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Monthly Economic Indicators

Analysis

Real GDP growth remained moderate in the March quarter, increasing 0.5%, following growth of 0.4% in the December quarter. Construction-related investment fell in the quarter and net exports also detracted from growth. Nonetheless, domestic demand growth remained solid as private consumption rebounded from a slower December quarter outturn and business investment rose. Strong domestic demand is being reflected in rising import values and a widening current account deficit.

Indicators of activity in the June quarter point to continued solid growth in domestic demand. Business and consumer sentiment remain buoyant, export commodity prices are high, growth in international visitor arrivals is continuing and net immigration is at a record high. In contrast, activity in the housing market is continuing to ease.

Solid growth in nominal GDP as real growth remains moderate…

Real GDP grew 0.5% in the March 2017 quarter, well below our Budget forecast of 1.1%. Partial data, released after our forecasts were finalised, had indicated our Budget forecast was likely to be too strong. Nonetheless, we and most other forecasters did not expect growth to fade to the extent it did. The (more volatile) expenditure measure of GDP was similarly weak, up 0.2% in the quarter following a gain of 0.1% in the December quarter. Compared to the March 2016 quarter real expenditure on GDP was 2.0% higher, the smallest annual rise since the March 2014 quarter. 

Figure 1: Nominal GDP growth
Figure 1: Nominal GDP growth   .
Source:  Statistics New Zealand

Despite the modest gain in real GDP, growth in nominal GDP, which underpins our tax forecasts, exceeded our expectation of a 1.1% rise, rising 1.4% in the quarter (Figure 1). However, significant downward revisions to growth in prior quarters meant growth in the year ended March, of 5.6%, was a little weaker than the 5.9% forecast in the Budget Update. Meanwhile, tax revenue in the fiscal year to April was a little ahead of forecast, as it has been consistently this fiscal year. 

Within the industry breakdown of real GDP, increased dairy production was a key driver of primary sector and manufacturing output (Figure 2). Higher dairy production was also reflected in an increase in inventories, as exports of dairy products fell 10.6%.  Wholesale, retail trade and accommodation also made a large contribution to growth, reflecting ongoing strength in tourism, immigration and employment. However, growth in other services, including finance and real estate was subdued, partly reflecting an easing in housing market activity. Construction and transport activity both fell. On the latter, Statistics New Zealand (SNZ) noted that both rail and air transport were down, the former likely reflecting disruptions from the Kaikōura earthquake.    

Figure 2: Industry contributions to GDP
Figure 2: Industry contributions to GDP.
Source:  Statistics New Zealand

In the expenditure measure of GDP, spending by households continued to grow at a solid pace, up 1.3% in the quarter, driven in equal parts by increased spending on durable goods, including motor vehicles, and services. Investment spending also continued to rise at a reasonable pace, up 1.2% in the quarter, despite falls in residential, non-residential and other construction investment. Investment in plant, machinery and equipment surged 12.6%, although growth had been sluggish in previous quarters.     

…as net exports weakened…

Overall, gross domestic demand rose 1.0% in the quarter and 3.9% from the same quarter last year.  However, much of that demand was met through imports, which rose 1.3% in the quarter and 7.3% from the same quarter last year. Meanwhile, exports of goods have fallen in each of the last three quarters and services export value growth has slowed, despite continued strong growth in the number of international visitor arrivals. As a consequence, net exports have been a significant drag on growth over the past year.

The national accounts measure of the terms of trade fell 2.1% in the March quarter, driven by a fall in the services terms of trade, although gains in previous quarters meant the terms of trade was up 4.1% from the same quarter a year ago. Real gross national disposable income, which reflects changes in purchasing power arising from the terms of trade, also fell in the quarter but rose 3.4% from a year ago. 

On a per-capita basis, growth in real GDP and real disposable income fell in the quarter and annual growth remains below average. The implication is that productivity growth also remains subdued, limiting prospects of a significant acceleration in real wage growth in the short term. 

Growth outlook remains positive…

There were clearly some temporary factors restraining growth in the quarter, including disruption from the Kaikōura earthquakes, the sharp fall in non-residential building investment, and the decline in dairy exports. The absence of these temporary drags, and signs of a bounce back in exports, leaves our initial estimate of June quarter growth a little above our Budget forecast of 0.9%. Moreover, the fundamental drivers of recent growth i.e. strong population growth, low interest rates and high terms of trade, remain in place, leaving us comfortable with our forecast of growth increasing at an annual pace of around 3.5% by mid-2018.

…but lower inflation is a risk 

Nonetheless, in the shorter term, slower-than-expected GDP growth in the March quarter means our estimates of excess capacity eased rather than tightened as anticipated (Figure 3).

