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Monthly Economic Indicators

Analysis

Economic developments over the month of May reinforce the key themes underpinning the Budget Economic and Fiscal Update (BEFU).  That is, solid real economic activity in a low inflation environment. 

Employment continues to rise...

According to the Household Labour Force Survey (HLFS), the number of people employed rose by 0.7% (or 16,000) in the March 2015 quarter - stronger than forecast in the BEFU, but slightly weaker than expected by the market. In the past year employment has grown by 3.2% (74,000), close to a 10-year high (Figure 1).  The details were also strong, with most of the growth in full-time employment, up 0.6% in the quarter (or 11,000) while part-time employment was flat.

Figure 1: Working age population, labour force and employment growth
Figure  1: Working age population, labour force and employment growth.
Source: Statistics NZ

Construction continues to account for close to a third of the annual growth in employment (adding 23,300 jobs), with most of that occurring in Canterbury and Auckland.  Auckland is now dominating the national growth in jobs, accounting for almost half of the annual increase. 

...as does labour supply...

The working age population increased by a sizeable 0.6% (20,000) during the March quarter, to be up 2.1% in the past year.  This is the strongest annual growth since 2004 and is being fuelled by record high net migration.  Meanwhile, better job prospects are also encouraging more people to look for work.  The participation rate reached a record high of 69.6% in the March quarter, up from 69.4% at the end of 2014 and higher than the 69.2% forecast in the BEFU.  Male participation led the increase in the quarter, with the male participation rate rising to an eight year high of 75.3%. The female participation rate remains close to its record high at 60.2%. 

...stemming the decline in unemployment

With growth in the labour force matching that of employment, the unemployment rate remained steady during the quarter at 5.8%.  While this is lower than the 6.0% recorded a year ago, implying a modest tightening in the labour market over that period, the unemployment rate is slightly higher than anticipated in the BEFU. 

Earnings growth modest

Earnings growth has been more modest than expected, reflecting both the additional labour market capacity and the current low inflation environment.  Annual growth in hourly earnings (as measured by the Quarterly Employment Survey) slowed from 2.6% in December to 2.1% in March. Still, with annual CPI inflation at 0.1%, real wage growth remains robust. Moreover, annual growth in weekly gross earnings rose to 5.9% (from 5.7%) owing to a 3.8% rise in weekly paid hours.

Looking forward, labour market indicators such as hiring intentions and job ads suggest employment growth will remain positive, albeit moderating from recent strength, in line with the BEFU forecasts.  As such, wage inflation is expected to pick up as the labour market tightens and the economy continues to grow above trend.  The outlook for labour supply is more uncertain.  For example, given current trends, it is possible that net migration and/or participation could prove stronger than the central forecast in the BEFU, boosting labour supply.  All else equal, this would see a higher unemployment rate and slower wage growth than currently expected. 

Another record high for net migration

There was a net inflow of 4,700 (seasonally adjusted) migrants in April, the smallest monthly net inflow so far this year. However, on an annual basis, this pushed the net inflow to a new record high of 56,500 people, chiefly owing to increased migrants from India and China (largely students) and fewer departures to Australia.  In fact, the month of April saw the first net positive inflow (of 120 people) from Australia in 24 years.  The highest net inflow from Australia since the series began in 1982 was 400 migrants in both July and August 1983.

In annual terms, the net inflow is now close to the peak of 57,000 forecast in the BEFU.  As highlighted in Scenario two in the BEFU Risks and Scenarios chapter, there is a risk that the current net migration cycle reaches a higher peak and/or has a longer duration relative to the Treasury’s central forecasts.

Strong growth in retail sales in March

Total seasonally adjusted retail sales volumes rose 2.7% in the March quarter, supported by a 3.5% rise in fuel volumes. In annual terms, retail volumes are up 7.4%, the largest increase since 2004. In value terms, sales growth was softer, rising 1.7% in the quarter (Figure 2).

Figure 2: Retail trade
Figure 2: Retail trade.
Source: Statistics NZ

Falling retail prices, particularly fuel prices (down 9.4% in the quarter), may explain some of the recent strength in retail volumes with consumers taking the opportunity to spend the cash ‘windfall’ elsewhere.  If that is the case, the rise in fuel prices over the past couple of months would be expected to dampen spending growth in the June quarter.  April electronic card transactions data lend some support to that view, with the total value of electronic card transactions falling 1.1% in April, following rises of 0.4% and 1.2% in February and March.

That said, the broad-based nature of the spending growth (all 15 storetypes saw an increase in volumes over the quarter) indicates that there is more than just a price effect at play. 

