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Monthly Economic Indicators

Analysis

Domestic economic data releases over the month of June point to a slightly stronger outlook than in the Budget Economic and Fiscal Update (BEFU).  Solid GDP growth in the March quarter was driven by construction and services. An increase in the terms of trade supported growth in nominal GDP and contributed to the narrowing of the current account deficit.  Strong growth appears to have continued in the June quarter. Beyond that, the outlook is slightly less certain, depending on how Brexit unfolds. This month’s special topic discusses Brexit’s implications for New Zealand.

GDP growth was slightly higher than expected in the March quarter...

The main data releases in June were the March quarter GDP and Balance of Payments figures.  Real production GDP rose 0.7% in the March quarter (Figure 1), slightly above Treasury’s forecast (0.6%) and market expectations.  Annual average growth eased to 2.4%, in line with BEFU, with small downward revisions to previous quarters offsetting the stronger March outturn.  While the quarterly growth figures were slightly firmer than forecast, there were few surprises in the details which confirmed construction, tourism and services as the key growth drivers.  Consistent with BEFU, we still expect these drivers to keep annual average growth around 2.5 - 2.8% over 2016, subject to how Brexit develops.

Figure 1: Real production GDP
Figure 1: Real production GDP   .
Source:  Statistics NZ

Real expenditure GDP growth was a little weaker than production GDP growth at 0.5% in the quarter (BEFU 0.3%).  Nominal GDP growth was relatively strong at 2.0%, above BEFU (1.6%), owing to a larger increase in the SNA terms of trade than expected.  On an annual average basis nominal GDP growth was 3.8%, broadly in line with BEFU (3.7%).  Tax revenue data for April indicate that this strength in the nominal economy has persisted into the June quarter.

...with construction leading growth

Construction activity increased 4.9% in the quarter, consistent with other reports of strong growth in the industry, including dwelling consents. All construction sub-industries grew in the March quarter, with construction trade services and heavy and civil engineering the main drivers. Investment in construction also increased this quarter, with residential investment up 4.2%, non-residential investment up 4.4% and other construction, which includes infrastructure investment, up 12.0% on increased roading and telecommunications investment as ultra-fast broadband is installed.

Services activity continued to expand at a solid pace, up 0.8% in the March quarter. Ten out of eleven services industries recorded growth, led by health care and residential services, up 2.7%, likely a reflection of higher demand from population growth. Retail trade increased 1.3%, mostly due to increased food and beverage services activity and durable goods sales. The former was largely driven by population growth and tourism. Over the year ended March 2016, services industries expanded 2.5%.

Agricultural production fell slightly due to earlier livestock slaughter brought on by the El Nino weather pattern, driving the 0.4% fall in overall manufacturing.  Mining activity contracted sharply (-3.3%), with oil production lower, detracting slightly from GDP growth in the quarter.

Migration remains high, supporting GDP growth

Aggregate GDP growth figures continue to be bolstered by rapid population growth, which in turn has been supported by high net migration.  Real GDP per capita growth slowed to 0.5% in the year to March, with the population growing by 2.0%.  Similarly, real gross national disposable income (RGNDI) per capita, which adjusts GDP for terms of trade movements (i.e. a measure of the average real purchasing power of New Zealand’s disposable income), was unchanged in the year to March 2016, with population growth driving the 2.0% increase in aggregate RGNDI. Around three quarters of population growth in the year to March was from net migration. 

International migration data show that these high levels of net migration have persisted since March.  The annual net inflow of migrants increased to 68,400 in May, driven by increases in the number of arrivals, with the number of departures fairly stable at a relatively low level since early 2015 (Figure 2).  Students, those on work visas and NZ and Australian citizens largely drove the growth in permanent and long term arrivals.