Figure 3: Output gap measures
Figure 3: Output gap measures   .
Source:  The Treasury

As a consequence it may be a little longer before inflationary pressures build and flow through to higher prices. The risk is that lower inflation spills over to slower growth in company profits, household incomes and, ultimately, tax revenue. This risk is amplified by the recent increase in the exchange rate, which is around 3% higher than forecast.    

Current account deficit widens…

Weakness in the external trade accounts was the main driver of the wider current account deficit revealed in the Balance of Payments release for the March quarter. Seasonally adjusted estimates of all the major balances deteriorated (Figure 4), leading to a $1.1 billion increase in the quarterly deficit. The annual deficit widened to 3.1% of GDP from 2.7% in the year ended December 2016. 

Figure 4: Current account change by component (seas.adj.)
Figure 4: Current account change by component.
Source:  Statistics New Zealand

The current account deficit was financed by a net investment inflow of $2.0 billion. Nonetheless, New Zealand’s net liability position narrowed to 58.5% of GDP (down 1.9% points) as market price and valuation changes to New Zealand’s net liability position more than offset the impact of the net investment inflows. 

…as terms of trade rise… 

The Overseas Trade Indices showed the merchandise terms of trade rose to a 40-year high in the March 2017 quarter, driven by an 18.0% rise in dairy export prices. Unusually, when compared with earlier peaks in the terms of trade, the current peak does not coincide with record high export prices. Rather, the current peak is notable for the weakness in import prices (see Special Topic). 

The juxtaposition of the wider current account deficit and the record high terms of trade achieved in the quarter suggests that some of the strength evident in the national accounts measure of household consumption was likely met from lower saving. This view appears to be corroborated by the financial accounts of the balance of payments, which showed a net inflow of foreign investment into New Zealand was driven by banks withdrawing currency and deposits from overseas and increasing other investment liabilities such as loans. However, we do not think this is the start of a trend. May credit data shows household lending growth continued to ease and we expect household incomes continued growing at a reasonable pace.  In sum, we anticipate the annual current account deficit will track broadly sideways at around 3.0% of GDP over the rest of the year. 

The merchandise trade surplus narrowed to $103 million in May from $536 million in April as export values eased following a large gain in April and import values rose on higher fuel imports, which is likely to reverse in coming months. Export values in the quarter are running well ahead of the March quarter and the trade balance overall has recovered from the weaker March quarter, signalling a reduced drag on GDP from net exports in the June quarter.    

Inbound tourism number continue to rise

Tourism inflows continued to rise steadily, up 9.8% in May from a year ago (Figure 5). Australia has overtaken China as the main driver of growth in numbers. However, Australian visitors tend to spend less per visit than their Chinese counterparts, and total visitor spending has fallen slightly over the past year after a period of strong growth. New Zealander departures overseas have also increased sharply over the past year, putting further downward pressure on net tourism exports.     

Figure 5: Short-term arrivals and departures
Figure 5: Short-term arrivals and departures.
Source:  Statistics New Zealand

Positive domestic indicators include migration…        

Turning to the domestic economy, indicators over the past month have generally been positive. Migration figures for the 12-months ended May showed the net inflow of migrants rose to a fresh high of 72,000. The pace of increase has levelled off in recent months as departures have stabilised (Figure 6), in keeping with our Budget forecasts. Although past strength in arrivals is likely to continue to add to demand for some time, the supply side impact may begin to wane, helping to create conditions more conducive for a sustained lift in inflationary pressure. 

Figure 6: Monthly migration flows
Figure 6: Monthly migration flows   .
Source:  Statistics New Zealand

…and business and consumer sentiment…        

The BNZ-Business New Zealand manufacturing and services sentiment indices both showed the sectors to be expanding at a solid pace. The combined production value of the two series rose to a record high. Employment intentions also remained high, consistent with ongoing strength in the NZ job ads series, which rose 15.6% in May from the same month a year ago. 

Retail spending as measured by Electronic Cards Transactions eased 0.4% in May, following a rise of 0.9% in April, driven by lower fuel sales. Core retail sales also eased 0.4%, following 1.4% in April. On an annual basis, both core and total retail sales continued to grow solidly, up 4.8% and 5.2% respectively. We will be watching to see what, if any, impacts touring supporters of the British and Irish Lions rugby team have on June card spending. 

Meanwhile, spending should remain well-supported by consumer confidence, which improved in both the quarterly Westpac McDermott Miller survey and the monthly ANZ-Roy Morgan survey (Figure 7). In both surveys, the rise in confidence was driven by expectations around future conditions, which may reflect expectations of tax cuts next year as proposed in the 2017 Budget and the improved outlook for export incomes evident in the terms of trade.   