The Treasury’s assessment is that a combination of factors have come together to drive the pick-up in consumer spending, including high levels of consumer confidence, still rapid population growth, solid income growth (largely owing to stronger employment growth and hours worked), low interest rates, increased housing market activity, and the high New Zealand dollar.  Ultimately, this mix makes for a more durable outlook for consumer demand, consistent with that forecast in the BEFU.

Auckland housing market strengthens further

REINZ housing market data for April showed a 27.6% increase in house sales over the past year, although there was a small 0.5% decline for the month. While the timing of Easter and ANZAC Day may have played some part in the weakness over the month, it is notable that outside of Auckland housing activity firmed.  The number of sales excluding Auckland rose 1.5% in the month, suggesting that current low interest rates may be beginning to have a more broad-based impact. 

The REINZ national house price index increased 5.4% in the three months to April, dominated by a 9.5% increase in Auckland prices (Figure 3). On an annual basis, the national price index rose 9.3%, almost entirely owing to Auckland (up 18.9%). In contrast, prices fell in both Wellington and Christchurch, down 2.8% and 0.6% respectively.

Figure 3: House prices
Figure 3: House prices.
Source: REINZ

Housing policy changes proposed

Continued divergence between Auckland house prices and the rest of the country led the RBNZ to propose changes to its Loan to Value Ratio (LVR) policy in its May Financial Stability Report.  The changes are due to come into effect on 1 October 2015 (to allow for a period of consultation), and include capping residential property investor loans in the Auckland Council area to a LVR of 70%, and increasing existing speed limits for all high LVR borrowing outside Auckland, from 10% to 15%.

In addition, the Government has announced tighter rules around taxation of trading in investment properties and requirements for details of foreign buyers, also due to come into effect on 1 October following a period of consultation.  A new test will be introduced, meaning gains from all residential property sold within two years of the purchase date will be taxable unless the property was the seller’s principal place of residence, inherited from a deceased estate or sold as part of a relationship property settlement.  Further, buyers and sellers of all property must provide a New Zealand IRD number as part of the property transfer and non-residents must also provide their home country tax identification number, along with identification requirements such as a passport.

These proposed policy changes were not included in the BEFU forecasts as they occurred after finalisation on 10 April.  However, the impact on house price inflation is expected to be small: the RBNZ estimates its LVR measures could be expected to lower nationwide house price growth by 1%-2% points nationally; no impact on house prices was estimated for the Government’s measures.  In general, house price growth has been slightly stronger than forecast in the BEFU.  If the new measures have a small negative impact as anticipated, then these influences are likely to be broadly offsetting.

Forward indicators remain positive

Forward-looking indicators suggest domestic demand will remain healthy for some time yet.  Business confidence and firms’ own activity expectations showed no marked change from March in the April ANZ Business Outlook (ANZBO), pointing to above-trend growth continuing through 2015.  At a sector level, confidence in the agricultural industry fell with profits expected to decline, but this follows a surprise rise in March.

The manufacturing sector continued to show expansion in April, albeit at a more modest pace. The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) stood at 51.8, down 2.8 points from March.  Weakening economic conditions in Australia, the strong NZD/AUD exchange rate, and falling dairy incomes, were cited as key reasons for the decline.  Despite the moderation, the manufacturing sector has remained in expansionary territory for 31 consecutive months.  Meanwhile, the Performance of Services Index (PSI) fell by 1.1 points to 56.5.  At current levels the sector still sits firmly in expansionary territory and, with the key sales and new orders indicators remaining above 60, the short term outlook remains positive.

Inflation outlook still benign

The RBNZ’s June 2015 Quarterly Survey of Expectations revealed a small lift in inflation expectations compared to the March quarter.  Even so, at current levels, expectations remain near historic lows.  The one-year-ahead measure rose to 1.3% from 1.1% in the March quarter, while the two-year-ahead measure edged up to 1.9% from 1.8% (Figure 4). 

Figure 4: Inflation and inflation expectations
Figure 4: Inflation and inflation expectations.
Sources: RBNZ, Statistics NZ

Low inflation expectations are consistent with the moderation, and in some cases outright decline, in the costs faced by businesses.  The Labour Cost Index, which measures changes in wages and salaries for a fixed quantity and quality of labour, increased just 1.7% over the past year, while the producers’ price input index fell 1.1% in the March 2015 quarter, to be down 4.0% in the year.   Key drivers of the annual decline in input prices were falls in dairy and oil prices (the latter influencing petroleum and coal manufacturing and transport costs) and lower electricity and gas prices.  Even apart from those falls, input cost pressures were weak. 

