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Monthly Economic Indicators

Analysis

Business confidence bounces back…

Business confidence in the National Bank Business Outlook (NBBO) lifted strongly in May, with a net 38 percent of respondents expecting better economic times over the year ahead. The increase followed a similar-sized increase in April, returning confidence to around levels seen prior to the February earthquake. Optimism in the survey was broad based, with profit expectations, investment and employment intentions all rising above their long-run averages. Firms’ own activity outlook (a better indicator than confidence for economic growth), also rose strongly, returning to around pre-earthquake levels (Figure 1).

Figure 1 – Own activity outlook and GDP
Figure 1 – Own activity outlook and GDP.
Source: National Bank, Statistics New Zealand, Treasury

Figure 1 shows high activity expectations in early 2010 failed to translate into increased economic growth. The degree of consolidation by the household and agriculture sectors surprised many firms and was compounded by a series of negative events over the latter part of the year. Unlike 2010, the factors expected to drive the economy over the year ahead appear more certain; the Rugby World Cup is scheduled to take place in the second half of the year and the earthquake rebuild is expected to gather momentum from early 2012.

… supported by rising business credit

Business credit continues to expand as firms and banks increasingly have more confidence in the economic recovery. Since falling to a trough in September 2010, seasonally-adjusted business credit has expanded for seven consecutive months. Credit growth slowed rapidly from the onset of the recent recession as businesses, along with households, looked to pay down debt in order to strengthen their financial position. While growth is modest, up 3.4% since September and 1.1% on an annual basis (Figure 2), businesses appear to be resuming investment after projects were postponed or cancelled during the 2008/09 recession and in the following year.

Figure 2 – Credit growth
Figure 2 – Credit growth.
Source: Reserve Bank of New Zealand

Service and manufacturing indicators up

The BNZ-BusinessNZ Performance of Services Index indicated growth lifting in the service sector in April, rising 1.5 points to 52.6 on the back of an increase in new orders/business (over 50 indicates expansion). While the index has pointed to increased activity in each month for the past year and a half, the rate of expansion has risen since the start of the year, providing momentum into the June quarter. Services activity is expected to expand over the second half of the year, thanks to recovering activity and increased tourist spending as a result of the Rugby World Cup.

Similar to the services measure, the BNZ-BusinessNZ Performance of Manufacturing Index pointed to activity expanding in April, with the seasonally-adjusted measure rising to 51.5 following the earthquake-affected 50.2 read-out in March. Manufacturing activity plummeted over the recession but is expected to grow relatively strongly in the near term, supported by stronger trading-partner growth and a cross rate with the Australian dollar that has been well below its long-run average for many months. The composition of New Zealand’s exports is becoming increasingly weighted towards the Australian economy and fast-growing economies in emerging Asia (particularly China). In the recent Budget, we forecast exports of goods and services to grow 2.5% per annum on average over the next four years, constrained by a high currency over the year ahead and long lags to export volume growth, particularly for agricultural products.

Record trade surplus for April month…

Goods exports to China rose 27% on year-ago levels, helping drive the largest monthly trade surplus on record in the April 2011 month. Compared to April 2010, total goods exports rose 17% on the back of large increases for dairy products, meat and forestry, helped by surging commodity prices. Import values rose significantly less than exports (up 7% on April 2010), with higher prices for crude oil imports accounting for most of the increase.

… driven by strong commodity prices

Export price increases outstripped rising import prices for the sixth consecutive quarter in March, lifting the merchandise terms of trade (the ratio of export to import prices) 0.9% in the quarter to reach a new 37-year high. Surging demand over the past two years has driven higher prices across a range of hard (eg, minerals) and soft (eg, food) commodities; with New Zealand’s goods exports weighted significantly more towards commodities than goods imports, this has driven the terms of trade to multi-decade highs. In addition, the latest ANZ Commodity Price Index and Fonterra online auctions (and forecast payouts) suggest commodity prices may be consolidating at these high levels. However, very recent developments in global growth point to some easing in commodity prices, as expected in the Budget.

