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Monthly Economic Indicators

Analysis

The economy appears to have maintained solid momentum over the first half of the year. Labour demand was very strong in the March quarter but rapid labour force growth led to unemployment rising in the quarter. Robust real wages, along with high migration and tourism inflows, supported retail spending in the March quarter. Costs faced by businesses remain subdued but there are signs of increased price pressures. The OTI goods terms of trade rose in the March quarter and net exports have held up better than expected. On balance, the economy appears to be doing slightly better so far this year than anticipated in the Budget Update.

Employment growth was robust in the March quarter…

According to the Household Labour Force Survey (HLFS), the number of people employed rose by 1.2% (or 28,000) in the March 2016 quarter – substantially stronger than forecast in the Budget Update (0.5%) and expected by the market (0.7%). This took annual employment growth to 2.0% (47,000), as negative growth over mid-2015 weighed on the annual figure with the series volatile on a quarterly basis. Details of the quarterly growth were also positive, with 75% of jobs growth in full-time employment and Quarterly Employment Survey (QES) measures of labour demand painting a similar picture (Figure 1).

Figure 1: Labour demand
Figure 1: Labour demand.
Source: Statistics NZ

By industry, construction continued to expand rapidly while professional services was also up strongly, each contributing 17,500 jobs over the past year. Jobs growth in construction is being increasingly driven by Auckland, as the residential part of the Canterbury rebuild has plateaued and as Auckland building activity increases.

…but even stronger labour supply…

The working-age population increased by 0.8% (21,000 people) in the March quarter, to be up 2.5% in the year. This is the fastest pace of annual growth recorded in the HLFS and is chiefly owing to record high net migration. In addition, better job prospects (2.2% jobs growth in the past six months) are encouraging more people to look for work, with the participation rate up 0.5% points to 69.0% in the quarter as a result. Overall, higher participation and strong growth in the working-age population led to the labour force rising a record 1.5% in the quarter. However, labour force growth can be volatile and flat outturns in mid-2015 dampened annual growth to 2.0% (Figure 2).

Figure 2: Labour market performance
Figure 2: Labour market performance.
Source: Statistics NZ

…led to a rise in unemployment

The increase in the labour force more than offset strong growth in employment, which led to the unemployment rate rising to 5.7% from 5.4% in the December quarter (Figure 2). Although the unemployment rate was a little higher than forecast, it does not materially change the labour market outlook. As in the Budget Update,we continue to expect unemployment to remain a little below 6.0% this year, as labour force growth and employment growth remain broadly balanced. Labour market indicators, such as hiring intentions and job ads, point to positive employment growth over 2016, albeit moderating from recent strength. The labour supply outlook also remains solid, with ongoing high net migration expected to continue but possibly easing (discussed below).

Real earnings growth remains robust…

Increasing labour supply and consistently low inflation are keeping earnings growth moderate. Annual average hourly earnings growth picked up to 2.4% in March from 2.1% in December, owing to an increase in public sector wage growth (boosted by police and health sector settlements), but a fall in average weekly paid hours led to annual average weekly earnings growth easing to 2.3% in March from 3.1% in December. This, combined with slightly slower growth in full-time equivalent employees, resulted in total weekly gross earnings growth moderating from 6.0% in December to 4.8% in March. Inflation of just 0.4% indicates robust real earnings growth, which is positive for real consumption growth.

…driving healthy retail spending in March…

Retail spending started 2016 on a solid footing, supported by robust income growth, a resurgent housing market, low interest rates, high visitor arrivals and rapid population growth. Total retail sales volumes rose 0.8% in the March quarter, down slightly from the December quarter, but consistent with our expectation of robust, albeit slightly softer, private consumption growth in the first quarter of 2016 (0.8%).  In value terms, total sales rose a more subdued 0.6%, dampened by lower fuel and apparel prices.
Volume growth for core retail industries was slightly stronger at 1.0%, as lower fuel and vehicle sales detracted from total sales. Some of the core spending growth is likely to be attributable to tourism, as visitor arrivals continued to increase in the quarter.
Falling fuel prices (down 7.5% in the March 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 may dampen spending growth in the June quarter. However, the expansion in sales was relatively broad-based (11 out of 15 industries rose) and April total electronic card transaction values were up 1.5%, suggesting spending growth is unlikely to be dampened significantly by rising fuel prices (increased around 2% in April and up further in May).