Figure 2: Net migration
Figure 2: Net migration   .
Source:  Statistics NZ

Flattening monthly net inflows may be the first signs of the annual migration cycle reaching a peak.  In both April and May there was a seasonally adjusted net inflow of 5,500 people.  If monthly inflows continue at these levels, the annual inflow will peak in June and begin to decline thereafter.  The monthly trend figures are also in decline.

Private consumption growth eased...

Turning to the expenditure GDP breakdown, private household consumption grew 0.4% in the March quarter, below our expectations in BEFU (0.9%) and much slower than the previous quarter (1.0%).  Growth mostly came from increased expenditure on services (0.7%), consistent with the growth in services industries in the production GDP breakdown.  Growth in consumption of non-durable goods was subdued. 

While domestic consumption was subdued, spending by tourists remained strong.  Real expenditure by non-residents in New Zealand (i.e. tourists) grew 4.9% in the quarter, to be 16.8% higher in the year ended March 2016.  Spending by tourists is also measured in other personal travel services exports in the Balance of Payments data, which increased by 24.6% in the year to March, and contributed to the narrowing of the annual current account deficit.

Indicators for consumption since March have been mixed.  Seasonally adjusted electronic card transactions rose by 1.3% in April before falling 0.6% in May.  Similarly, the ANZ-Roy Morgan Consumer Confidence Survey showed a lift in confidence in April followed by a decline in May.  Confidence has since rebounded in June, although it continues to decline from its peak two years ago (Figure 3). The Westpac McDermott Miller survey of consumer confidence showed confidence falling below its long run average in the June quarter.

Figure 3: Consumer confidence
Figure 3: Consumer confidence .
Source:  ANZ-Roy Morgan, Westpac

While the partial indicators since March have been mixed, private consumption growth is expected to pick up in the June quarter.  Low interest rates, high net migration and solid labour income growth should sustain aggregate private consumption growth at a reasonable rate, although per capita consumption growth is likely to remain low.  High house price growth could also induce a “wealth effect” on consumption, but there is no evidence of this occurring just yet.  For example, although total household credit growth remains high (up 7.9% in April compared to a year ago), this appears to be driven by housing credit (8.3% higher than a year ago) related to high rates of house price growth.  Consumer credit growth (3.0%) is below nominal GDP growth.

...but was offset by strong investment

Investment lifted strongly in the March quarter (2.4%), unwinding the 2.2% decline in the previous quarter.  Growth was fairly broad based and contributed around 0.6 percentage points to quarterly GDP growth.  Residential investment saw its strongest quarterly growth rate since 2014, increasing by 4.2% in the quarter.  The outturn reflects both the uptick in the number of building consents issued late last year, as well as drier than usual weather allowing more work to be done.  Building consents data for the March quarter suggest that residential investment growth will ease in the June quarter, but retain a solid annual pace.  Recent consents data showed a slowing trend, which may reflect uncertainty ahead of the resolution of the Auckland Unitary Plan, pointing to more moderate residential investment growth in the second half of 2016.

Business investment grew by 2.0% in the quarter, mostly from construction-related investment (see page 2).  Investment growth in plant, machinery and equipment was modest but positive.  Growth in these areas was partly offset by sizeable declines in transport equipment and intangibles investment.  The former was chiefly due to fewer large capital imports in the quarter (there were no large aircraft imports this quarter, compared to two in September and one in the December quarter).  The decline in intangibles investment was led by a decrease in software purchases.  Less natural resource exploration may have also contributed, with a large exploration rig leaving the country’s waters in the quarter.

The June ANZ Business Outlook reported stronger business sentiment led by the construction and services sectors, with optimism about future prospects at a six month high. Investment intentions also rose, in line with the robust outturns seen thus far.

The current account deficit narrowed…

Largely reflecting a fall in meat and dairy export volumes, net exports of goods and services were a drag on real GDP growth in the first quarter of around 0.4 percentage points.  However, the stronger than expected terms of trade (up 3.6%), together with a positive movement in the primary income balance, led the annual current account deficit to narrow from (a downwardly revised) 3.2% of nominal GDP in December to 3.0% in March (Figure 4).  This was at the low end of market expectations and lower than expected in BEFU (-3.3%). 

