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Monthly Economic Indicators

Analysis

Data released in October reinforced our view that households continue to consolidate their position by limiting spending growth and reducing their demand for debt. Despite last minute spending in the September quarter, as consumers brought forward spending to beat the GST rate rise, consumption remains weaker than our Budget forecast, contributing to a GDP outturn that is likely to fall short of our forecast. Meanwhile, weaker activity translated into subdued business sentiment pointing to muted growth in the coming year. However, while data in October had an overall weaker tone, factors such as high commodity prices, post-earthquake reconstruction in the Canterbury region and the Rugby World Cup are likely to support activity through 2011.

Policy developments drew the most attention internationally, as weaker data earlier in October created an expectation of further quantitative easing. Data released late in the month were more positive, supporting commodity prices (the subject of this month’s Special Topic) and commodity currencies like the Kiwi dollar.

Household spending remains soft...

Households continue to show restraint in the face of significant debt and general uncertainty, resulting in limited spending growth. The August retail trade survey showed that total sales, seasonally adjusted, remained largely unchanged from July and were only 2.3% higher than August last year – a substantially lower rate of growth than the average of the last decade. In addition, average nominal retail activity in July and August was only 0.3% higher than the average over the June quarter, suggesting underlying retail spending in the third quarter will be subdued. Given that the September quarter Consumers Price Index (CPI) signalled higher goods prices, underlying growth in sales volumes is also looking soft.

Flat sales in August were the result of an ongoing recovery in motor vehicle sales (+2.3%) in addition to higher fuel sales (+2.1%) being offset by a fall in core sales (-0.6%). The weakness in core sales was driven by hardware and appliance retailing. Recent restraint shown by households is illustrated by sales of durable goods, which have struggled to reach pre-recession levels. In contrast, spending on non-durable items, almost half of which represents purchases at supermarkets and petrol stations, has surpassed 2008 levels and continues to grow, albeit at a lower rate, to better match fundamentals such as population growth and inflation (Figure 1).

Figure 1 - Durable and non-durable retail sales
Figure  1 - Durable and non-durable retail sales   .
Source:  Statistics NZ

...despite last minute purchases prior to GST rate rise

Consumers waited until the last minute to bring spending forward prior to the 1 October GST rate rise. Total retail Electronic Card Transactions (ECT) jumped a seasonally adjusted 1.5%, and core retail lifted 1.4% pointing to a rebound in retail sales in September. The boost in spending was concentrated on purchases of durable goods (+4.0), fuel (+2.9%) and consumables (+1.1%). While September ECT data indicate that pre-GST spending is likely to be less than anticipated at the Budget, ECT do not capture a large proportion of durable spending. The boost in spending is likely to be temporary, as suggested by the ANZ-Roy Morgan measure of consumers’ current conditions.

Figure 2 - Confidence and electronic cards
Figure  2 - Confidence and electronic cards   .
Source:  ANZ-Roy Morgan, Statistics NZ

A net 7% of consumers (down 25pts) considered that October was not a good time to purchase a major household item, contributing to an 11 point fall in consumers’ current conditions (Figure 2).

Housing market contributing to soft spending...

A subdued housing market is contributing to restrained household spending, as weakness in house prices limits the extent to which housing-related wealth contributes to consumption. For instance, the REINZ house price index fell 0.7% in September to be 1.3% lower than a year ago, the first annual decline since June last year. In addition, at $350,000, the median house price remained unchanged compared to a year ago.

The current weakness in housing market activity points to continued weakness in house prices. Subdued activity in the housing market is evident in the number of house sales, which fell a seasonally adjusted 6.7% to be 33% down on September 2009. However, the result was exaggerated by a sharp contraction in sales in the Canterbury region as a result of the 4 September earthquake. Nevertheless, national sales would still have declined in the month in the absence of the earthquake.  Housing construction looks set to rise in Canterbury as investment intentions for residential building increased in the recent National Bank Business Outlook (NBBO) survey.  Although headline confidence jumped in October, it was largely driven by sentiment from Canterbury.

