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Monthly Economic Indicators

Analysis

Ongoing positive signs from the economy

The two major data releases for the December 2013 quarter confirmed previous indications of a strong end of the year for the economy. All signs indicate that the economy continued to grow at an above-potential rate of growth in the first quarter of 2014. Business and consumer confidence remains buoyant, and increasing net external migration gains will continue to support aggregate demand too. With the monetary tightening cycle now underway, the trade-weighted exchange rate (TWI) hit a post-float high in recent weeks (although it has retreated a bit since).

Real GDP continues at above-potential pace...

In keeping with market expectations, real production GDP grew by 0.9% in the December 2013 quarter, following a downwardly-revised 1.2% increase in the previous period. Annual average growth rose slightly, to 2.7% from 2.6% in the September quarter (Figure 1).

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

Activity increased on a quarterly basis in 12 of the 16 industry groups but the largest positive contributions came from the manufacturing, mining, and wholesale trade industries, which each contributed 0.2%-points to the headline rate. Construction activity rose only modestly in the quarter but annual growth increased to 7.6%. The two largest negative contributions to growth came from the business services and agriculture industries. Output in the former, which comprises around 9% of total GDP, fell for the second consecutive quarter, although it was still 2.9% higher than a year ago. Meanwhile, the decline in agricultural production followed the strong bounce-back in agricultural output in the September quarter from the early 2013 drought.

Real expenditure GDP grew by 0.6%, driven by private consumption and exports. Household consumption increased by 1.3%, reflecting higher spending on durables and services. The 5.4% quarterly increase in goods export volumes was driven by a 20.6% increase in dairy exports, although the total increase in exports was tempered by a 3.6% fall in services.

The other main components of expenditure GDP made smaller and broadly offsetting contributions to quarterly growth. That said, in keeping with the strong gains in the manufacturing and wholesale trade industries in the production-based accounts, investment in plant and machinery continued to grow strongly, up 7.5% in the quarter.

Export prices jumped by 4.6% in the quarter while import prices fell by 3.6% (driven by a 2.7% quarterly increase in the TWI). As a result, the implicit terms of trade rose by 8.2% in the quarter and by 18.6% from the December 2012 quarter (Figure 2). The increase in the terms of trade contributed to a pick-up in the GDP deflator and a 3.0% increase in nominal GDP – its fastest pace since mid-2005. That said, such growth has not delivered as much tax revenue recently as we forecast in the Half Year Update. While we can explain some of the variance, it is not clear yet how much is owing to timing or other issues.

Figure 2: Terms of trade and the GDP deflator
Figure 2: Terms of trade and the GDP deflator.
Source: Statistics NZ

...while the current account deficit narrows

Also in line with market expectations, the annual current account deficit narrowed sharply in the December quarter, to 3.4% of GDP from 4.1% in the previous quarter. As indicated by the more timely monthly trade data, the narrowing in the headline deficit was driven overwhelmingly by an improvement in the goods balance. This was partly a function of the surge in the terms of trade over the past year or so (recall that the official Overseas Trade Indices terms of trade measure reached a fresh 40-year high in the December quarter). However, having previously been held back by the lingering impacts of the early 2013 drought, the improvement was driven by the surge in goods export volumes visible in the expenditure GDP data. All told, having registered a small deficit in the September quarter, the annual goods balance posted a surplus of 0.6% of GDP in the December quarter (Figure 3).

Figure 3: Current account components
Figure 3: Current account components.
Source: Statistics NZ

By contrast, the other major components of the current account did not contribute to the narrowing of the headline deficit. The annual services surplus remained broadly steady in the region of 0.5% of GDP, with the higher exchange rate contributing to visitors spending less per day than they have in the past. We expect the recent strength of the NZD, particularly against the AUD, to continue to place downward pressure on visitor spending and the services balance over the coming year.

Meanwhile, having remained steady in the region of $2.2 billion for the past 15 months or so, the quarterly income deficit widened to $2.6 billion, driven by an increase in income outflows to foreign investors. This ties in with the strength of profits from the banking sector, and the wider pick-up in economic activity, at the end of last year. By contrast, having reached its highest level since late 2007 in the September quarter, New Zealanders’ income from investment overseas fell slightly in the December period.

