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Monthly Economic Indicators

Analysis

Domestic data released in the month showed that consumer spending at retail outlets rose in anticipation of October’s rise in the Goods and Services Tax (GST) but, with household credit growth slowing and house prices falling, the underlying dynamic remains weak. Outside of commodity exports, the data suggest the economy is in a flat patch and that businesses remain reluctant to increase their exposure to debt. However, strengthening business confidence points to a more vibrant economy over 2011.

Early in the month positive labour market data and record high export commodity prices combined with further easing of US monetary policy to send the NZ dollar to post-crisis highs against the US dollar. These gains proved short-lived as concerns around inflation in China and European sovereign debt intensified, spilling over to a change in the outlook for New Zealand’s foreign currency sovereign credit rating. International developments are covered in this month’s Special Topic.

Retail sales rose on pre-GST spending…

Retail sales rose ahead of October’s GST increase but likely fell back in October. To the extent that the surge in September sales “brings forward” spending that would otherwise have occurred in the December quarter and beyond, spending in those quarters will be lower, albeit offset by a normalisation of sales in Canterbury, which rose just 0.1% in September.

Total and core retail sales (the latter excludes vehicle-related industries) rose 1.6% in September from a month ago, driven by spending on mid-sized consumer durables: furniture and floor coverings (+30%) and appliances (+14%).

Increased activity in the September month accounted for most of the rise in activity in the quarter. In the September quarter, the value of sales rose 0.8% and the volume of sales increased 0.7%, while core retail sales and volumes both rose 0.9%. The leading contributors to the rise in core retail volumes were the same as for the month - appliance retailing (up 4.3%) and furniture and floor coverings (up 6.1%).

The similarity in sales values and volumes implies a switch in spending towards goods whose prices are not rising. This is reflected in September’s drop in spending at supermarkets and grocery stores (-$9 million), despite the Food Price Index showing a 1.2% rise in the month, and the rise in spending on furniture and floor coverings (+$9 million) where prices were flat in the September quarter.

Overall, the effect of GST on retail sales was significantly below our Budget expectations, although some of the GST impact may have occurred in the June quarter when volumes rose 1.5%. Moreover, with consumers’ perceptions of current conditions remaining weak, house prices edging lower, and credit growth grinding to a halt, households appear to remain firmly in consolidation mode.

Figure 1 – Retail sales and private consumption
Figure 1 – Retail sales and private consumption.
Source: Statistics NZ

For GDP, the rise in sales volumes over the quarter provides a reasonable foundation for growth (Figure 1). However, weakness in other components of consumption, such as communications, has provided a significant offset in recent quarters. The services sector generally is struggling to make significant headway in the current environment according to the BNZ-BusinessNZ Performance of Services Index, which fell 2.9 points to 52.0 in October, but above the neutral mark of 50.

...but likely fell in October…

Indications of a reversal of September’s retail sales gains was provided by October’s Electronic Card Transactions (ECT) report, which covers all debit and credit card spending in New Zealand on a GST inclusive basis.

ECT retail sales rose 0.8% in October following a 1.7% increase in September. The increase was mainly due to a rise in fuel retailing, reflecting higher GST and excises as well as some volume growth. Durable goods sales fell 6.0%, having increased 4.1% in September. The rise in GST was reflected in higher spending on consumables (up 2.4%) and apparel (up 2.7%) but, overall, core retail sales were flat on September, implying a fall in sales volumes. The official retail sales report for October, due 14 December, excludes GST and will provide a clearer picture of the post-GST effect on consumer spending.

Food prices also reflected the impact of higher GST, rising 2.2% in October, and up 5.1% from October 2009 (Figure 2). Not all food prices showed the full GST impact, but its effects could be seen in a large proportion of goods - around 40% of all food prices rose between 2.0% and 2.5%. The rise in food prices reinforces our view that, on average, consumer prices will rise in line with GST although the impacts may take several months to flow through fully.

Figure 2 – Food prices and durables goods
Figure 2 – Food prices and durables goods.
Source: Statistics NZ

Looking forward, food prices are likely to increasingly reflect the impact of rising commodity prices. Higher prices for dairy products, beef and lamb contributed substantially to the 1.2% quarterly rise in September’s Producer Price Index, and the ANZ Commodity Price Index has continued to rise, up 8.4% in the first two months of the December quarter.

