The economy grew 1.4% in the year ending December 2011, the fastest pace in over three years. The Rugby World Cup (RWC), exceptional pastoral growth and high export prices provided an effective antidote to the disruptions caused by natural disasters at home and abroad and by government debt woes overseas.
The RWC lifted private consumption spending and tourism numbers; however natural disasters in New Zealand and Japan, combined with economic weakness in Europe and the United States, meant tourist spending was lower than it might have been. The result was a moderate increase in total tourist numbers and spending.
Increased activity in the property and business services industry, likely reflecting activity related to both the RWC and the Canterbury earthquakes, accounted for half of the rise in total GDP. Exceptional pastoral growth helped lift dairy export volumes to record levels in the December quarter. As a consequence New Zealand's trade surplus reached its highest level in a decade and helped limit the current account deficit to 4% of GDP.
Good pastoral farming conditions have continued into 2012, providing a firm base for activity to build on over 2012. Our March round of business talks suggested growth in early 2012 will be maintained at a similar pace to that over 2011. Other indicators of business activity point to a rise in the pace of growth later in the year. However, as indicated in last month's report, the growth outlook for the 2012 calendar year appears weaker than the 2½% forecast in February's Budget Policy Statement (BPS).
Economic recovery continues...
Real production GDP rose 0.3% in the December quarter, weaker than the Treasury and the market expectations of 0.7% and 0.6% respectively. However, it should be seen in the context of a difficult global situation (Figure 1). In the December 2011 quarter GDP fell 0.3% in the euro area and in the UK, fell 0.2% in Japan and rose only 0.1% across the OECD area as a whole. Both Australia and Canada were soft with 0.4% growth.
- Figure 1 - Economic growth over 2011
- Source: Statistics NZ, Datastream
Relative to the Treasury's forecast, the impact of the RWC on services exports was small. This reflects, at least in part, the negative impacts of natural disasters in New Zealand and Japan, as well as the high NZ dollar and economic turmoil in other key tourism markets. Not only do these factors tend to reduce the number of people visiting but also the amount of spending while here. These effects were most clearly evident in the data on visitors from Japan. The trend decline in the number of visitors from Japan reasserted itself and numbers fell 21% in the year ending December 2011 (Figure 2), the lowest level since 1994, and total spending fell 36% in the year. A rise in visitors from other countries, particularly China and Australia, more than filled the gap left by reduced numbers of visitors from Japan, Korea, USA, UK and Germany, and total visitor numbers rose 3% in the year. This led to a 3% rise in travel spending for the year, but when the 5% rise in travel prices is factored in, the real value of spending fell 2%. In effect, while the 133,200 RWC visitor number was higher than expected, overall tourist spending fell short of expectations.
- Figure 2 - Visitor numbers
- Source: Statistics NZ, Treasury
The distinction between visitor numbers and visitor spending was evident in our business talks. Businesses that were directly exposed to the RWC, for example though merchandise or hospitality services, tended to report a significant impact on sales. On the other hand, businesses with a more general exposure to tourism noted the limited impact on sales.
...driven by growth in services industries
The mixed impact of the RWC on industries can be seen in Figure 3. The RWC clearly benefited the wholesale and retail industries and the finance, insurance, property and business services industry. Most of the growth in the latter grouping came from property and business services, up 4.7% in the year and accounting for half of all GDP growth. Activity in this group includes business types that would have benefited from: the rise in house sales over the year; the RWC, such as advertising, and vehicle hires; and the Canterbury earthquakes, such as engineering and surveying. In contrast, activity in community and personal services, which includes sport and recreation, and transport, storage and communication, showed no rise in the year.
- Figure 3 - Contribution to GDP growth in 2011
- Source: Statistics NZ
Output in agriculture grew 4.4% over 2011 as dairy production increased off the back of exceptional pastoral growth. Dairy production has remained strong throughout the March quarter and appears headed to end the season around 10% higher than in the last season.
Manufacturing output rose 1.5%, although with the exceptions of the food and beverages and petroleum and chemicals groups, there was little growth. Inventories increased sharply in September and their subsequent run-down in December resulted in a fall in output. Only two of the nine sub-industries managed to increase production. Government administration and defence posted a 2.2% fall in the December quarter, offsetting earthquake related rises earlier in the year.
Real expenditure GDP rose 1.3% in the year ending December, led by growth in private consumption expenditure, up 2.5% in the year. Residential investment declined 12% in the year, while non-residential investment grew 5.3%, helped by a 14% rise in plant and machinery investment. Net exports fell in the year as imports strengthened, up 6%, and overshadowed the 2.4% rise in export volumes. Despite the fall in tourism spending, exports of other services rose and total services export increased 0.6% over the year.