The net international liability position declined to 66.6% of GDP ($147.6 billion) at the end of last year – its lowest level as a proportion of GDP since September 2002. The change from the previous quarter was dominated by favourable valuation changes. Such valuation changes accounted for over two-thirds of the movement in the net international investment position (NIIP) over 2013, reflecting net market price changes, such as gains in overseas equity markets and the corresponding value of New Zealanders’ international assets (Figure 4).

Figure 4: NIIP and valuation changes
Figure 4: NIIP and valuation changes.
Source: Statistics NZ

A bright start to 2014...

All signs indicate that the economy continued to grow at an above-potential rate in the first quarter of 2014. The ANZ Business Outlook survey surged to its highest level since March 1999 in February (data for March will be released on the same day as this report), while the seasonally-adjusted BNZ-BusinessNZ Performance of Manufacturing Index made it eighteen consecutive months in expansionary territory in February. And even though the corresponding Performance of Services Index dropped sharply in February, the series is volatile and the bigger picture is that it remains in expansionary territory too. The Treasury’s recent discussions with a range of businesses in the main city centres supported this positive outlook.

It is a similar picture for the household sector as well, with Westpac’s seasonally-adjusted consumer confidence measure reaching a nine-year high in the March quarter. There are clear signs of a pick-up in discretionary spending, including on hospitality, visible in February’s Electronic Card Transaction data. So-called discretionary spending is frequently the last spending area to pick up in a cycle, and underlines the broad-based expansion and embedded activity in the economy.

...alongside further gains in net migrant flows

The ongoing pick-up in net inward migration flows is another factor that will continue to add to aggregate demand in the near term. There was a (seasonally-adjusted) net inflow of 3,470 permanent and long-term migrants in February. This took the annual net migration inflow to 29,000 – its highest rate in nine years – and the migration cycle is shaping up to be of a similar size to the previous one in the early 2000s. Around eighty percent of the increase in annual net migration since the start of 2013 reflects migrant flows to and from Australia (Figure 5).

Figure 5: Turnaround in external migration since the start of 2013
Figure 5: Turnaround in external migration since the start of 2013.
Source: Statistics NZ

Monetary tightening cycle underway...

The Reserve Bank indicated that the 25 basis point increase in the OCR in March is likely to be the start of a 200 basis point rise over the next couple of years. With short-term interest rates in the major economies expected to remain close to record lows for another year or so, the trade-weighted exchange rate reached a post-float high in the middle of March (Figure 6).

Figure 6: Short-term interest rates
Sources: Consensus Economics, Haver

...and will moderate the pace of expansion...

Looking slightly further out, we expect GDP growth to ease somewhat towards the end of the year and into 2015, but to remain at a robust pace. This outlook is dependent upon monetary policy tightening having its intended effect of starting to slow domestic demand growth. We also expect net trade to make smaller contributions to GDP growth than it did in the December quarter.

But there are a number of other factors that may also weigh on activity in parts of the economy over the coming year or so – particularly the recent increase in the (already elevated) exchange rate. While tourist arrivals remain strong – visitor numbers in February were the highest ever for a February month – the strong dollar is likely to continue to constrain tourists’ daily spend. The strength of the dollar will also be a headwind for import-competing firms and some exporters. Meanwhile, the combined 10% fall in global dairy prices over the past three fortnightly GlobalDairyTrade auctions is a reminder that the current sweet-spot will come to an end as and when global supply increases (although prices are likely to remain elevated by historical standards).

...including in the housing market

The slight cooling in the housing market, linked to the Reserve Bank’s introduction of loan-to-value (LVR) restrictions in October 2013, and the nascent monetary tightening cycle, is another factor that may weigh on private consumption growth later in the year.
Admittedly, the REINZ house price index increased by 0.9% in February in seasonally adjusted terms, driven by a 3.7% rise in the Auckland median price index. However, the median price measures appear to be affected at present by a change in the composition of house sales since the introduction of LVRs, with fewer sales taking place at the lower end of the market. Nationwide house sales, which show a strong positive relationship with house price inflation, fell by 5.7% in the month.