Producer price inflation picking up…

Rising commodity prices are flowing through to higher input and output prices for producers. The Producers Price Index (PPI) for outputs rose 1.7% in the quarter and 4.3% in the March 2011 year, led by higher prices in primary and manufacturing industries. The recent run-up in international milk prices flowed through to output prices for dairy processing while rising commodity prices, more generally, were evident in output price movements across a range of sub-industries.

With large commodity price swings driving PPI output inflation in recent years, the headline figure has been less relevant to firms with non-tradable goods and services. Estimates of tradable and non-tradable industries in the PPI suggest that while output prices for tradable industries rose sharply over 2010 and remain high, output prices for non-tradable industries have remained low by historical standards, in line with the weak domestic trading environment (Figure 3).[1]

Figure 3 – Output price inflation
Figure 3 – Output price inflation.
Source: Statistics New Zealand, Treasury

The PPI inputs index rose 2.2% in the quarter and, similar to the outputs index, was driven by commodity price rises. On an annual basis, the 5.3% lift in input prices outstripped the 4.2% rise in output prices, indicating material inputs are placing pressure on profit margins. However, inflation for other inputs has either been falling (capital goods) or weak (labour costs) recently, helping to limit average inflation for firms’ inputs.

… but capital goods prices remain flat…

The Capital Goods Price Index remained flat in the March 2011 quarter, recording a 0.2% increase, with prices down 0.1% in the March 2011 year. While commodity prices have driven up input prices, a subdued construction sector and a rising exchange rate - reducing price pressure for imported capital goods - have resulted in flat prices overall for capital goods in recent quarters. Capital goods price inflation is expected to remain subdued in the near term, reflecting a continuation of these factors for the remainder of 2011. However, the medium-term outlook is for stronger capital goods price inflation, reflecting a strong pick-up in the construction sector as a result of the Christchurch rebuild and a forecast fall in the exchange rate from the start and middle of 2012 respectively.

… and labour cost growth weak, but rising…

Measures of salary and wage growth in the March 2011 quarter were generally soft, but lifting from cyclical lows. The Labour Cost Index (LCI) showed salary and wage rates for a fixed quality and quantity of labour rising 1.8% in the year to March 2011. The latest outturn is weak by historical standards but continues to edge higher from the 1.5% low recorded a year earlier. The recovery in wage growth is being driven by the private sector, with public sector wage growth levelling off (Figure 4).

Figure 4 – LCI – total salary and wage rates
Figure 4 – LCI – total salary and wage rates.
Source:  Statistics New Zealand

…reflecting the labour market recovery

Labour market data for the March 2011 quarter did not capture the impact of the 22 February earthquake, owing to timing and data collection issues, but provided an indication of ex-earthquake labour market activity. Employment surged 1.4% (or 30,000 workers) in the quarter, significantly greater than expectations and taking the level beyond the late-2008 peak to 2.21 million. Full-time jobs continued to lift, but a 4.0% rise in part-time employment was the main driver of the headline figure. With the number unemployed falling slightly, the unemployment rate fell to 6.6% from a revised 6.7% in the previous quarter (Figure 5).

Figure 5 – Unemployment and participation rates
Figure 5 – Unemployment and  participation rates.
Source: Statistics New Zealand

Higher demand for labour drew more people into the labour force, with the participation rate rising sharply from 67.9% to 68.7%. The first of our special topics looks at recent trends in labour force participation. As in the Budget 2011 forecasts, we expect the unemployment rate to lift slightly to 6.8% in the current quarter, as the resumption of Christchurch surveying is reflected in higher unemployment. We expect the labour market to strengthen from the second half of the year and tighten rapidly over 2012, reflecting momentum increasing in the Christchurch rebuild. The extent of the Christchurch rebuild is likely to place upward pressure on resources and nontradable inflation over 2012 and 2013.