Figure 7: Consumer confidence
Figure 7: Consumer confidence   .
Source:  Westpac McDermott Miller, ANZ-Roy Morgan

…and low interest rates…

Interest rates are expected to remain low consistent with the Statement accompanying the Reserve Bank’s Official Cash Rate review that monetary policy will remain accommodative for a considerable period.  In our Budget Update, we forecast short-term interest rates to begin rising in the second half of 2018.   

…partially offset by rising food prices…

Sharply-rising food prices have been eating into household budgets, with a 1.7% increase in May taking annual food price inflation to 3.1%. Fuel prices have fallen over the June month, providing a partial offset to the higher food prices.

…and an easing in housing market activity

Conditions in the housing market continued to ease in in Auckland where prices slid 0.7% in May, to be up just 1.8% on a year ago, and sales were 27.5% lower than a year ago. Conditions in the rest of the country generally remain firm, with prices up 11.3% on a year ago and sales up 13.6% from a year ago. Nationally house price growth eased to 5.0% from a year ago, down from 11.7% at the start of the year. 

In the new dwelling construction sector, residential consent issuance has recovered somewhat over the past three months, but given earlier consent numbers we continue to expect activity to remain around its March levels through the middle of 2017. 

Construction of non-residential construction may be peaking

In the non-residential building construction sector, there are also some signs that activity may have reached a plateau. March’s building activity survey showed non-residential building activity declined 7.2% in the March quarter (Figure 8). To some extent, a pull-back in activity was not unexpected given non-residential construction activity has increased 30% over the past three years.

Canterbury has been a big driver of activity, but over the last year or so, activity in the Auckland area has been the major driver of growth. Auckland was the big driver of March’s fall in non-residential activity, with data showing the value of activity dipped 24.5% ($172 million) in the quarter, likely a reflection of a number of building projects being concluded or scaled back.

We expect non-residential construction to increase over the year ahead although the level of activity is likely to be close to levels where capacity constraints become increasingly evident. Costs are rising at a relatively fast pace, and there are some indications that consent issuance has slowed, consistent with expectations that the level of activity may be approaching its peak See for example the National Construction Pipeline report [1].

Figure 8: Non-residential building activity and consents
Figure 8: Non-residential building activity and consents   .
Source:  Statistics New Zealand

UK election results in a hung parliament

Markets were primarily focused on UK politics and oil prices this month. The UK election resulted in a hung parliament with the Conservative party losing a net 13 seats while the Labour party gained a net 30 seats. However, the Conservative party will remain in government, aided by the support of the Northern Irish Democratic Unionist Party (DUP). Negotiations for Brexit have now officially begun with the UK agreeing to the EU proposition of first negotiating the terms of Brexit before any trade deals are discussed. The UK has also reaffirmed its position that it intends to leave the single market, surprising some analysts who had expected the election to alter this position. The pound is now around 7% lower against the NZD from mid-May. The USD has also fallen in the month and is currently down 5% against the NZD from mid-May, primarily due to market uncertainty about the future track of interest rates (further detail below). Overall the TWI is up around 5% since mid-May and roughly in line with its level at the start of the year (Figure 9).

Figure 9: Exchange rates in 2017
Figure 9: Exchange rates in 2017   .
Source:  Haver

Oil price falls have continued in June. The WTI oil price fell below $43 a barrel in June, down more than 20% from the start of the year, technically becoming a bear market.  Prices remain around a similar level to a year ago. The oil price is being suppressed by doubts about the ability of OPEC to limit global supply, both for member countries and for countries outside the agreement. The decline in oil prices this year is placing downward pressure on headline inflation globally (see Figure 10).

Fed increases interest rates but markets uncertain on outlook from here…

Inflation has stalled in the US with falls in both annual CPI inflation and the annual PCE deflator. Headline CPI inflation fell in May, bringing annual inflation to 1.9%, down from 2.2% in April. Annual core inflation also fell, from 1.9% in April to 1.7% in May. The headline PCE deflator rose 0.2% in April, bringing annual inflation to 1.7%, down from 1.9% in March. Annual core PCE inflation also fell, from 1.6% in March to 1.5% in April. 

US labour market data was mixed with jobs figures disappointing but the unemployment rate continuing to fall. Nonfarm payrolls showed a net gain of 138,000 new jobs in May, down from a downwardly revised 174,000 in April. The unemployment rate declined to 4.3% from 4.4% in April, below many estimates of full employment, and the lowest rate since 2001.