…supported by the resurgent housing market…

Momentum in the housing market continued from March into April following a pause in the December quarter as the market adjusted to regulatory changes. The Real Estate Institute of New Zealand’s (REINZ) figures showed national house sales rose 9.8% in April (seasonally adjusted), to be 18.4% higher than a year ago (Figure 3). The monthly rise was led by Auckland, although declines in the five months to February left sales up only 2% on an annual basis.

Figure 3: House sales
Figure 3: House sales.
Sources: REINZ

The national stratified median house price index rose 2.2% (s.a.) in April, also led by Auckland. On an annual basis, national house prices were up 14.5%, the highest pace since the regulatory changes were introduced in the December quarter, as house prices in Auckland and other North Island areas continued to pick up. That said, at an annual pace of 14%, Auckland house price inflation is about half the peak it reached last year.

…and record high migration and tourism

Net migration inflows reached 68,100 in the year to April, their twenty-first consecutive record high. At 5,500, seasonally adjusted monthly net inflows were up slightly from March, as a bounce-back in arrivals more than offset a pick-up in departures. However, monthly net inflows have eased from 6,000 in February and, if they continue at this level, the annual total will reach a turning point in mid- to late-2016 (Figure 4), in line with our Budget Update forecast of a turning point in the September quarter. There was a seasonally adjusted net outflow of around 100 to Australia in April, the first since March 2015, reflecting the recent stronger performance of the Australian labour market. Student arrivals, which were a significant driver of arrival growth, have also been lower than a year ago for several months.

Seasonally adjusted international visitor arrivals fell 1% in April, due to a pull-back following the Easter holidays in March. However, April arrivals were a new record for the month and the trend continues to rise.  Arrivals were 10.6% (312,500) higher in the year ended April 2016 than the prior year, contributing to robust retail spending and labour demand.

Figure 4: Net migration flows
Figure 4: Net migration flows.
Source: Statistics NZ

Indicators suggest the June quarter started solidly…

The BNZ-BusinessNZ Performance of Services (PSI) and Performance of Manufacturing Indexes (PMI) suggest both sectors made a solid start to the June quarter.  The PSI rose to 57.7 in May from 55.1 in April, while the PMI ticked up to 56.5 from 54.7 (a PSI/PMI reading above 50 indicates the sector is expanding).

Business confidence was also up from the previous month in the May ANZ Business Outlook (ANZBO) while firms’ own activity expectations showed no marked change, with the latter pointing to around trend growth continuing through 2016. Consistent with this positive view, profit expectations, and employment and investment intentions all edged higher to sit close to their historical averages.

…although some easing indicators suggest weaker patches in the second half of 2016

According to the ANZ-Roy Morgan consumer confidence survey, consumer confidence eased a little further in May to 116.2. The outturn is slightly below the historical average and consistent with softer, albeit still moderate, consumption growth over the second half of 2016.

The trend for residential building consents continued to decline in April due to further weakness in apartment consents. However, consents for stand-alone dwellings continued to rise strongly, up 15% in the month.

Price outlook remains weak…

The RBNZ’s June 2016 Quarterly Survey of Expectations revealed a marginal lift in inflation expectations from the March quarter. Even so, at current levels, expectations remain near historical lows. The one-year-ahead measure edged up to 1.2% from 1.1% in the March quarter, while the two-year-ahead was broadly flat at 1.6% (Figure 5).

Figure 5: Business costs and expectations
Figure 5: Business costs and expectations.
Sources: RBNZ, Statistics NZ

Low inflation expectations are consistent with the moderation, and in some cases decline, in businesses costs. The Labour Cost Index (LCI), which measures changes in wages and salaries for a fixed quantity and quality of labour, increased 1.6% over the past year, while the producers’ price input index fell 1.0% in the March 2016 quarter, to be down 0.9% 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 lower electricity and gas prices. Excluding those falls, input cost pressures were still weak.

…although there are some signs of rising price pressures

Capital goods prices continue to rise, up 3.1% in the year to March. Construction costs remain the key driver, with plant, machinery and equipment costs also rising.  Higher construction costs were also evident in ANZBO firms’ pricing intentions, which ticked up in May to a net 22% from a net 16% in April; the lower NZ dollar in the month and higher fuel costs may have also contributed. In addition, there are signs of emerging wage pressures, with the private sector unadjusted LCI (ie, including productivity increases) accelerating to 3.1% (from 2.8%) and a higher share of pay rates recording an annual rise (up from 60% in December to 66%).

