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Monthly Economic Indicators

Analysis

Solid domestic demand but weak inflation

Real gross domestic product (GDP) growth in the December quarter was in line with Treasury’s Half Year Economic and Fiscal Update (HYEFU). The outturn supported the key themes presented in the HYEFU of strong real activity but in a low inflation environment.

Recent demand indicators also support that outlook. Consumer confidence and business sentiment both remain at elevated levels and, with surging net migration and robust employment growth, the outlook for real activity remains strong.
Spare capacity continues to be absorbed as output expands at an above-trend rate of growth. Treasury’s preferred measure of the output gap, derived from a small macro model [1], indicates that the economy is currently operating at around capacity (Figure 1). Despite that, non-tradables inflation has been relatively muted and – with inflation expectations continuing to moderate – the Reserve Bank reaffirmed its on hold policy stance in its March Monetary Policy Statement.

Figure 1: Output gap estimates
Figure 1: Output gap estimates.
Source: The Treasury

Headline growth in line with expectations…

Real production GDP rose 0.8% in the December 2014 quarter, the same as Treasury’s HYEFU forecast. In annual terms, the economy continued to grow at an above-trend rate with output expanding by 3.3% in the year ended December – up from 2.9% in the previous quarter (Figure 2). Growth in the quarter was driven by a 0.8% rise in the service industries.

Figure 2: Real production GDP growth
Figure 2: Real production GDP growth.
Source: Statistics NZ

Retail trade and accommodation provided the largest contribution to service industry growth, rising 2.3%, owing in part to a surge in international tourism expenditure. Meanwhile, increased house sales underpinned a 1.2% rise in the rental, hiring and real estate services industry, consistent with a resurgent housing market.

The largest negative contribution to quarterly growth came from utilities. This was due to a decline in hydro-electricity generation given low lake levels – a consequence of a drier winter.

…driven by services…

Real expenditure GDP rose 1.1% in the quarter, following a 1.1% rise in the September quarter. Net exports provided the largest contribution with exports of goods and services rising a combined 6.1%, supported by an 8.8% surge in services exports. This more than offset the 3.0% rise in goods and services imports.

The rise in services export volumes chiefly reflected a 15% surge in tourism expenditure in the December quarter (Figure 3) driven by an increased number of visitors and increased per person spend. Average spending by visitors from China, the US and the UK increased throughout 2014, while Australian average spending fell, likely reflecting the decline in the AUD against the NZD. The surge in spending was consistent with the upbeat mood of tourism and hospitality industry participants in our recently completed business talks (see this month’s special topic).

Figure 3: Quarterly travel services exports
Figure 3: Quarterly travel services exports.
Source: Statistics NZ, NZ Treasury

Short-term visitor arrivals for the first two months of 2015 indicate that the higher level of tourism expenditure will likely persist in the March quarter. Visitor arrivals in the first two months of 2015 from China are up 39% compared to the same period last year, in-part reflecting higher arrivals for the Chinese New Year. A 2.8% rise in hospitality spending in February’s electronic card data also supports that view.

Domestic demand held up well in the December quarter despite a much greater proportion of domestic consumption being attributed to international tourists. Private consumption rose 0.6%, supported by durables and services consumption.

Total investment rose 0.2%, with a 5.2% rise in residential building investment offsetting a 0.9% fall in business investment. The decline in business investment largely reflects fewer large aircraft imports in the quarter. A large pipeline of non-residential consenting suggests that the contraction in non-residential construction in the quarter was temporary.

…and indicators supportive of a solid growth outlook…

Solid activity indicators bode well for growth in the first half of 2015. However, as indicated last month, drought conditions and lower dairy prices are expected to have a modest negative impact on agricultural production in the first half of 2015. Despite dairy production holding up well – with Fonterra revising their current season production forecast to -2% from -3.3% in their 2015 interim financial result – meat slaughter is a little weaker than expected.

The ANZ-Roy Morgan and Westpac McDermott Miller consumer confidence indices each nudged higher in March – buoyed by lower fuel prices and declines in fixed-term mortgage rates. Business sentiment continued to improve in the first ANZ Business Outlook survey of 2015. Business confidence and firms’ own activity expectations remain at historically high levels (Figure 4), while both the BNZ-BusinessNZ PMI and PSI indicated healthy levels of expansion in the manufacturing and service industries in February.

Figure 4: Business sentiment
Figure 4: Business sentiment.
Source: ANZ, Statistics NZ

Meanwhile, the boost to population growth from net permanent and long term migration continues with a seasonally adjusted net gain of 4,800 migrants in February – which took annual net migration to a record high of 55,100, exceeding our HYEFU forecast for the year to March.

…and solid housing demand…

Housing market activity has continued to increase since September with lower fixed-term mortgage rates and strong net migration supporting housing demand. House sales rebounded in February after a softer January. REINZ data showed sales rose 12.6% in the year to February. Median sales prices rose 0.8% in the month and 3.6% in the year – overwhelmingly driven by a 14% rise in Auckland’s median sales price.