Stronger global activity amidst market jitters

Data released in March indicated that the recovery in the developed economies has regained its pace. In Australia, the rebalancing into the non-mining economy progressed, while momentum in the US economy appears strong despite weather-disrupted data. However, credit risks in China and the Ukraine crisis led to nervousness in markets.

Some rebalancing in the Australian economy...

The Australian economy grew 0.8% in the December quarter, bringing growth in 2013 to a historically soft 2.4% but still respectable amongst developed economies. Solid consumption reflected the pick-up in retail sales, which expanded further in January by 1.2%. However, private investment fell 2.3%. Positively, the 1.0% growth in housing investment and a surge in approvals in January indicate a healthy supply response to higher house prices, driven in turn by low interest rates. Net exports, led by iron ore, contributed positively to the quarterly growth outturn. Growth is being rebalanced from mining investment into other sectors and exports.

Employment rebounded 0.4% in February, but analysts still expect the unemployment rate (at 6.0%) to rise over 2014. The soft labour market appears to be weighing on consumer confidence.

...as solid US fundamentals were evident...

US data signalled strong economic momentum despite the harsh winter. The ISM PMIs were reasonable in February, consistent with the 0.6% growth in industrial production (IP) and a 0.3% rise in retail sales. Non-farm payrolls grew 175,000, and analysts expect more hiring as the weather improves. While the unemployment rate edged up 0.1% point to 6.7%, this was attributed to more people entering the labour market. Housing permits rebounded 7.7% in February and starts fell just 0.2%, suggesting that growth in housing supply may be reasonable once weather disruptions come to an end. However, home sales continued to contract, pointing to soft demand.

The Federal Reserve (Fed) pared its April asset purchases by US$10bn to $55bn and dropped the 6.5% unemployment threshold, under which a rate hike is possible, from its forward guidance. Comments by Chairwoman Yellen and the Fed’s latest projections suggest a more aggressive-than-expected tightening of policy after QE ends.

...and activity in Japan picks up before tax rise

Japanese activity strengthened ahead of April’s sales tax rise. IP and retail sales surged in January, while the tertiary (services) activity index rose, and the manufacturing PMI was strong in February. However, the imminent sales tax rise, appears to be weighing on household confidence.

Tepid growth in China...

Chinese activity appears tepid in early 2014. Annual increases in IP (8.6%), retail sales (11.8%) and fixed investment (17.9%) were historically low in January and February (Figure 7). The 0.4-point fall in the HSBC manufacturing PMI in March to 48.1 suggests soft activity. However, authorities maintained the 2014 growth target at 7.5%, and growth has met its target for the past 16 years.

Figure 7: Economic activity in China
Figure 7: Economic activity in China.
Source: Haver

...as worries over credit risks re-emerge

Concerns over credit risks resurfaced. A high-profile bond default suggests that authorities are allowing some financial products to fail to ensure better pricing of risk. Plans to liberalise deposit rates raised concerns of higher borrowing costs, and Premier Li said that defaults are unavoidable as financial deregulation proceeds. Credit risks and weak data impaired market sentiment, with equity and hard commodity prices weakening.

The PBoC expanded its USD/RMB band, from 1% to 2% above or below its daily reference rate. Relaxing the exchange rate regime will better allow monetary policy to address domestic concerns as China’s capital account is liberalised. The recent RMB depreciation continued as the PBoC signalled to speculators that the RMB is not a one-way bet. As part of exchange rate liberalisation, direct trading between NZD and RMB began on 19 March, and is expected to reduce the cost of business between New Zealand and China.

Crisis in Ukraine worries markets

The crisis in Ukraine and possible sanctions against Russia, a major energy supplier for Europe, also strained market confidence. Global equities have been volatile during the crisis, while yields fell and gold prices rose as investors sought safety. Markets recovered later as risks of an outright conflict receded, but tensions remain.

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