The annual goods deficit widened from 0.9% of GDP to 1.0%, slightly smaller than the 1.2% anticipated in BEFU.  Nominal goods exports fell in the quarter (-2.1%), driven by a decline in real goods exports (-3.5%) as prices rose 1.4% in aggregate.  The decline in export volumes was chiefly driven by dairy and meat, the latter due to an earlier slaughter pattern in response to El Nino weather conditions.

Figure 4: Current account
Figure 4: Current account.
Source:  Statistics NZ

On the other side of the ledger, nominal goods imports fell by 3.9% owing to a decline in prices, particularly for oil.  Real goods imports were largely unchanged from the previous quarter.  However the composition of imports did change, with larger volumes of mineral fuels imported but less capital goods.
As alluded to earlier in the consumption section, travel services export values were strong in the March quarter, growing by 2.8%.  This was the main driver of the increase in the annual services surplus to 1.6% of GDP (from 1.4% in December). 

Some of the strength in travel services exports was likely a seasonal boost from Easter falling in March.  However, visitor arrivals have remained solid in April and May, allowing for the usual seasonal downturn (Figure 5).  This should continue to support travel services exports and help sustain the services surplus.

Figure 5: Short term visitor arrivals
Figure 5: Short term visitor arrivals.
Source:  Statistics NZ

The primary income (investment income) deficit narrowed from 3.6% to 3.4% of GDP.  The smaller deficit relates chiefly to a reduction in investment income from foreign investment in New Zealand in the quarter (smaller investment income outflows).  This outturn is consistent with relatively flat corporate tax returns in the March quarter.

New Zealand’s net international investment position (NIIP) deteriorated slightly from -61.8% of GDP in December to -63.1% in March.  The deterioration partly reflects market volatility in early 2016, which led to smaller increases in New Zealand’s international assets (e.g. offshore equities) than the increases in liabilities (foreign-owned assets in New Zealand, such as New Zealand equities).

...but the annual goods deficit continues to widen...

Overseas merchandise trade data showed the annual trade deficit at the end of May widened slightly to $3.6 billion.  On a seasonally adjusted basis, exports fell 0.6% in May.  Falls in diary
(-3.2%) and crude oil exports (-18.6%) were partially offset by gains in forestry (11.2%), meat (7.1%) and fruit (4.4%) exports.  Given exports to China were up 26.7% in the year, the increase in forestry exports may be linked to the recent surge in state-led infrastructure investment.  Seasonally adjusted imports fell faster than exports, down 1.3% in May.

Although the trade balance appears to be holding up better than expected, the annual trade deficit has widened considerably over the past 18 months. This deficit may widen further as dairy prices and volumes ease, as reflected in recent dairy auction outturns, and as oil prices rise.  Recent strength in the NZD will add further resistance (particularly for lamb exports to the UK, with the fall in the pound following the Brexit vote), although trade in services is expected to provide a significant offset.

...and key commodity prices remain low

Dairy prices have lifted slightly over recent GlobalDairyTrade (GDT) auctions but remain at low levels (Figure 6).  Prices for most dairy products on the GDT auction are only just returning to the levels seen in January of this year.  The outlook for dairy prices remains weak as global milk production remains high, particularly in the EU[1].  New Zealand milk solids production for 2015/16 was 1.5% lower than the previous season; Fonterra forecast production to decline by a further 3% in the 2016/17 season.

The ANZ World Commodity Price Index has followed a similar, broadly sideways trend in recent months, with a 1.0% lift in May following two small declines in March and April.  Nonetheless, the index remains 11.7% lower than a year ago.  The NZD price index is 3.5% lower compared to a year ago, providing some support to exporters.