Capital goods prices have continued to rise, but remain modest compared to previous economic expansions, up just 2.8% in the year to March 2015. Construction costs remain the key driver, with plant, machinery and equipment costs remaining relatively stable while transport costs continue to decline.  Against this backdrop it is perhaps not surprising that firms’ pricing intentions edged lower in the April ANZBO from a net 28% to a net 23%. 

Overall, these indicators suggest consumer price inflation will remain low in the near term, as indicated in the BEFU.  That said, we note that the 5% increase in petrol prices since the BEFU forecasts were finalised adds some upside to our CPI forecast of 0.2% in the year to June 2015.

Speculation of interest rate cuts increases

Expectations of monetary easing have increased since BEFU finalisation, spurred on by current low inflation and relatively benign inflation indicators.  At the time of writing, financial markets were almost fully pricing two 0.25% point cuts in the Official Cash Rate (OCR) by the end of the year.  This has led some banks to cut their fixed rate mortgages, which could provide further impetus to the housing market and consumer spending.

Trade deficit widens...

The annual merchandise trade deficit widened further in April to $2.6 billion, the largest deficit since June 2009, and chiefly as a result of lower export values, particularly dairy values.  The result is consistent with an expected widening of the annual current account deficit to around 4.6% of GDP in the June 2015 quarter, as in our BEFU 2015 forecasts. Overseas Merchandise Trade data showed a $123 million surplus for April, the smallest surplus for an April month since 2011.

...while dairy prices continue to fall

The GlobalDairyTrade (GDT) Price Index fell 2.2% in the second auction for May. Average GDT prices are now down 26.7% from their recent peak in early March 2015, which will dampen dairy export values over coming months.  Moreover, the 10.0% decline in average GDT prices since the BEFU forecasts were finalised presents some downside risk to the outlook for export commodity prices.  Scenario one in the Risks and Scenarios chapter of the BEFU canvasses the implications of weaker export commodity prices on the terms of trade, GDP and the fiscal position.

Fonterra announced on 28 May an opening farm gate milk price of $5.25/kg of milk solids (ms) for the 2015/16 season, reflecting recent auction results and the overall weak outlook for dairy markets in the near term.  This was in line with Treasury and market expectations, with bank analysts expecting the price to increase to $5.50-5.70/kg ms by the end of the season.  At the same time the 2014/15 season was revised down further to $4.40/kg ms with the forecast dividend unchanged at 20-30 cents.  While the 2015/16 milk price has increased from last season, farm revenues will be lower next season due to the smaller retrospective payments (Figure 5).  The impact on farm revenues will be particularly pronounced in July and August and farm cash flows will be tight throughout the season.

Figure 5: Fonterra farm gate revenues
Figure 5: Fonterra farm gate revenues.
Note:  Assumes 1% production growth
Sources: Fonterra, the Treasury

Previous declines in global dairy prices led to a 7.4% fall in the ANZ World Commodity Price Index for April, partially offset by price increases for meat (beef in particular), wool, pelts and apples. However, the high NZ dollar remained a constraint, with commodity prices in the NZD index falling some 8.9%.

The NZ dollar TWI is currently lower than assumed in the BEFU forecasts.  If sustained, the recent fall will help to offset the decline in commodity prices while also supporting other parts of the tradable sector.

Global bond yields increase from low levels...

The fall in the NZ dollar reflected a change in the outlook for monetary policy in New Zealand and major economies.  Firmer expectations of US monetary tightening, a re-appraisal of euro area growth prospects, and a reduced likelihood of expanded stimulus in Japan led to higher bond yields in those economies.  The US 10-year bond yield rose 0.10% points to 2.14% (Figure 6) and the German 10-year yield lifted 0.18% points to 0.55%. The NZ 10-year yield followed, up 0.33% points to 3.77%.

...as recovery in the US labour market...

The US labour market resumed its recovery following the harsh winter. Nonfarm payrolls rebounded by 223,000 in April and the unemployment rate fell 0.1% point to 5.4%, while wage growth ticked up slightly. However, other data for the June quarter were on the softer side overall. Industrial production fell in April (0.3%), while the ISM manufacturing PMI (51.5) showed muted growth, although the non-manufacturing PMI was more upbeat (57.8). Retail sales were flat in April, showing increased household caution. Annual inflation was negative (-0.2%), but core inflation was higher than expected at 1.8%.