Rising food prices are also likely to act as a brake on durables spending (Figure 2) and household consumption more generally.

…as credit growth and housing market stall

Credit growth in the household sector stalled in October as house sales fell to their lowest level in an October month since at least 1992 when the series compiled by the Real Estate Institute of New Zealand (REINZ) begins. Sales fell 7.2% (seasonally adjusted) in the month, pulled down by the low level of sales in Canterbury, although these did pick up from September’s levels. The REINZ House Price Index fell 0.9%, the sixth fall this year, and was 3.5% lower than a year ago.

Building consents for new homes are also falling. Excluding apartments, which tend to be volatile, consents fell for the fourth consecutive month, down 1.1% and down 14.4% on October 2009. Consents in Canterbury did not show any real impacts from the earthquake, falling 6.6% from a year ago, compared with declines of around 5% for Auckland and Wellington. Declines in other regions were much larger: consents in Northland, Manawatu-Wanganui, and Otago were all over 50% down on last year.

Residential investment rose 11% in the June quarter, but the weakness in consents points to a negative contribution to GDP in the September quarter. Reconstruction work in Canterbury is likely to take until the New Year to get into full swing and, unless the housing market makes a significant come-back over November, residential investment will probably act as a drag on growth in the December quarter as well.

Given this weakness it is not surprising that household credit growth was flat in October, reducing annual growth to 2.0% (Figure 3).

Figure 3 – Credit growth
Figure 3 – Credit growth.
Source: RBNZ

Business credit rose 0.9% in the month, the largest rise since late 2008, but it remains 6.6% below last year’s level (Figure 3). However, it does appear that demand is gradually returning as business credit for the three months ended October rose 0.7%, the first three-month gain since February 2009. It will take longer to confirm a change in trend but until business credit begins to really accelerate there is little prospect of a sustained shift to higher economic growth.

Agriculture and education drive employment recovery…

Employment grew strongly in the September quarter, up 1.0% (23,000), and the unemployment rate fell to 6.4%, down 0.5 percentage points (%-pts). However, the data is volatile on a quarterly basis suggesting that September 2009 may be a preferable base for comparison. Compared to a year ago employment rose 1.8% (39,000) and the unemployment rate fell 0.1%-pt (Figure 4) despite the number of people unemployed remaining steady at 144,500.

Figure 4 – Employment and unemployment
Figure 4 – Employment and unemployment.
Source: Statistics NZ

Fourteen of the 16 industry groups in the Household Labour Force Survey (HLFS) recorded a rise in employment from September last year. Around half of the gain occurred in the agriculture, forestry and fishing (up 13,200) and education and training (up 6,500) industries, the latter dominated by the public sector. The financial services and insurance industry recorded the largest fall (down 8,600). The strength of the public sector contribution was also evident in the Quarterly Employment Survey (QES), which excludes agriculture, with a 2.7% (8,800) rise in public sector jobs[1]. In comparison, private sector filled jobs rose 0.2% (2,700), suggesting that the recovery in employment is yet to gain any real traction.

The QES also showed manufacturing jobs had fallen to a fresh low of 190,000, well down from the average of over 230,000 in the decade prior to the global financial crisis. More promisingly, declines in the industry appear to be coming to an end: the annual pace of job losses slowed to -2.6% from -4.7% in the June quarter; and employment was flat in the (HLFS). The employment component of the BNZ-BusinessNZ Performance of Manufacturing Index, which has been averaging around 51.5 in recent months also points to a stabilisation in employment. However, the headline PMI has fallen below the neutral mark of 50, suggesting conditions in the industry remain difficult.

…but unemployment slower to fall…

Two factors appear to be holding unemployment up: an increased willingness by older age cohorts to participate in the labour market and high rates of unemployment for 15-19 year olds. Participation in the 50-59 age cohort has continued its secular rise, up over 2%-pts from a year ago to a record high, contrasting sharply with the 4%-pt fall in the 15-19 year age group to a record low (Figure 5). The drop in the latter reflects the 23% unemployment rate for the cohort, which is amplified by the 46% rate for the Maori only ethnic group.