The US Federal Reserve increased interest rates in June, as widely expected. The Fed noted that recent inflation outturns had been weaker than anticipated but that they expected inflation to return to 2% in the medium term. The Fed’s ‘dot plot’ showed the median member’s forecast was for one additional increase this year. Analysts appear sceptical on the likelihood of any future rate rises with current market pricing implying a less than 50% probability of a further interest rate increase by the end of 2017.

…While UK inflation begins to put pressure on the Bank of England

The Bank of England (BoE) decided to leave interest rates on hold in June. While this aligned with market expectations, analysts were surprised by the increased support by committee members for a rate rise, with three of the eight members voting for an increase. This followed CPI data that showed that inflation had increased to 2.9% in May, up from 2.7% in April (Figure 10). Core inflation also lifted to 2.6% from 2.4% in April. The depreciation of the pound surrounding the recent UK election will likely continue to put upward pressure on inflation and may see further pressure for an interest rate increase this year. Brexit is also adding to monetary policy uncertainty. BoE Governor Mark Carney noted that risks surrounding Brexit are one of the reasons he favours keeping interest rates on hold for the time being. Alternatively, Andy Haldane, chief economist of the Bank said this week that risks from overshooting the inflation target are growing and that he had considered voting for a rate increase at the June meeting. Market pricing of a rate rise by the end of the year is less than 50%.

Figure 10: Oil prices and inflation
Figure 10: Oil prices and inflation   .
Source:  Haver

ECB remains on hold in June

Inflation for the euro area eased to 1.4%, down from 1.9% in the year to April. Annual core inflation also fell, down 0.3% points to 0.9%. The European Central Bank (ECB) left rates on hold in June as widely expected. The ECB President noted that downside risks had abated and were now broadly balanced. The ECB’s forward guidance was altered slightly to remove the reference to lower rates as the most likely policy move. The ECB’s growth forecasts were revised up but the inflation forecasts were downgraded. Comments by ECB President, Mario Draghi, later in the month were more hawkish saying “All the signs now point to a strengthening and broadening recovery in the euro area – deflationary forces have been replaced by reflationary ones.” Market pricing of a rate increase this year has not increased significantly, though the comments did cause a slight appreciation in the euro. 

Australia GDP comes in weak  

Australian GDP was subdued increasing 0.3% in the March quarter to be 1.7% higher than the March quarter a year ago. Household consumption growth rose 0.5% in the quarter and 2.3% from the start of 2016, well below its historical average growth rate of 3.3%. A number of one-offs contributed to the softness in the March quarter including weather-related disruptions to exports (-1.6%) and private dwelling investment (-4.4%). Nominal GDP growth was much stronger at 2.2% in the quarter and 7.7% for the year, helped by a strong increase in terms of trade (up 7% in the quarter, 25% annually). The Australian dollar appreciated slightly upon release, reflecting market relief that downside risks were not realised.

Australia experienced another month of strong jobs growth in May with annual employment growth lifting to 2.0%, up from 1.7% in April. The unemployment rate fell to 5.5%, down from 5.7% in April. However, the labour market data are volatile and the Australian Bureau of Statistics measure of trend unemployment was unchanged at 5.7% in the month.

The RBA left rates on hold again as expected. The Bank stated that the current weakness in GDP reflected quarterly variation and growth would return to around 3% in the medium term.  Market pricing suggests a cut is slightly more likely than an interest rate rise in the next 12 months, although no change is the most likely outcome for the foreseeable future. During June, Moody’s downgraded 12 Australian banks, including the big four ANZ, CBA, NAB and Westpac, which were all downgraded to Aa3 from Aa2. The primary concern highlighted by Moody’s was the increased risk in household debt levels, an issue the RBA has also highlighted in recent months. The downgrade was later extended to the New Zealand subsidiaries with ANZ, ASB, BNZ and Westpac all being revised down from A1 to Aa3. This brings Moody’s ratings into line with other ratings agencies.

Japan builds momentum

Annual industrial production growth in Japan rose to 5.7% in April from 3.5% in March, though this was still below expectations. Annual CPI inflation remained in positive territory, rising to 0.4% in April, up from 0.2% in March. In the labour market, Japan’s seasonally adjusted unemployment rate for April remained at 2.8% for the third consecutive month, the lowest level since the mid 1990’s.

Weak data in China and a credit rating downgrade

China’s key monthly indicators showed mixed performance in May. Annual industrial production growth remained at 6.5%, proving stronger than markets had anticipated. Retail spending growth remained steady in the year to May, as expected, at 10.7%. Fixed asset investment growth fell to 8.6% from a year ago, down from 8.9% in April. Finally, in line with market expectations, annual CPI inflation was 1.5% in May, down from 1.6% in April.

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