…but nominal growth remains weak…

The SNA total terms of trade fell 2.2% in the December quarter as export prices fell 2.2%, while import prices were flat.  This moderated nominal GDP growth to just 0.4% in the December quarter – moving annual average growth to 5.7% (Figure 5).

Annual inflation is expected to have fallen to around 0% in the March quarter – as the flow through from oil prices is fully captured – and inflation is expected to remain low throughout 2015. As a consequence of the weaker outlook for domestic prices we expect quarterly nominal GDP growth to be softer than forecast in the near term.

Figure 5: Nominal expenditure GDP
Figure 5: Nominal expenditure GDP
Source: Statistics NZ

…however tax revenue ahead of forecast…

The quarterly nominal growth outturn was stronger than Treasury’s HYEFU forecast and consistent with the positive variance in tax revenue for the seven months to January. Stronger profitability from both non-incorporated and corporate entities meant other individuals’ tax and corporate tax were each $158 million above forecast. Source deductions were also $146 million above forecast, resulting in core Crown tax revenue being $456 million ahead of forecast.

…and OCR left unchanged in March MPS

The RBNZ left the OCR unchanged at 3.5% in the March MPS with the Bank’s central forecast supporting a period of stability in the OCR. Major downgrades to the inflation forecast reflected oil price developments and softer inflation expectations. The RBNZ explicitly stated they would not respond to the direct effects of the oil price fall; however, the impacts of lower inflation expectations on wage and price setting behaviour would be monitored closely.

The  most recent survey of expectations showed one year ahead inflation expectations have eased to 1.1% (previously 1.6%), while two year ahead eased to 1.8% (previously 2.1%) – the lowest levels since the OCR was introduced in March 1999.

Although the RBNZ reiterated that the NZD remains “unjustifiably high and unsustainable”, market participants perceived the statement as less dovish than they were expecting given markets were pricing some probability of a cut in the rate. This saw the NZD appreciate sharply on release. The NZD has appreciated considerably after some mid-month weakness as a result of USD strength (see international section), with the NZD reaching post-float highs against the AUD and EUR. The higher value of the NZD will place further downward pressure on tradables prices in the near term.

Annual current account deficit widens…

The annual current account deficit widened to 3.3% of GDP in the December quarter (Figure 6) from 2.6% of GDP in the September quarter.

Figure 6: Current account components (% of GDP)
Source: Statistics NZ

…driven by a sharp narrowing in the annual goods surplus…

As expected, the deterioration was driven by a narrowing in the annual goods surplus to $1.1 billion (0.4% of GDP) from $3.1 billion in the previous quarter. This decline was spread evenly across both lower export values and higher import values.

The fall in exports represents continued flow-through from the sharp declines in dairy prices throughout 2014. Dairy prices have risen 16% this year from low levels, although in the most recent auction they fell 8.8%. Fonterra kept their farm gate milk price forecast unchanged at $4.70 per kg/MS, but lowered the dividend range from 25-35 cents to 20-30 cents per share.

The rise in import values was spread fairly evenly across the major goods import categories, reflecting strong consumer and business demand. For the year, increases have been driven primarily by capital goods imports, in part reflecting Air New Zealand’s fleet upgrade.

…but travel service exports surge…

The surge in tourism expenditure in the quarter saw the annual services balance rise by $0.4 billion to $1.9 billion (0.8% of GDP). This more than offset greater investment income outflows given stronger corporate profitability relative to international returns on New Zealand’s investment abroad. The annual income deficit widened by $200 million to $10.8 billion (-4.5% of GDP).

…but annual deficit expected to widen further

On an annual basis, the current account deficit is expected to continue widening to over 5% of GDP by the end of 2015. That said, the current account deficit is now expected to peak at narrower levels than estimated in the HYEFU, reflecting lower oil prices and the impact of higher levels of tourism expenditure in the near term. Most of the widening will be a result of the annual goods balance moving from surplus to deficit in the March quarter of 2015, as lower dairy export values continue to flow through the merchandise trade data and strong demand boosts imports.

Global activity slightly more balanced

The growth outlook across the major advanced economies has become more balanced. The recovery in the US and UK has moderated, while demand in the euro area and Japan has picked up. However, the outlook for China and other Asian economies has weakened. Concerns over US monetary tightening led to some volatility in US markets, but the European Central Bank’s (ECB) quantitative easing (QE) programme lifted investor confidence in the euro area.

US and UK recoveries moderate from 2014...

The US expansion has slowed from mid-2014, with GDP growth in the December quarter (Q4) revised down 0.2% points to 0.5%. Business investment growth slowed, partly as a weaker outlook for energy prices led oil companies to scale back investment projects, while USD appreciation began to weigh on export growth.

Since then, US economic data have mostly been weaker than expected (Figure 7). Consumer confidence eased in March from its 14-year high in January, resulting in a fall in retail spending. Weaker household sentiment and spending was partly driven by the harsh winter and higher petrol prices. Poor weather also dampened construction and manufacturing activity. On a positive note, the labour market recovery remained robust, with non-farm payrolls rising 288,000 in February, while the unemployment rate fell 0.2% points to 5.5%.