Inflation expectations lift sharply

The Reserve Bank’s Survey of Expectations showed two-year-ahead inflation expectations lifting from 2.6% in February to 3.0% in May – the largest percentage point increase and the highest outturn for over 20 years. Over the past decade, inflation expectations (and inflation) have trended up, with the two-year-ahead measure now at the top of the Bank’s 1-3% target range (Figure 6).

Figure 6 – Inflation and inflation expectations
Figure 6 – Inflation and inflation expectations.
Source: Reserve Bank of New Zealand, Statistics NZ

The May survey is the first since the 22 February earthquake so a significant proportion of the increase in inflation expectations is likely owing to respondents factoring in higher utilisation of resources (and consequent inflation pressure) as the Christchurch rebuild picks up in intensity. This theme was evident in the NBBO (discussed earlier), which showed elevated construction intentions, the capacity utilisation measure rising to a 9-year high, and pricing intentions heading back to mid-2008 levels.

Movements in the series can be influenced by sharp price changes, particularly for petrol. Between the February and May surveys, petrol prices rose above $2.00 per litre, peaking at $2.22 around the time the survey was conducted – a large 3-monthly increase relative to history. Finally, current inflation can also be a driver of expectations. At 4.5%, inflation is well above the 1-3% target and, although just under half of this can be attributed to the 1 October rise in the GST rate, the high headline level may also have been a factor.

Looking ahead to the August survey, the recent trend has been falling petrol prices, with prices down sharply in recent weeks. Some of this decline can be put down to the strengthening currency, which recently reached a post-float high against the US dollar and will reduce inflationary pressure on other tradable goods and services in coming months. In the Budget, we forecast annual inflation to peak at over 5% in the current quarter, before falling to 2.5% in June 2013, ie two years out. The Reserve Bank’s next Monetary Policy Statement is due for release on 9 June.

Consumer confidence remains weak…

In contrast to business confidence bouncing back in recent months, consumer confidence has failed to rebound. The ANZ Roy Morgan measure remained stuck in a range of 101-103 in the three months to May after being as high as 117 in January (over 100 indicates optimism).

Unlike the single forward-looking question measuring business confidence in the NBBO, the headline consumer confidence measure comprises a mix of current and forward-looking questions. Similar to businesses, confidence around future conditions has risen in recent months (albeit modestly), but the headline measure has been held back by declining perceptions around current conditions. History shows consumers tend to be over-optimistic, with expectations of future financial positions more positive than perceptions of current conditions; the gap has widened since the onset of the recession, driven by lower current perceptions (Figure 7).

Figure 7 – Consumers’ financial positions
Figure 7 – Consumers’ financial positions.
Source: ANZ Roy Morgan

… tempering high business confidence

The relationship between consumer confidence and private consumption is relatively strong, with the latter making up over 60% of expenditure GDP. As the latest confidence data suggests, consumers remain cautious and, as noted in the recent Budget, we expect this to be a theme over the medium term. Debt positions remain very high by international standards and we consider the consolidation process, that has been in place for around three years, still has longer to run. While the Christchurch rebuild will provide a boost to the economy, particularly for the construction sector, activity in other nontradables industries across New Zealand is not expected to benefit to the same extent.

World recovery loses some momentum...

May saw a loss of momentum in the world economy, with data releases mainly weaker than market expectations. The softer data, concerns around China’s growth and increasing inflationary pressures have all contributed to the slowdown. However, we do not see this as the start of another downturn, more as a temporary lull.

US growth took markets by surprise, with March quarter growth only 0.5%; markets had expected much more than the annualised 1.8% rate. The UK failed to rebound significantly from its December quarter weather-related slump, with growth only recovering the 0.5% fall in March. Japan fell into a recession as the devastating earthquake and tsunami significantly affected output, after an already weak December quarter.
The Australian economy contracted 1.2% in the March quarter, although this was mainly due to a negative contribution from net exports, attributed to adverse weather events in January (Queensland floods, Cyclone Yasi). Despite this, domestic demand was actually stronger than expected. We expect Australian growth to rebound in the June quarter, as coal and other exports recover, and strong investment, mainly in the mining sector, provides stimulus.

