the second hike this year. That said, inflationary concerns in the developed world have lessened as energy prices and growth prospects have eased.

Fiscal consolidation (discussed in more detail in May’s MEI Special Topic) is another negative influence on medium-term growth. While forecasts for the UK and Euro area reflect this process, greater uncertainty exists around how to reduce US budget deficits.  Large expenditure cuts and/or tax hikes need to be made, which may dampen growth. Japan is in a similar position in this regard; difficult decisions will have to be made, although the rebuild will take precedence.

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