Figure 7: Citigroup data surprise index
Figure 7: Citigroup data  surprise index.
Sources: Haver

In the UK, the recovery continued at a slightly slower pace, with jobs growth easing from mid-2014. However, forecasters still expect 2015 growth in the US (3.1%) and the UK (2.7%) to remain significantly stronger than in other major advanced economies.

...while activity picks up from a low level in other major advanced economies

Euro area activity has rebounded from low levels and in general has exceeded expectations (Figure 7), owing to a pick-up in the labour market, declines in petrol prices and low interest rates. The unemployment rate fell 0.1% point to 11.2% in January, down from 11.6% in mid 2014. Higher jobs growth and lower fuel prices supported fast growth in retail sales volumes (3.7% on a year ago in January), and bank lending to the private sector rebounded. Since December, forecasters have revised up 2015 growth for the euro area by 0.3% points to 1.4%.

In Japan, domestic demand expanded modestly in 2014Q4, led by private consumption, and exports surged on the back of a weak exchange rate. Consumer confidence recovered in early 2015 as a result of lower petrol prices and the delay in the second sales tax rise, supporting increased activity. The average forecast of 2015 growth has remained at 1.1% since December, but the 2016 outlook has been revised up 0.7% points to 1.7%.

Australia’s growth remains below trend...

The Australian economy grew 0.5% in Q4, bringing growth in 2014 to 2.7%, in line with market expectations. Business investment fell, but low interest rates boosted household consumption and dwelling investment. Data point to continued steady growth in the interest rate-sensitive sectors in early 2015, supported by higher consumer confidence and solid house price growth. However, employment growth has slowed since Q4 and the unemployment rate in February (6.3%) was above its Q4 average (6.2%).

...and China lowered its growth target

China’s growth was relatively weak in early 2015, reflecting restraint in local government spending, the government’s anti-corruption policy, falling house prices and relatively tight monetary conditions. The government lowered its 2015 growth target to “about 7%” (from 7.5%) and stated the need for deeper reforms to ensure sustainable growth in the long term. Annual inflation rose to 1.4% in February from 0.8%, but was still lower than the government’s target of “about 3%”. To achieve the growth target, analysts expect continued yet cautious monetary easing by the People’s Bank of China.

The outlook for other East Asian economies has weakened, driven by a downgrade to China’s growth forecasts. Country-specific factors also contributed, including slow structural reforms and lower commodity export prices. Soft data led to policy rate cuts by the central banks of Korea (to 1.75%), Thailand (1.75%), and Indonesia (7.5%).

Monetary policy still expected to diverge...

Monetary policy in the advanced economies continues to diverge, although the disparity in policy outlooks narrowed, which reflects the slightly more balanced economic outlooks. The US Federal Reserve’s (Fed) March statement confirmed its intention to raise its policy rate in the second half of 2015. However, the Fed signalled a more accommodative outlook over the next two years than previously, noting recent soft data and revising down its forecasts of GDP growth, inflation, and the Fed Funds rate. Meanwhile, markets expect the Bank of England to leave policy steady over 2015, contrasting with earlier expectations of tightening.

The ECB began its QE programme on 9 March, indicating its willingness to buy assets with negative yields. The Bank of Japan sustained its QE, and stated that the programme will continue for as long as necessary to achieve 2% inflation. The Reserve Bank of Australia held its policy rate at 2.25% as it waits for more data to assess the economic outlook, but signalled further easing in coming months.

...leading to more contrasting market moves

US markets were volatile in early March, as expectations of Fed tightening rose in the lead-up to the Fed’s statement. The 10-year US Treasury yield rose to a three-month high of 2.2%, before falling below 2.0% following the release of the Fed’s statement, and the S&P500 declined from its all-time high. Meanwhile, sentiment was buoyant in euro area markets, with the Stoxx600 up 1.9% as investors shifted to higher-yielding assets, following a 5-10 bps reduction in 10-year bond yields across the euro area as the ECB’s QE boosted bond demand. Brent crude oil prices reversed their increase in February, tumbling 13% to $US54/bbl over the course of March, and iron ore prices fell 12% over the same period, owing to high levels of inventories and USD appreciation (which dampened prices expressed in USD).

Figure 8: Trade-weighted exchange rate indices
Figure 8: Trade-weighted exchange rate indices.
Sources: Haver

Currency moves also reflected the divergence in global monetary policy. The USD rose 4.3% in trade-weighted terms since the start of 2015 (Figure 8), driven by an 11% appreciation against the EUR and was also higher against the commodity-based currencies. The NZD TWI initially fell in the first half of March, owing to depreciation against the USD, before rebounding later as the USD showed some weakness and the NZD rose to post-float highs against the AUD and EUR. The NZD TWI was at 79.1 towards the end of the month, higher than its February average (77.2).

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