Nominal GDP subdued by weak prices
Expenditure on GDP in current prices fell 0.5% in the December quarter, its first fall since mid-2009. Contributors to this fall include lower consumer goods prices, in line with the fall in the CPI, and a rise in import prices as the exchange rate fell. As a consequence the level of GDP in current prices was $1.5 billion below the forecast in the Pre-election Update. This is consistent with tax being well below forecast so far this fiscal year.
The national accounts measure of the terms of trade fell 2.5%, the first decline since mid-2009. Our BPS forecasts include a sharp fall in the terms of trade in 2012 but with additional weakness in dairy prices now appearing, a larger fall is likely. The additional weakness in dairy prices seems to be driven largely by increased supply in the major producer markets. It is not just New Zealand that is experiencing favourable conditions for dairy production; the US, Australia and Europe are as well.
Turning to the March quarter, the BPS forecast 0.5% real growth in the March 2012 quarter as activity slowed in the wake of the RWC. This forecast still looks reasonable, although after December's result the explanation changes to one of a pick-up in activity. For example, primary food manufacturing can be expected to increase - there was some support for this in this February's 15% rise in meat export volumes. There have also been supportive signs of growth in the BusinessNZ-BNZ Performance of Manufacturing and Service Indexes.
Business confidence rose in March, according to the National Bank Business Outlook (NBBO), pointing to faster growth later in the year. The net balance of firms expecting improvement rose 6 percentage points to 34%, likely a reflection of reduced risks to the global outlook. Expectations of a rise in construction and investment activity associated with the Canterbury rebuild are also supporting confidence. The more reliable indicator of forward GDP - firms' own activity assessment - also rose, and is now at a level that in the past would have been consistent with GDP growth in the 3.5% to 4.5% range. Our forecast is for growth of 2% to 2.5% over the 2012 calendar year. Households do not yet appear to have the strength of conviction in future income growth to undertake the consumption spending required to lift GDP growth rates to a much higher level in 2012. However, we do expect consumption to rise to around 3% per year in 2013 as the Canterbury rebuild gets underway and economic activity in the rest of the country gathers momentum.
New data could lead to revisions
The December GDP release will be the final one under the ANZSIC 1996 industry classification. The 2006 version and other updates from 27 April 2012 will likely result in changes to historical data, including the potential for some reduction in the 4.5% gap between the expenditure and production measures of real GDP. These changes could have implications for our forecasts of the economy, post-Budget.
Current account deficit narrows
Record dairy volumes in the December quarter contributed to a $0.5 billion increase in the annual goods surplus to $3.6 billion, the highest in a decade (Figure 3). The annual current account deficit was reduced by a similar amount, to $8.3 billion (4% of GDP), indicating that movements in the services and income balances had little impact this quarter.
The impact of the Rugby World Cup on the services balance was weaker than we had expected - services exports rose just $38 million (seasonally adjusted) in the quarter. The annual income deficit narrowed slightly, down $0.1 billion to $10.4 billion. The net international liability position was stable at 72% of GDP.
The industrial dispute at the Ports of Auckland seems to be impacting on the trade data, with February export values down 6.9% and imports down 6.6% on February 2011. These movements saw the annual trade surplus narrow to $621 million from $765 million in the year ending February 2011. Delays in loading and unloading vessels will also impact on March's trade data.
The Treasury is forecasting the current account deficit to remain around the 4% mark over 2012. Export values are expected to stay high, although rising imports means the trade balance narrows. Subdued profit growth by foreign-owned companies in New Zealand and a static debt stock are expected to see the income deficit remain around the $10 billion mark over the year. Beyond 2012, a return to average pastoral conditions combined with weak export services growth, strengthening import demand from the residential investment recovery, and rising domestic profitability contribute to a current account deficit forecast of 6% of GDP by December 2013.
- Figure 4 - Current account balances
- Source: Statistics NZ
Labour productivity falls
Labour productivity in the measured sector of the economy, which excludes public health and education, decreased 0.1% in the year ending March 2011. That is, labour inputs increased faster than firms' outputs. While this is beneficial for employment, it limits the scope for increases in real wages. Productivity growth typically rises during the expansionary phase of the business cycle and we estimate economy-wide productivity to have increased 0.6% over 2011. A further increase in labour productivity over the next few years is vital to help alleviate capacity pressures, most obviously those looming in the construction industry.
Global growth stabilisation theme continues…
The stabilisation seen in the global outlook in February continued in March, with the Greek debt restructuring completed and a continued positive tone in US data. Consensus forecasts for New Zealand's main trading partners remained at 3.5% for 2012 and 4.0% for 2013, similar to the assumptions underlying the Budget Policy Statement forecasts. While the risks of severe global disruption arising from the euro debt crisis have been significantly reduced in the near term, risks remain to the downside and may have just been pushed out in time.