...and lower demand for household credit

With housing market turnover nearing 2008 lows, demand for housing-related credit has followed suit. Moreover, stagnant house prices are reducing households’ ability to access credit through equity withdrawal. The Reserve Bank of New Zealand’s (RBNZ) credit aggregate data provides evidence that households are reducing their reliance on debt, with the net rise in total household debt (+$576 million) in the September quarter at levels last seen in the early 1990s (Figure 3).

Figure 3 - Net change in household credit
Figure  3 - Net change in household credit   .
Source:  RBNZ

Business confidence illustrates fragility of the recovery...

The strength of New Zealand’s economic recovery was sorely tested in September with business confidence, as reported by the Quarterly Survey of Business Opinion (QSBO), falling sharply. Headline confidence declined 27%pts, to reveal a net 9% of firms expect deteriorating conditions, and downbeat business sentiment was seen across all regions, industries and most activity measures. Moreover, firms continue to experience soft demand as shown by the 11 point fall in domestic trading activity in the September quarter pointing to lacklustre GDP growth in the coming year (Figure 4).

Figure 4 - GDP and domestic trading activity
Figure  4 - GDP and domestic trading activity   .
Source:  NZIER, Statistics NZ

Weak business confidence was underpinned by deteriorating profitability, as a net 30% (-14%pts) of firms experienced lower profits and a net 14% expect weaker profitability ahead. The survey suggested that lower profitability is the result of lower sales, with 77% of firms reporting that sales remain the largest single factor limiting growth. In addition, weak domestic demand seems to be dampening firms’ ability to pass on cost increases. While a net 38.5% (+3%pts) of firms expect to face higher costs, only 30.1% (-10%) expect to raise selling prices in the following quarter.

...but may overplay weakness of activity

While the QSBO points to much softer GDP growth than expected at the Budget, movements in underlying measures were not as dramatic as headline confidence. For example, although actual hiring undertaken in the quarter was reported to have fallen, hiring intentions increased 4%pts in line with ongoing employment growth. Labour market data released in early November will confirm business hiring activity. In addition, the QSBO survey does not capture agriculture sector opinion. Despite adverse weather affecting Southland in September, farmers on the whole experienced better weather conditions in the third quarter compared to the drought-affected June quarter.

Unlike the more recent NBBO survey, the September QSBO survey is unlikely to have captured the full extent of the Canterbury earthquake, as well as expected future activity associated with the clean-up, even though responses were returned during September. For instance, although the response rate from Christchurch was significantly lower than usual, measures of sentiment were comparable to other regions. In addition, building intentions were marginally lower than those recorded in June.

Food prices and government charges lift inflation...

Increases in food prices and the capture of government-related charges made significant contributions to the 1.1% rise in the September quarter CPI, in line with our Budget forecast. Food prices rose 2.4% in the quarter as adverse weather exaggerated the seasonal rise in vegetable prices, and past increases in commodity prices helped to lift the prices of groceries. Government-related charges, such as fuel and tobacco excises, ACC and local authority rates and costs associated with the Emissions Trading Scheme (ETS), also boosted the CPI, and contributed to the 1.2% quarterly rise in non-tradables prices – which were 2.5% higher than September 2009. Meanwhile, a fall in petrol prices, reflecting lower New Zealand dollar prices for oil and refined fuel, partly offset higher food prices resulting in tradables prices lifting 0.9% for the year (Figure 5).

Figure 5 - Tradables and non-tradables inflation
Figure 5 - Tradables and non-tradables inflation   .
Source:  Statistics NZ

...and annual inflation has reached a trough

The 1.5% annual rise in consumer prices will be the trough in the current cycle as further government-related charges, such as the change to GST, will be a key driver of December quarter inflation. And while underlying inflation remains subdued, with annual inflation in the September quarter (excluding government-related charges) around 1%, certain indicators point to stronger underlying inflation in coming quarters. For instance, price changes for most imported goods lag exchange rate movements by around 1-3 quarters. The exchange rate remained relatively stable over the first half of 2010, and as a result prices of imported goods are unlikely to fall by the extent seen in earlier quarters. Furthermore, inflation related to certain services, in particular rents, house construction and property maintenance, has begun to rise in recent quarters in line with tax changes and a gradual recovery.

