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Monthly Economic Indicators

Commentary

The contraction of the New Zealand economy in the first half of 2008 was reflected in the labour market in the September quarter.  Both firms and households faced higher prices and retail sales volumes declined further in the third quarter, adding weight to our view that economic activity fell slightly on an expenditure basis in the September quarter (flat on a production basis).  However, private consumption will be supported in the near term by falling costs of living and monetary and fiscal policy responses.

Global financial markets remained highly volatile in November and the availability of credit remains constrained.  The effects on the real economy became more apparent with some major economies confirming that they are now in recession.  The deepening of the downturn has prompted governments and central banks worldwide to take further action.

Labour market weakens further

The labour market continued to weaken in the September quarter, according to the Household Labour Force Survey (HLFS), as the unemployment rate increased 0.3 percentage points to 4.2%, its highest level since the December 2003 quarter (Figure 1).  Given this weakness, and the further slowdown in the economy, the unemployment rate is likely to be higher than our Pre-Election Economic and Fiscal Update (PREFU) forecast of 4.4% in the December 2008 quarter.  We now expect there to be a similar rise in the unemployment rate in the December quarter.

Figure 1 - Unemployment and Participation Rates
Figure  1 - Unemployment and Participation Rates.
Source:  Statistics NZ

Despite the weakness in the labour market, the labour force participation rate reached a record-equalling 68.7%.  The total labour force expanded by 8,000 people (0.4%) in the September quarter, and was 1.6% higher than a year earlier.  The female participation rate increased to its highest recorded value of 62.6%, but was offset by a decline in the male participation rate of 0.4 percentage points to 75.0%.  The increase in the female participation rate may be a response by households to higher costs of living over 2008 as more females remain in, or actively seek, work.

Salary and wage growth remains strong…

Annual wage growth reached record levels on the two main measures.  The Labour Cost Index (LCI), which holds the quantity and quality of labour fixed, increased 3.6% on an annual basis (Figure 2) – exceeding the previous record 3.5% rise in the year to June 2008.  Both private and public sector wage and salary rates rose 1.1% in the September quarter, and were 3.7% and 3.6% higher than a year ago respectively.   Annual growth in private sector wages and salaries is the largest recorded in the series.

Figure 2 – Wage Growth
Figure  2 – Wage Growth.
Source:  Statistics NZ

Annual growth in average ordinary-time hourly earnings increased from 5.3% in June to 5.5% in September according to the Quarterly Employment Survey (QES), which allows for the changing composition of the workforce.  The continued strong growth of wages and salaries represents the effects of past labour market strength and high inflation.  Although there still seems to be considerable momentum in wage and salary growth, we believe that the peak in this cycle is near.

…up until now firms have reacted by reducing staff hours

Firms have responded to increasing labour costs and weaker demand by reducing staff hours.  Seasonally adjusted QES paid hours fell 0.3% in the September quarter.  Correspondingly, the HLFS actual hours worked fell 0.9% in the September quarter.  A reduction of hours worked adds weight to our view that economic activity fell slightly, on an expenditure basis, in the third quarter.

Employment remains at high levels…

Employment rose 0.1% in the third quarter to 2.172 million people.  On an annual basis, employment was 1.0% higher than in September 2007.  The growth in employment in the past year was underpinned by the creation of jobs within the manufacturing (7,400), education (7,800), and health and community (6,900) industries.  A fall of employment in the agriculture, forestry and fishing industry (11,300) partly offset growth elsewhere.  This month’s Special Topic reviews the major sources of job growth over the past decade and discusses prospects for employment over the year ahead.

…but will fall in the near term

We expect that employment will fall sharply in the December quarter.  Firms’ employment intentions remained at record low levels in November with a net 21% of firms expecting to reduce staff during the coming 12 months (Figure 3), according to the National Bank Business Outlook (NBBO).

Figure 3 – Employment and Employment Intentions
Figure 3 – Employment and Employment Intentions.
Source:  ANZ National Bank, Statistics NZ

Overall, business confidence remained downbeat in November with a net 14.1% of firms expecting that their own activity will deteriorate.  Weak business confidence was echoed in firms’ outlook on profits, with a net 38.9% of firms expecting lower profits.  Investment intentions improved only slightly from an all-time low published in October, to a net 12.4% of firms expecting to invest less over the next year.

Producers’ prices continue to grow strongly…

Producer prices increased sharply in the September quarter.  Non-labour input costs increased 3.7% in the quarter and 13.6% over the year.  Output prices increased by a lower proportion as firms have found it difficult to pass on cost increases in an environment of lower demand.  Output prices grew 2.8% in the quarter, to be 9.8% higher compared to September 2007.  Although world prices for most commodities have already peaked, local producers are still facing cost increases due to delays in the pass-through of spot commodity prices and/or falls in the exchange rate.

Higher world crude oil prices helped push up the wholesale trade index by 8.1% and 4.3% for input and output prices respectively.  Dairy cattle farm output prices rose 24.4%, reflecting last season’s high whole-milk payout prices.  Increased dairy cattle farm output prices contributed to a 20.2% rise in dairy product manufacturing input prices.  Higher prime beef and lamb prices in the September quarter contributed to the 17.5% increase in the livestock and cropping farming output index. The only notable offset to rising costs was a significant drop in electricity prices, following a return to more normal hydro generation conditions.