Euro area growth was stronger than anticipated, at 0.8% in the March quarter, although large disparities are apparent between the major Euro countries (Germany, France), and the periphery. For example, Germany has grown 5.2% over the last year, compared to Greece’s -4.8%. These disparities create tensions around monetary policy and wider policy issues, such as how to make some of the smaller countries more competitive when they are unable to devalue their currency.

... but indicators still positive

The loss of momentum is apparent in indicators such as manufacturing Purchasing Manager Indices (PMIs) and the US version, the ISM. PMIs around the world fell during May, particularly in Europe and the US (Figure 8), indicating a slowing in growth, but not a fall in output, as most PMIs around the world remain at an expansionary levels (apart from Australia). China’s PMI fell slightly in May, but remains above 50. The OECD’s recent economic outlook report reiterates that they see the global recovery as becoming more self-sustaining, but with significant risks. One of the risks they identify is the relationship between fiscal consolidation and economic growth; a special topic discusses this issue.

Figure 8 – Selected manufacturing PMIs
Figure 8 – Selected manufacturing PMIs.
Source: Datastream

Higher inflation negatively impacting growth

Rising world inflation has been negatively impacting on growth through rising oil and food prices over the first half of this year, putting pressure on disposable incomes throughout the world. However, underlying inflation has been more subdued. This has been evident in the large difference between headline and core inflation (headline inflation excluding food and energy). For example, the current headline inflation rate in the US is 3.2%, whereas the core rate is much more subdued at 1.3%. Core inflation, the price measure preferred by many central banks, has remained relatively low, allowing them to hold policy rates. We do, however, see rate hikes as inevitable due to increasing underlying inflationary pressure as economic slack is used up, particularly in Australia, the UK, the Euro Area and many developing countries in Asia.

Commodity and equity markets fall in May

China is one economy where monetary tightening is well underway already as inflation reached 5.3% in April, with five reserve requirement ratio hikes so far this year, as well as policy rate increases and quantitative controls. This tightening continues to concern markets; as China is the main driver of world growth, a hard landing would result in a large fall in demand. These concerns contributed to the fall in equity and commodity markets during May. WTI oil prices fell around $16 per barrel, although they have recovered somewhat from their low. Other commodities have declined too, as negative sentiment gathered momentum. So far, New Zealand’s main export commodities have not been adversely affected.

Equities also fell, but less than in May 2010. US 10-year Treasury yields fell below 3.0%, levels not seen since December last year, as demand for government bonds increased. As some positive sentiment returned (helped by some stronger-than-expected NZ data) later in the month, NZ government bond yields fell to around 5.12% from 5.63% in late April and the NZD peaked at US 82.6 cents in early June.
The Euro area continues to keep markets on edge, particularly the situation in Greece. There has been speculation of a possible restructuring of debt, with bond-holders possibly having to take a “haircut” (receive less than the amount invested). Officials have been quick to quell fears, but the future remains uncertain. Portugal’s bailout package was confirmed, with further cuts to spending and tax hikes included as conditions.
Overall, the international outlook remains broadly unchanged from our Budget 2011 forecasts, although the balance of risks has shifted slightly towards our scenario based on slower global growth arising from high inflation and monetary tightening.

Economy on track, as expected in the Budget

May’s data reveal an economy that is currently fairly flat, but both consumers and businesses are confident that better times lie ahead. The relatively stronger forward-looking outlook from businesses is likely a reflection of a more robust trading environment for tradable industries, with agriculture and manufacturers benefitting from high world commodity prices and exposure to the Australian economy respectively. All up, these data suggest the recovery will continue to be business-led, with households following as employment and income growth lift, as expected in the Budget.

Notes

  • [1]Tradable estimate includes agriculture, mining, and manufacturing. Nontradable estimate includes all other industries although they will be tradable to some extent (eg, tourism).

 

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