Figure 6: 10-year government bond yields
Figure 6: 10-year government bond yields.
Source: Haver

...supported expectations of Fed tightening...

Despite soft activity in some sectors, the Federal Reserve (Fed) is expected to raise its policy rate in late 2015. Fed Chair Yellen stated that a rise in the Funds Rate in 2015 is appropriate, but spare capacity in the labour market, fiscal consolidation and slow global growth mean that monetary tightening is likely to be gradual. Markets have priced in a 25 bps rate rise by December 2015.

...and euro area rates adjust to faster growth...

Higher euro area yields reflect an improved growth outlook but also more risks in peripheral economies. Euro area GDP grew 0.4% in the March quarter (Q1), up from the December quarter (0.3%), as quantitative easing (QE) led to low interest rates and euro depreciation. The European Commission revised up its growth and inflation forecasts for 2015 and 2016. European Central Bank (ECB) President Draghi affirmed that QE will continue until the recovery is entrenched. The ECB will frontload more QE into June ahead of a period of low liquidity, leading to some declines in yields. Annual inflation remained weak in April (0.0%), due to lower fuel prices.

Greek risks remain high. Greece may not be able to meet a debt payment to the IMF in early June, especially since it met a payment in May only by drawing on its IMF reserves. The impasse between Greece and the EU over the bailout continued.

The rise in UK bond yields is partly attributed to higher political uncertainty leading up to the UK elections. Economic data point to continued albeit slightly softer recovery in the economy. Markets do not expect a rate rise by the Bank of England until at least the second half of 2016.

...while BoJ states further easing is unlikely despite a slow recovery

Japanese GDP expanded 0.6% in Q1, but details point to only a slow recovery in demand. Growth was led by a rebound in residential construction and a slower rundown in inventories. Private consumption rose 0.4%, but remains sharply lower than before the April 2014 tax rise.

However, the Bank of Japan remains positive on the economic outlook. Governor Kuroda stated that inflation is expected to pick up once the transitory impact of lower petrol prices recedes. He indicated that additional monetary easing is unlikely at this stage. Analysts are less upbeat, and many still expect further easing later in 2015.

However, PBoC cut rates to boost growth...

In China, growth in activity remained historically slow. Annual growth rates in industrial production (5.9%), fixed investment (12.0%) and retail sales values (10.0%) in April were lower than their Q1 averages. Exports declined 6.2% from a year ago owing to weaker external demand, while a 16.1% fall in imports reflects subdued domestic demand. The PBoC cut its one-year lending and deposit rates by 25 bps to 5.1% and 2.25% respectively, the third rate cut in six months. Many analysts expect further cuts to support growth, particularly given low annual inflation in April (1.5%).

...and the RBA eased monetary policy further

Australian activity picked up moderately. Retail sales volumes rose 0.7% in Q1, supported by low interest rates. Employment eased slightly in April, and the unemployment rate rose 0.1% point to 6.2%. Fast growth in dwelling approvals point to continued solid residential investment growth. However, annual growth in the wage price index was at an all-time low in Q1 (2.3%), adding to expectations of slow nominal GDP growth in 2015. The Australian Government Budget forecast a slightly larger cash deficit as a percentage of GDP for the next three years, owing to lower nominal GDP growth and tax receipts. This month’s special topic compares the New Zealand and Australian economic and fiscal outlooks.

The Reserve Bank of Australia (RBA) cut its policy rate by 25 bps to 2.0% in May. The RBA noted the recent sharp falls in export prices, weak business investment and a high AUD against some major currencies. The RBA in its latest Statement on Monetary Policy projected an ongoing period of sub-trend growth until the December quarter of 2016, a quarter later than previously forecast.

Sluggish exports weigh on Asian economies

March quarter growth in other Asian economies was mixed. Quarterly growth was strong in South Korea (0.8%) and Malaysia (1.2%), on the back of steady growth in household consumption and fixed investment. Taiwan’s GDP expanded steadily (0.7%), although as a result of a fall in imports. However, growth was historically soft for Indonesia (0.8%), Thailand (0.3%) and Hong Kong (0.4%). A common factor weighing on growth across most Asian economies was subdued growth in goods exports since mid 2014, chiefly reflecting weaker demand from China.

Key global risks persist for New Zealand

While domestic drivers of New Zealand’s growth are upbeat, slow global growth continues to weigh on the external sector. Global bond yields may rise further as US monetary tightening draws closer, reinforced by the uncertainty over Greece. Our Asian trading partners are relatively exposed to greater market volatility, presenting negative risks to the demand for New Zealand exports.

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