Firms are also facing higher costs for capital items, which is restricting their investment decisions.  The Capital Goods Price Index (CGPI) rose 1.4% in the September quarter, up from a 1.0% rise in the June quarter, taking the annual increase to 3.8%.

… however, they have reached their peak…

The commodity prices that propelled producers’ prices in the September quarter have declined sharply from their peaks.  The ANZ commodity price index fell a further 7.2% in November, following a 7.4% decline in October, to be 21% lower than its July peak (Figure 4).  In New Zealand dollar terms the index fell 1.8% in November.  The relatively small decline in New Zealand dollar terms illustrates the cushioning effect of the fall in the exchange rate, which did not fall to the same extent as commodity prices in November.

Figure 4 – ANZ Commodity Price Index
Figure 4 – ANZ Commodity Price Index.
Source:  ANZ National Bank

On November 21, Fonterra revised its forecast payout for the 2008/09 year to $6.00/kg from an earlier forecast of $6.60/kg.  The $6.00/kg forecast payout is substantially lower than the final $7.90/kg payout for the 2007/08 season, but is still high by historical standards.  The Fonterra payout reflects (with a lag) the movements in international commodity prices.

… and inflation is expected to fall

Falling commodity prices, particularly oil, along with a weaker outlook for domestic and world economic growth, have contributed to a weaker outlook for inflation.  The RBNZ survey of expectations (a survey of business managers) revealed that both 2-year and 1-year ahead CPI inflation expectations were revised down. The 2-year inflation expectations measure fell 0.3 percentage points to 2.7% from its 17-year high of 3.0% in August. Inflation expectations twelve months ahead were revised down by 0.8 percentage points to 2.8%.  In addition to inflation expectations, the survey reported a marked increase in unemployment rate expectations and significantly lower expected GDP growth.  The unemployment rate is expected to reach 5.5% one year from now; whereas 1-year ahead annual average GDP growth was revised down 1.0 percentage point to 0.3%.

Retail sales volumes fell for the third consecutive quarter

Retail sales volumes fell 0.9% in the September quarter, the third consecutive quarterly decline, and 3.4% on an annual basis (Figure 5).  Weak third quarter retail sales volumes support our view that private consumption, and more importantly economic activity, remained weak in the September quarter.

September quarter sales volumes were led down by vehicle retail sales, which fell 3.1%.  Automotive fuel sales volumes also contributed by falling 2.0%, as the July peak in petrol prices lifted the average price in the third quarter above the previous quarter’s average.  Core retail sales, which excludes the four vehicle related store types, fell 0.2% in the quarter.  Supermarket and grocery store sales were the largest contributor, falling 1.9%.  The fall in supermarket and grocery sales volumes is a reflection of significant increases in food prices in August, mainly in vegetable prices following an unusually cold and wet winter.  High food and fuel prices placed pressure on household budgets.

Figure 5 – Total Retail Sales Volumes
Figure 5 – Total Retail Sales Volumes.
Source:  Statistics NZ

Consumers have also responded by reducing discretionary spending – as shown by falling sales volumes in cafes and restaurants (-3.3%) and recreational goods retailing (-3.0%).  Consumers have also delayed the purchase of durable goods – as evident in falls of furniture and floor covering volumes (-6.8%) and hardware retailing volumes (-5.7%).  Store types that experienced increases in sales volumes include department stores (3.8%) and appliance retailing (6.1%). At the same time, nominal sales fell 7.1% for department stores and 3.4% for appliance retailing, indicating heavy discounting during the September quarter for these products.

Relief from high costs of living is already underway

We believe that private consumption will temporarily increase in the December quarter.  Households are now experiencing much lower petrol prices, lower interest rates, lower food prices, and from 1 October personal tax cuts.

The food price index fell 0.3% in October, the first decline since August 2007 and the largest since December 2006.  The largest contributor to the decline was a 6% fall in the fruit and vegetable group.  There were indications that recent falls in commodity prices have begun to pass through to lower food prices with falls in retail prices for some dairy products.  Food prices are expected to fall in the near future as further commodity price reductions are passed through to consumers.  Lower food and petrol prices are expected to reduce annual inflation below 4% by the end of 2008.

House sales remain subdued…

The number of house sales in October remained at record lows.  According to the Real Estate Institute of New Zealand (REINZ), there were 4,469 house sales in October, 34.8% lower than October 2007.  The median days to sell fell 5 days in October to 47 but still remains at elevated levels.  October’s median selling price, of $335,000, was $5,000 above September’s value but was still 4.3% lower than last year.  In contrast, Quotable Value’s (QV) quality adjusted mean house price fell 6.8% over the three months to October compared with the same period last year.

…consistent with very weak residential building consents

Residential building consents issued fell markedly in October as weak housing market activity affected residential investment decisions.  Total dwelling consents fell 28.2% in October to 1,173, the lowest monthly total since January 1992, and were 43.8% lower than October 2007.  In seasonally adjusted terms, dwelling consents fell 22.0% in October and were down 43.2% compared to October 2007.  Significantly lower residential consents in October indicate that building activity will remain soft in early 2009 and will lead to substantially weaker residential investment, which will be a major restraint on GDP growth.