…with completion of Greek debt restructuring…
After some initial concern over the participation rate for the Greek private sector involvement (PSI), the final result was seen as successful. There was 86% (€152b) participation for bonds under Greek law; as it was less than 90%, collective action clauses were activated, bringing total participation to 95.7% (€197bn). This resulted in the activation of CDS contracts, but this was seen as positive, as it shows that the CDS market is actually functioning (despite low overall payouts), which should help bond issuances by other countries. The bailout for Greece was later ratified by EU members, with €28bn to be provided by the IMF.
Equity markets rose in response to the Greek debt restructuring and reduction in tail risks. Having said this, many consider that a further debt restructuring will be necessary; the new Greek bonds are already trading at a discount. Another factor tempering market sentiment is the prospect of a debt restructuring program for Portugal, although there have been no official announcements. Spain is also of concern, with fiscal targets being changed, and larger-than-expected deficits. Spanish bond yields have begun rising as a result, but remain much lower than for the countries that required bailouts.
…and continuing US strengthening
Non-farm payrolls increased an above-expectation 227,000 in February, with 61,000 in upwards revisions signalling further strength. The unemployment rate remained steady at 8.3%. Regional manufacturing PMIs were largely positive in the month, albeit with declines in Richmond and Dallas; they do, however, remain in expansionary territory. Industrial production in February was flat, although upward revisions to January helped the level. Retail sales grew strongly in line with the improving labour market, despite an easing in consumer confidence. Some forecasters have started upgrading growth forecasts for the United States; we remain cautious given the upcoming fiscal consolidation and downside risks to global growth.
But growth concerns remain for China…
With the near-term resolution of the Greek crisis, there was renewed focus on China's growth and its sustainability. While the consensus view remains for a soft landing (growth between 7-8%), there are increasing concerns of a hard landing (growth around 5%). February export data was weak, industrial production growth eased more than expected to 11.4% (apc) and retail sales growth fell to 14.5% (apc) in comparison to the 17% seen in much 2011.
House prices also fell in most of the regions surveyed, while the HSBC manufacturing PMI unexpectedly fell 1.6 points to 48.1. Offsetting some of the concern is that the authorities have ample room to ease monetary policy (and expand fiscal policy), especially given the inflation rate fell back to 3.2% in February. Analysts are cautious over reading too much into Chinese data in January and February owing to the disruption caused by the Chinese New Year holiday.
…while Australian growth was weaker than expected…
Australian GDP grew 0.4% in the December 2011 quarter, much lower than the market expectation of 0.8%. The annual increase of 2.3% was close to expectations owing to upwards revisions to past growth. Growth in the quarter came from public consumption, net exports, inventories and below-trend consumption growth. Investment subtracted from GDP after a strong September quarter. The growth outlook has also been under scrutiny as the concerns around China's growth have resurfaced. Owing to Australia's significant exports to China and large investment intentions dependent on Asian demand, a hard landing in China would have big implications for Australia. This would flow on to New Zealand as well, with China and Australia our top trading partners.
The unemployment rate rose in line with expectations from 5.1% to 5.2%, but employment fell 15,400; a small increase had been expected. The RBA announced before the GDP release that its policy rate would remain unchanged at 4.25%, saying that GDP was near-trend and inflation within the target range. Overall, analysts are split over the RBA's next move given the weaker-than-expected GDP outturn.
… and European growth outlook still bleak
The euro area manufacturing PMI took an unexpected fall in March, falling 1.3 points to 47.7 (Figure 5); Germany's PMI was the main driver, falling 2.1. The euro area services PMI also fell, now sitting at 48.7. The implications of these moves are that a mild recession is widely expected for the first half of 2012. The growth fundamentals further out are also bleak, with significant rebalancing required to make the monetary union sustainable. It should be noted however, that this rebalancing is necessary, and if successful, should help prevent crises of this nature in the future.
- Figure 5 - Euro area PMIs and GDP
- Source: Haver
Markets rise on improved sentiment
The improved tenor of US data and near-term resolution of the Greek debt crisis led to a re-evaluation of financial assets. US bond yields rose and the USD strengthened mid-month, giving a glimpse of what might happen when a solid recovery takes hold. However, US 10-year bond yields pared gains, finishing around 15-20 basis points higher at 2.20%. Equity markets were higher for the month, but increases remain tentative given the downside risks that still remain. Commodity prices were broadly stable; oil prices remained at high levels. Both the NZD and USD depreciated slightly against the USD, at odds with the typical "risk-on" appreciation seen in recent years, but more consistent with a sustained recovery in US activity.