Figure 6: Dairy prices
Figure 6: Dairy prices.
Source:  GlobalDairyTrade

Crude oil prices have lifted from their low levels earlier in the year, although they remain lower than a year ago and well down compared to two years ago.  Oil prices remained relatively stable throughout June, trading in a fairly tight range on either side of the US$50/barrel mark. Falls in crude oil prices made a sizable positive contribution to New Zealand’s terms of trade in the March quarter, but much of this contribution is likely to be unwound in the June quarter.  The rebound in oil prices is already evident at the pump, with June quarter average petrol prices around 5% higher than in the March quarter, putting upwards pressure on tradables inflation.

RBNZ left the OCR unchanged at 2.25%

Earlier in June the Reserve Bank left the OCR unchanged at 2.25%.  Prior to the decision analysts were split, although market opinion was leaning towards an “on hold” decision.  The Reserve Bank expects inflation to increase from its current low levels owing to increases in fuel prices, some increases in capacity pressures and expected depreciation of the NZD, although they noted further policy easing may be required depending on the emerging flow of economic data. Markets have interpreted the Brexit vote as increasing the probability of looser monetary policy, and most local commentators expect at least one further 25 basis point reduction this year.

The NZD appreciated sharply following the OCR announcement, with the TWI increasing 1.5%.  The NZD depreciated against the USD following the Brexit vote, but remains above 75.  If maintained, this will pose some downside risk to the Reserve Bank’s inflation forecasts through the exchange rate’s impact on tradables inflation.

House price growth remains elevated

While growth in consumer prices remains muted, house price growth does not.  REINZ data for May indicated that the national stratified median house price rose by 14.7% from a year ago, in part due to a 2.1% lift in the month of May.  Price pressures continue to spill over from Auckland, resulting in price increases in the Waikato and Bay of Plenty.  In Auckland itself, the median price fell slightly in the month but was 8.2% higher than a year ago.  Housing demand in Auckland has recovered following a drop in late 2015 when the market reacted to regulatory changes, supported by the strong fundamentals of high net migration inflows and low interest rates.

The seasonally adjusted number of house sales fell across most regions in May, with nationwide sales down 4.5%.  The fall in house sales in May reflects continued reductions in the number of houses available for sale, which occurred earlier in Auckland and is now happening increasingly in other regions. The number of properties available for sale is down by over 40% since May 2015, led by shortages across the North Island.

Brexit fuels global market volatility

After a period of relative calm in May, global market volatility escalated in June with uncertainty around the speed of US monetary policy normalisation and the ‘Brexit’ referendum at the end of the month. News of the ‘Leave’ majority rocked markets; in line with ‘risk off’ sentiment the GBP/USD fell 9% and equities declined, while the US dollar index rose 3% and both JPY/USD and gold rose 4%. Bonds rallied, with the German and Japanese 10-year bond yields falling further into negative territory. Consequently, the VIX (a measure of market volatility) returned to its high, early-2016 levels, although remains well below mid-2015 levels (Figure 7). Central Banks stand ready to inject additional liquidity, with the Bank of England (BoE) saying it “will not hesitate to take additional measures”. Market implied odds for future rate cuts have increased in many countries, including NZ. However, in the week since the referendum polls closed, markets have stabilised somewhat.

Figure 7: CBOE Volatility Index (VIX)
Figure 7: CBOE Volatility Index (VIX).
Source:  Thompson Reuters

UK votes to leave European Union

Economic growth in the UK is expected to be adversely affected by the vote to leave the European Union (EU). Recent UK activity has been positive, rebounding from previous weakness with the unemployment rate reaching 5.0%, industrial production growth surging to 2.0% in April, and retail sales growing 0.9% in May (Figure 8). However, some commentators have suggested a shallow recession is possible in the second half of 2016 from declining trade, labour and capital flows from the EU and heightened uncertainty. Capital costs may also increase, with two rating agencies downgrading the UK’s sovereign rating.