Merchandise trade deficit widens

A merchandise trade deficit of $942 million was recorded in October.  Growth of import values exceeded export value growth in October, increasing the annual merchandise trade deficit to $5.2 billion (Figure 6).  The value of exports grew 13.8% on an annual basis to $3.8 billion in October, similar in magnitude to the 14.7% reduction in the TWI exchange rate over the same period implying no overall increase in volumes. The value of imports grew 15.3% compared with October 2007 to $4.8 billion.  Recent falls in commodity prices have yet to be fully reflected in import prices, as shown by the significant increase in values of petroleum and related product imports (69.5%).  The increase of petroleum imports was mainly the result of an increase in the price and volume of crude oil imports.

Figure 6 – Merchandise Trade Balance
Figure 6 – Merchandise Trade Balance.
Source:  Statistics NZ

Although the annual merchandise trade deficit is below its February 2006 peak of $7.3 billion, we expect that it will continue to widen over the next few months.  Export growth is expected to decline in the short-term.  Lower world demand will reduce the value of dairy exports and growth in crude oil export values will tail off as the Tui oil field is now operating at peak production.  Crude oil exports will be supported by the Maari oil field when production comes on stream.  Further out the trade deficit will decline as the lower exchange rate benefits exporters, and import growth should decline as commodity price falls feed through and weaker domestic demand reduces imports.

Tourist numbers decline

Short-term visitor arrivals were 3.3% lower in October compared to October last year, following a 6.1% decline in arrivals in September.  Further declines in short-term arrivals are expected as slowing world growth affects international tourism flows.  The largest falls in short-term arrivals came from China (31.5%), Korea (17.0%), Japan (15.1%) and the United States (12.4%).

Global financial markets remain volatile …

Global financial markets remained highly illiquid and volatile in November as the credit crisis showed little sign of easing.  Although the premium for interbank interest rates over effective policy rates and government bill rates declined from its peak in October, it remained at high levels and the availability of credit was tightly constrained.

… and the real economy slows …

The effects of the financial crisis on the real economy became more apparent in November with some major economies entering recession.  The Euro zone (and wider EU) recorded two successive quarters of negative growth in the June and September quarters, as did Japan.  The United States and United Kingdom both recorded negative growth in the September quarter and the US was confirmed as having been in recession since December 2007.  Other economic data have also been extremely weak, with some forward-looking indicators falling to their lowest levels since the early 1980s recession.

… and share and commodity prices fall

Weak economic data, combined with poor corporate performance, particularly in the finance and auto industries, led to further falls in equity prices throughout November.  Prices recovered from a sharp dip in late November, but remained volatile in early December.  Commodity prices also fell as demand weakened; oil prices fell below US$50/barrel for the first time since early 2005 and commodity prices generally declined (Figure 7).

Figure 7 – Oil and share prices
Figure 7  – Oil and share prices.
Source:  Datastream

Central banks eased monetary policy …

Central banks around the world responded to the deepening of the downturn with monetary easing.  The Bank of Japan reduced its policy interest rate from an already-low 0.5% to 0.3% at the beginning of the month, followed by reductions of 150 basis points (bps) by the Bank of England and 50 bps by the European Central Bank.  China’s central bank reduced its policy rate by 108 bps, the Reserve Bank of Australia made cuts of 75 bps and 100 bps at successive reviews and the BoE and ECB made further cuts in early December taking their policy rates to 2.0% and 2.5% respectively (Figure 8).  The Fed funds rate is already at 1.0%, but Chairman Bernanke has indicated a willingness to consider “unconventional” loosening of monetary policy.

Figure 8 – Central bank interest rates
Figure 8  – Central bank interest rates.
Source:  Datastream

… and governments increased fiscal stimulus

Governments also responded by announcing fiscal stimulus packages to support demand in their economies.  Germany, the United Kingdom and China all announced packages; in addition, the EU is attempting to coordinate fiscal stimulus across all 27 members and US President-elect Obama is said to be working on a fiscal stimulus to be enacted when he takes over in January.

Forecasts continue to be revised down

In response to the worsening economic conditions, most forecasters revised down their outlook for world growth.  The IMF took the unusual step of revising their October World Economic Outlook less than a month after it was released; they revised down global growth in 2009 from 3.0% in October to 2.2% in November.  The OECD also released revised economic forecasts for their member countries of -0.3% in 2009 (the same as the IMF’s figure for advanced economies in 2009).  Consensus forecasts were also revised down for New Zealand’s top 20 trading partners from 2.2% in 2009 to 1.7%.  (Note that these different forecasts are not directly comparable as they include different countries and are aggregated using different weights).

OCR cut by 150 basis points

The Reserve Bank reduced the official cash rate (OCR) by 150 basis points to 5% citing ongoing international financial market turmoil and the significant deterioration in the outlook for world growth.  The Reserve Bank noted that the latest cut to the OCR moved monetary policy to an expansionary position.

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