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Monthly Economic Indicators

Analysis

While euro crisis headlines have weighed on household and business confidence in June, modest momentum in the domestic economy continues to build. Annual average GDP growth increased to 1.7% in the March quarter from 1.4% in December. Indicators to date, including core Crown tax revenue running ahead of forecast, point to further modest gains in the June quarter. Global developments, particularly in the euro zone, will ensure that the road ahead remains bumpy, although the expected quickening in pace of the Christchurch rebuild in the second half of the year will provide some positive offset.

Risks increase in the global economy, particularly in Europe...

The growth outlook for our major trading partners deteriorated in June and risks associated with the euro debt crisis have increased despite the positive outcome of the second Greek election. New Democracy took the largest share of the vote and formed a coalition with its traditional rival socialist party and a small left-wing party. While the outcome was positive, Greece’s fundamental problems of an unsustainable debt burden and poorly-performing economy remain. Greek banks are under pressure, the government is likely to run short of cash in the next month and under the existing programme it is expected to find further fiscal savings. The new government accepts the bailout programme but wants to renegotiate some of the terms.

...as the focus shifts from Greece to Spain

The focus of the crisis shifted from Greece to Spain in the past month as its government and banking sector came under increasing pressure. Spain’s euro area partners undertook to provide €100 billion of funds to support its ailing banking sector, but the move had little effect with interest rates on government debt rising further, in part because existing debt would be subordinated to any bailout funds. Spain’s problems are three-fold: its economy is in recession, its government finances are weak and its banks are under-capitalised after suffering losses from a large fall in house prices. In addition, there is an inter dependency between bank and sovereign debt. Credit ratings for both have been downgraded.

It is widely expected that Spain will shortly apply for an EU/ECB/IMF support programme. Cyprus has already requested support for its banks, which are exposed to the Greek financial sector, and concerns are increasing about the sustainability of Italy’s position as its bond yields rise.

No resolution to euro debt crisis in sight

As the month passed, there was increasing speculation about the outcome of the EU Summit being held on 28-29 June. Leaders of the four central euro area organisations put forward a plan for the future of the economic and monetary union which involves further centralisation based on greater financial, fiscal, economic and political integration. However, Germany, the nation which would be called upon to support weaker members of the area, is opposed to some of the proposals.

The outlook remains broadly consistent with our assumption in the Budget that European leaders would manage their way through the crisis, but stresses are increasing and the stakes are becoming larger as the crisis spreads to the bigger economies of Spain and Italy.

NZ March GDP surprise provides local relief...

Against the backdrop of a worsening global outlook, the 1.1% increase in real production GDP over the March 2012 quarter (Figure 1) provided welcome relief, albeit temporary. The quarterly increase was stronger than our Budget forecasts and market expectations (both 0.5%).

Figure 1 – Real production GDP
Figure 1 – Real production GDP.
Source: Statistics New Zealand

...with annual activity in line with Budget forecasts

Getting a feel for the momentum in the economy is difficult with one-offs such as the Rugby World Cup, the excellent growing conditions (which may not be repeated next season) as well as the May revisions to GDP data. However, combining the 0.4% from the December quarter and March quarter’s 1.1% growth, we get 1.5% or average quarterly growth of 0.75%. Annual average growth in the year to March of 1.7% was close to the 1.6% Budget 2012 forecast and the 1.8% Budget 2011 forecast. Hence, the overall pace of the economic growth over the past year appears in line with our expectations.

Increased agricultural production was the silver lining to the wet summer holidays

The wet summer holiday weather (Figure 2) was partially offset, at least in an economic sense, by excellent pastoral growing conditions, resulting in increased milk production and a 2.1% rise in the agriculture, forestry and fishing industry. In turn, this production flowed through to a 3.2% increase in food processing, and contributed to a 1.8% increase in total manufacturing activity.

Figure 2 – Sunshine hours, main centres
Figure 2 – Sunshine hours, main centres.
Source: NIWA

Real expenditure GDP rose 0.8% in the March quarter compared to our 0.5% Budget pick. Relative to our forecasts net exports, which subtracted 1.9% points from growth, were weaker than expected, but the negative contribution was offset by a run-up in inventories. We expected slightly stronger business and residential investment, although a large balancing item accounted for most of the divergence from forecast.

The service industry grew faster than the rest of the economy over the March year

The service industry grew faster than the primary and goods producing industries (manufacturing, utilities and construction) and contributed 0.7 percentage points of the 1.7% annual increase in GDP. Leading the rise in services industries, the professional, scientific, technical, administrative, and support services category increased 2.0%, its fifth consecutive quarterly rise, to be up 7.8% in the year ending March. This group includes businesses that would have experienced increased activity from rising house sales, the Rugby World Cup and the Canterbury earthquakes.

GDP is now above pre-recession levels...

The seasonal adjusted quarterly level of real GDP is now higher than its pre-recession peak. However, we will have to wait a while longer for per capita GDP to surpass its pre-recession peak; based on the March outturn and Budget growth forecasts from June onwards, we expect this to happen mid-2013.

Figure 3 – Real GDP levels
Figure 3 – Real GDP levels.
Source: Statistics New Zealand

...while core Crown tax revenue is ahead of forecast despite weaker nominal GDP

Nominal expenditure GDP grew 3.1% in the year ending March 2012, down from 4.8% in March 2011. The GDP deflator (economy-wide prices) rose 2.1% in the 2012 year, down from a 4.6% rise in the 2011 year, and accounted for the fall. Despite the weakening nominal GDP, core Crown tax revenue in the ten months to April 2012 was around $800 million (1.7%) above Budget forecasts.

Current account deficit widens as goods and services exports fall...

The annual current account deficit widened to 4.8% of GDP in the year ending March, up from 4.2% in December and 3.7% in March 2011. The goods surplus for the year ending March fell to $2.7 billion (1.4% of GDP) from $3.6 billion in the year to December. Falling dairy and fruit prices and lower crude oil exports were the main contributors to a fall in export values in the quarter. Imports of crude oil spiked in the March quarter and drove the increase in quarterly goods values.

The annual services deficit rose to $1.3 billion, the largest deficit since 1998, and was almost entirely owing to increased services imports. Services exports were largely flat, despite the RWC, but hosting and broadcasting fees associated with the Cup contributed to a rise in imports. Other import contributions came from increased insurance premiums and increased overseas travel by New Zealanders.

...and the income deficit widens...

The income deficit for the year grew to $10.8 billion, up $1.0 billion from March 2011. The rise in the annual deficit reflects the increase in bank profits over the year – the major banks reported large profit gains late in 2011 – partly offset by an increase in returns on New Zealand investments overseas.

Figure 4 – Annual Current Account Deficit
Figure 4 – Annual Current Account Deficit.
Source: Statistics New Zealand

We expect the current account to widen further over the year ahead, as commodity prices retreat further and the exchange rate remains elevated. Recent revisions to nominal GDP have increased the current account deficit to GDP ratio by around 0.2 percentage points, which combined with the March 2012 outturn points to a current account deficit of over 5% by March 2013, compared to the 4.6% forecast in the Budget.

...but net international liabilities fall

While the current account deficit widened, valuation changes decreased New Zealand’s net international liabilities. As at 31 March, New Zealand’s net international liabilities were $143 billion or 71% of GDP, decreasing 2% points from 73% in December 2011 (Figure 5). The appreciation of the exchange rate reduced overseas liabilities by $1.6 billion, while increased overseas equities prices increased overseas held assets by $1.0 billion.

Figure 5 – Net international liabilities
Figure 5 – Net international liabilities.
Source: Statistics New Zealand

 

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