Overall, these indicators suggest consumer price inflation will remain low in the near term, as indicated in the Budget Update. That said, the March quarter annual outturn, at 0.2% points higher than our Budget Update forecast, and fuel prices rising faster than anticipated will lead to slightly higher inflation over the rest of 2016.

Trade deficit trends wider...

Overseas merchandise trade data showed a $163 million deficit for April, narrower than the $483 million deficit recorded in March, although the narrowing is likely due to monthly volatility (March export values were unusually weak) with the trend still towards a widening deficit. However, the annual deficit narrowed slightly from March to $3.7 billion. Treasury expects the annual trade deficit to widen in coming months, with the current account deficit increasing to 3.5% of GDP in the June 2016 quarter from 3.1% in December, as lower dairy prices flow through and meat export volumes fall following earlier-than-usual livestock slaughter.

...while the goods terms of trade rises…

Overseas trade indexes showed the merchandise terms of trade rose 4.4% in the March quarter (Figure 6), owing to a broad-based fall in import prices (-4.3%), while export prices were largely flat. On the volume side, exports fell 2.7% in the quarter while imports fell 0.7%. Overall, the external sector appears to be more supportive of income and output growth than forecast in the Budget Update.

Figure 6: OTI goods terms of trade
Figure 6: OTI goods terms of  trade.
Sources: Statistics NZ

...and dairy prices stabilise in final auctions of season

Dairy prices rose modestly at GlobalDairyTrade (GDT) auctions in May, the final month of the dairy season. The GDT price index rose 1.2% in the month to around the 2016 year-to-date average, consistent with our expectation of flat to marginal rises in dairy prices over 2016. The GDT price index rose 3.4% at the first auction in June, but whole milk powder prices were down 1.7%.

Fonterra announced an opening farm gate milk price of $4.25/kg of milk solids for the 2016/17 season, slightly below expectations. However, Fonterra is looking to offset some of the cash flow effects of the low headline price with increased advanced payments (see the Special Topic: Outlook for the Dairy Sector for further discussion).

On balance, slightly more positive outlook than Budget Update

Overall, outturns released since the Budget Update forecasts were finalised on April 13 – chiefly the labour market, inflation, and the terms of trade – suggest that the economy is tracking slightly better than expected. The more positive than expected outlook, in addition to the resurgent housing market, has contributed to the market pushing back expectations of OCR reductions by the RBNZ.

April GST and source deductions outturns were a little higher than the forecasts presented in the Budget Update, and reinforce the view of the domestic economy performing slightly better than expected. On the other hand, company tax revenue was significantly below forecast but we expect some of this to reverse by the end of June as there appear to be a number of large income tax assessments that are yet to be filed. 

Steadier global markets and economic growth

Financial markets stabilised in May with risks to the global economy declining to some extent. Commodity prices generally rose over the month, with the rebound in WTI oil prices to an average of around $46/bbl relating more to supply disruptions than higher demand. Equities broadly strengthened over the month, bond rates rose and the USD appreciated as markets re-evaluated the prospect of a June rate hike to around 60%. The AUD moved in the opposite direction, falling significantly following the May RBA cut. As a result, the NZD fell against the USD but rose against the AUD. 

March quarter growth in our main trading partners was moderate but positive. Outturns surprised economic commentators more positively recently, in contrast to earlier in the year (Figure 7, where a figure above zero indicates data were better than expected). The 2016 Budget Update forecasts are for slow but increasing trading partner growth, as strengthening growth in most economies offsets slower growth in China, while the risks of a weaker world are covered in a scenario.

Figure 7: Citigroup Economic Surprise Index
Figure 7: Citigroup Economic Surprise  Index.
Source: Haver

Some positive US data raise expectations of continued Fed tightening…

Several indicators of US activity were stronger than expected: April personal spending, retail sales and industrial production rose well above expectations, the housing market remained buoyant, and the labour market remained strong (with the unemployment rate stable at 5.0% and annual wage growth of 2.5% in April). The Federal Reserve’s preferred measure of core inflation was 1.6% in the year to April, and it has indicated that an increase in its funds rate would be “appropriate” in coming months. Markets have priced in almost a full rate increase by July.