Despite soft data, certain factors are likely to support growth

Although economic data in October were generally soft, certain factors are likely to support growth in 2011. For instance, continued strong demand for New Zealand’s main export commodities, largely from emerging markets, has enabled commodity prices to maintain relatively high levels through 2010. High export commodity prices have lifted New Zealand’s terms of trade, leading to higher incomes for exporters, which will eventually flow through the economy. The ANZ commodity price index, in world price terms, rose 2.9% in September, partly offsetting three months of price falls, to be only 1% below May’s record high. A slight appreciation in the currency was not large enough to offset world price rises, and New Zealand dollar prices rose 1.2%.

Figure 6 - Short-term visitor arrivals
Figure 6 - Short-term  visitor arrivals   .
Source:  Statistics NZ

Also, while the Canterbury earthquake has severely disrupted people’s lives and damaged property, reconstruction work is expected to provide a boost to a construction industry that has plenty of spare capacity. Likewise, the 2011 Rugby World Cup is expected to add to economic growth by providing a boost to export services, as well as promoting New Zealand as a tourist destination to a large international audience. We anticipate a sizable jump in short-term visitor arrivals, akin to the rise in arrivals that coincided with the 2005 British and Irish Lions rugby tour (Figure 6).

International policy developments draw attention

Quantitative easing (QE), especially from the US but also Japan and the UK, has been the main focus globally in October. The Bank of Japan was the first to act by announcing ¥5trillion (US$60 billion) of QE, following the unsuccessful attempts to lower the Yen through intervention and after they effectively hit the zero interest rate bound (Figure 7). Markets have effectively priced in the fact the US Fed will announce a second round of QE at its November 2-3 meeting. Weak housing and labour market data, as well as officials’ speeches have added to the expectations. However, recent more positive US data has led to markets reducing the size of expected QE. The US is expected to use QE as a last resort as they have little scope to reduce interest rates, and inflation (too low) and unemployment (too high) are not consistent with the Fed’s targets.

Figure 7 - Central bank policy rates
Figure 7 - Central bank policy rates   .
Source:  Reserve Bank, Datastream

There has also been talk of the Bank of England expanding its asset purchasing programme, although this may now be less likely after a strong September quarter GDP release (see below). The extent of the impact of a second round of QE is uncertain, especially with it largely priced in, but it should remove some of the downside risk of a severe slowdown in advanced economies.

In contrast to talk of monetary policy easing in advanced economies, China is currently in a tightening cycle. In order to try to slow lending growth and control inflation, the People’s Bank of China temporarily increased the reserve requirement ratio for large banks and increased benchmark interest rates by 25 basis points. This came on the back of the economy slowing less than expected. Third quarter GDP growth held up above the market’s pick, while September activity data shows growth continues to be strong.

The strength of currencies internationally has also been the subject of much discussion. The US has renewed calls for China to allow for a faster appreciation of the Yuan, following on from the US-China trade deficit reaching a record high. The artificially low currencies in some developing countries are said to increase global imbalances. The G20 commented on the issue, stating that member countries will “refrain from competitive devaluation of currencies” and “move towards more market-determined exchange rates”. Thailand and Brazil added to the developing countries trying to manipulate their currency by introducing taxes on foreign capital flows.

Some data looking more positive...

The UK and Euro area look to be in stronger positions heading into the period of severe austerity measures, which the UK government announced would see spending cuts up to 4.5% of GDP through to 2015. UK third quarter GDP rose 0.8%, double the market pick, taking annual growth to 2.8%. Industrial production and service sector indicators suggest Euro area September quarter GDP also has some upside. In addition, there have been positive signs out of the US with the service ISM, and retail and house sales better than anticipated.

...helping support commodities and commodity currencies

QE expectations and improving data have helped the CRB commodity price index to hit a two-year high. This month’s Special Topic discusses the resurgence of commodity prices and what it means for the New Zealand economy. The higher commodity prices and a weaker US dollar (USD) from the anticipation of further QE from the Fed, have supported commodity currencies. The Australian dollar briefly hit parity with the USD (a post-float high) and the New Zealand dollar (NZD) hit a one-year high against the USD. The NZD is at historically-high levels against most currencies, with the AUD and the Yen being the major exceptions.

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