Figure 5 – Participation rates
Figure 5 – Participation rates.
Source: Statistics NZ

...and productivity growth remains weak

Labour inputs, as measured by hours paid (QES) and hours worked (HLFS), posted quarterly rises of 0.2% and 0.8% respectively, and are supportive of growth in output for the September quarter. However, these measures of labour input suggest productivity growth remains weak. Labour inputs in the QES were 2.3% higher than a year ago, a little above the Treasury’s forecast for GDP growth. The 3.0% rise in hours worked in the HLFS implies a fall in output per hour.

Annual wage growth slowed to 1.1% in September but appears to have reached its trough. Private sector hourly earnings grew 1.0% in the September quarter, up from 0.6% in June, pointing to earnings growth of around 3% by this time next year. After-tax earnings are also benefitting from lower income taxes but with the GST rise providing an offset and helping to push inflation to 5% by the middle of 2011, households’ discretionary spending budgets will remain tight.

Nonetheless, the labour market is firming, although, given the generally tepid nature of recent data, the case for a marked acceleration in growth is less than compelling. Moreover, labour market developments tend to reflect changes in economic activity with a lag. The Treasury is not expecting GDP growth to gain significant momentum until the middle of 2011, which suggests year-on-year employment growth is likely to remain around 2% over most of 2011, sufficient to reduce the unemployment rate to around 5½% by year’s end.

Business confidence rises

A net 33% of respondents to November’s National Bank Business Outlook expect business conditions to improve in the next 12 months, up from 24% in October. A net 35% of firms expect better times ahead for their own businesses, with readings on profits, investment, and employment all firming but, as the National Bank points out in its commentary, “such levels are a far cry from flagging an economy that is off to the races”.

The big movers in the survey were residential and commercial construction intentions, which makes it hard to look beyond reconstruction activity in Canterbury as the primary driver of the lift in confidence, even if it is spilling over to other regions and sectors.

Reconstruction in Canterbury and the 2011 World Cup will support domestic demand over the year ahead, but beneath that there are few signs of a post-recovery bounce in activity sufficient to really suck-in spare capacity. Indeed, the NBBO measure of capacity utilisation eased as did inflation expectations, both movements indicative of a subdued outlook for demand.

Trade surplus widens on record high commodity prices

New Zealand’s commodity export prices rose 3.5% to a record high in October, and rose a further 4.5% in November. Wool led the gain in the ANZ Commodity Price Index in October, up 29%, while pelts and skins lifted 32% in November. In New Zealand dollars, the index is marginally below its peak in May this year.

Higher export commodity prices are being reflected in the merchandise trade surplus, which grew to $1,176 million, up from $933 million last month and the largest trade surplus since 1994 (Figure 6). The trade balance for the month was a deficit of $319 million.

Figure 6 – Merchandise trade balance
Figure 6 – Merchandise trade balance.
Source: Statistics NZ

Export receipts were 25% ($723 million) higher than October last year (the preferred base as the data are not seasonally adjusted). Exports of dairy and forestry products, up 62% and 29% respectively, reflected the strength of demand from China. Imports for October rose 16% ($541 million) from last year, the largest annual rise in two years. Crude oil imports (up 47%) and plant and machinery imports (up 11%) led the increase.

Overall, the external sector is partially offsetting weakness in domestic demand, but this effect will likely diminish over the year ahead. Export growth has levelled off (Figure 7) and the agricultural sector has a limited capacity to expand in the short-term. In addition, a range of risks to export volumes emerged over the month including drought, the closure of the Pike River coal mine and the Kiwifruit vine disease, psa. Downside risk to prices also intensified over the month as China acted to curb rising inflation and the stability of the Euro area came under question. On the other side of the equation, imports, while currently 15% below their pre-recession levels (Figure 7), will rise as consumer demand and business investment recover.

Figure 7 – Merchandise trend values (monthly)
Figure 7 – Merchandise trend values (monthly).
Source: Statistics NZ

Notes

  • [1]Public sector includes State-Owned Enterprises and local government.
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