However, some indicators of activity were weaker. Non-farm productivity and payroll growth were softer than expected in April and core capital goods orders fell. Consumer confidence and the May manufacturing and services PMIs remained subdued, but some commentators anticipate a rebound in second quarter activity.

…and euro area growth lifts slightly

Euro area growth was a positive surprise. March quarter GDP grew 0.5%, up from 0.3% in the previous quarter, driven by domestic demand (Figure 8). That said, activity towards the end of the quarter appeared lacklustre, with industrial production and consumer demand (retail sales and imports) falling in March, and the unemployment rate unchanged at 10.2% in April. Against this backdrop of slowing activity, annual CPI inflation remained negative in May at -0.1% (core 0.8%). The manufacturing and services PMIs were little changed and consumer confidence was steady in May.

UK growth steady before Brexit referendum

March quarter GDP growth in the UK was unchanged at 0.4%. Growth was predominantly driven by private consumption, which grew 0.7% in the quarter, supported by a labour market that remained near capacity (the unemployment rate was unchanged at 5.1% in the March quarter). Investment grew only 0.4% in the quarter, in line with falling industrial production (down 0.3% apc). This weakness is likely to continue in light of low recent manufacturing and services PMIs. The Bank of England voted unanimously to keep its policy rate unchanged at 0.5% as consumer prices grew only 0.3% in the year to April (core inflation at 1.2%), and in face of uncertainty around the Brexit referendum (23 June).

However, a rise in Japan’s GDP growth is unlikely to be sustained…

Despite an upwards surprise in Japan’s first quarter GDP, further monetary stimulus is still expected. Japan’s GDP growth in the March quarter rose to 0.4% from -0.4% in the previous quarter. Growth was driven by private and government consumption, while private investment contracted. This growth is regarded as temporary, with the Kumamoto earthquakes, appreciation of the yen in April and weak consumer confidence likely to weigh on future outturns. The most recent outturns show retail sales growth was flat in April, industrial production grew 0.3% (better than expected, but still low), and consumer prices fell 0.3% in the year to April. Although core prices (ex food and energy) rose 0.7%, monetary policy may be eased further as consumer demand remains subdued. In early June, PM Abe postponed the sales tax increase from April 2017 until October 2019 and hinted at more fiscal stimulus.

…and China’s state-backed growth eased

Growth in China eased in the first quarter, and has continued to moderate. Both industrial production and retail sales growth fell in April, and imports and exports declined in the year to April.  Consequently price pressures were subdued; consumer price inflation remained at 2.3% for the year to April, below target, and producer prices fell 3.4% in the same period. China’s official manufacturing PMI was steady in May, but the services and Caixin manufacturing PMIs both fell slightly and consumer confidence dropped, indicating weaker future activity.

Government stimulus has, to date, been liberal. Although fixed asset investment growth eased to 10.5% in the year to April, it was supported by state-owned enterprise investment, which increased 23.7%. This investment appears to be supported by government borrowing, which surged in April amidst falling lending in China generally.

Figure 8: Trading partner economic growth
Figure 8: Trading partner economic growth.
Source: Haver

Australia’s growth solid, despite falling investment

Australian first quarter GDP growth surprised at 1.1% (0.8% expected) (Figure 8). Exports led growth, as volumes surged 4.4% in the quarter, reducing the current account deficit 0.5ppts to 5.0% of GDP. Private consumption was also robust, in line with above-expected March retail sales growth and a strong labour market (with 2.1% annual employment growth and unemployment at 5.7%). Business investment was the main detraction from growth, as capital expenditure fell 5.2% in the quarter.

The Reserve Bank of Australia cut its policy rate by 25 basis points to 1.75% at its May meeting following a surprise low inflation outturn, which led the Bank to cut its inflation forecasts from 2-3% to 1-2% for 2016, in line with a now internationally common ‘lower for longer’ inflation outlook.

On balance, global risks declining

Broader risks to global economic growth have decreased slightly. Euro area finance ministers agreed to release a further €10.3bn in bailout funds to Greece, Brexit appears less likely in most polls (average 53% vote for Remain, although this may have changed recently), and the US Federal Reserve is expected to tighten policy again as inflation and the labour market continue to strengthen. Risks remain on the policy front, in particular around the Chinese government’s balance between stimulating short-term growth and supporting future economic stability.

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