The BoE left its policy rate unchanged in June ahead of the referendum, but market pricing for a cut at the 14 July meeting has since risen to 28%. Headline consumer price growth was steady at 0.3%, but in future may be fuelled by the lower pound, with weaker growth acting as an offset.

Figure 8: UK economic indicators
Figure 8: UK economic indicators.
Source:  Haver Analytics

US GDP revised higher, but non-farm payrolls disappointment took June hike off table

US March quarter GDP growth was revised up 0.1ppt to 0.3%, but subsequent outturns have been subdued. May retail sales growth was moderate (0.5% mpc, 2.5% apc), the unemployment rate declined to 4.7% and the housing market appears to be recovering from the GFC. However, both industrial production and manufacturing output fell in May (led by motor vehicle production declines), and indicators of future activity were mixed.

The main outturn for the month was the May non-farm payrolls report, which disappointed both the Fed and markets by coming in at only 38,000 additional jobs (160,000 expected). The weaker labour market took a June policy rate hike off the table, with the Fed striking a decidedly more dovish tone at its meeting. While the Fed’s preferred measure of core annual inflation was 1.6% in April and May, concerns about the labour market and Brexit mean future moves are uncertain.

Australia’s growth strong in first quarter

Australia’s first quarter GDP growth surprised at 1.1%, as net exports, private consumption and residential investment offset weak business (particularly mining) investment. Recent domestic activity has been moderate, as retail sales growth eased to 0.2% in April, and the unemployment rate was steady at 5.7% in May. House prices fell in the March quarter for the first time since 2012.

The Reserve Bank of Australia left its cash rate unchanged at 1.75% without an explicit easing bias, stating “overall growth is continuing, despite a very large decline in business investment.”

Mixed euro area growth

Euro area March quarter GDP was revised up slightly to 0.6% as private consumption rebounded from a weak December quarter. Subsequent outturns were mixed, with flat retail sales growth in April, but industrial production surging 1.1% after two months of contraction. Unemployment was steady at 10.2% in April, while Germany’s rate sank to its lowest level since reunification (4.2%).

The European Central Bank kept its settings unchanged in advance of the UK referendum and the launch of existing stimulus (e.g. TLTRO II), despite the fourth consecutive month of consumer price deflation in May and core inflation of 0.8%.

Japan’s GDP surprise unlikely to be sustained

Japan’s March quarter GDP growth was revised up slightly to 0.5% due to a smaller contraction in private business investment, but subsequent developments have been weak. Retail sales growth and the unemployment rate were flat in April, while industrial production grew only 0.3% in March. However, these outturns were above expectations given the Kumamoto earthquakes.

The Bank of Japan left its policy rate unchanged at -0.1% in June, despite consumer prices continuing to fall in April. PM Abe delayed a consumption tax increase to support consumption, but this move was followed by Fitch Ratings lowering its outlook for Japan to negative, saying it doubted the government’s commitment to fixing its public finances. Despite the limited monetary and fiscal headroom, more stimulus is expected to offset the impact of the higher yen, which would otherwise lead to lower growth and inflation.

Activity in China mixed

China’s activity in May was mixed. Industrial production growth was steady (at 6.0%), real retail sales growth stronger (9.7%) and state-led infrastructure investment growth continued its rapid pace (20% annual). However, growth was weighed down by a softening property market and easing manufacturing investment growth. M2 money and consumer price growth declined to 12.7% and 2.0% respectively, both below target.

Economic risks mainly long-term

Brexit has added to the risks facing global economic growth, with the chance of a UK recession and by placing further pressure on EU growth and cohesion. However, markets have shown short-term resilience. BoE Governor Carney noted that banks have larger capital buffers and holdings of liquid assets than before the GFC. Market movements, while dramatic in the past few days, have been orderly with no sustained market disruptions reported. Finally, market volatility remains well below that during the GFC (the VIX peaked at 26.7 compared to around 65 in 2008). Key risks relate to what will happen in the longer-term, as the practical steps of the UK exit from the EU play out.

Notes

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