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Monthly Economic Indicators

Analysis

After a solid start to 2012, growth looks to have eased in the September quarter, with a number of indicators softening. Risks are to the downside in the near term from the Budget forecast of 0.6% quarterly GDP growth for September and 1.0% for December, with ongoing concerns over the international economy contributing to weaker business and consumer confidence.

Growth slowing in the second half of 2012...

The pace of GDP growth is likely to have slowed in the September quarter, following a solid start to the year. The strength of the economy in the first half surprised us to some extent, with the broad-based growth across most sectors at one time unusual. Tax outturns in the 2011/12 year came in slightly above Budget expectations, supporting the stronger growth story. Financial Statements of the Government for the three months ended 30 September 2012 will be released on 7 November.

Headline production GDP - the preferred measure of growth - averaged a solid 0.8% growth per quarter in the first half of 2012. However, the picture is clouded somewhat by the softer expenditure measure, which averaged just 0.3%. This makes it more difficult to assess the true strength of the New Zealand economy.

A number of indicators released during October point to an easing in both business and consumer sentiment. It is difficult to pinpoint a single reason for the easing sentiment; it is likely owing to a number of factors, including ongoing concerns around the global situation, such as the "fiscal cliff" in US and euro area issues, the relatively high NZD, and uncertainty around the timing of the Canterbury rebuild. The still-elevated unemployment rate is also likely having an effect on consumer sentiment, although the Treasury expects a modest fall in the unemployment rate for the September quarter, the data for which is due to be released in early November.

...as business confidence eases...

The Quarterly Survey of Business Opinion (QSBO) headline measures showed a softer picture for the September quarter. Business confidence declined in the September quarter, with a seasonally-adjusted net 5% of firms expecting the general business situation to decline over the next six months. Firms' actual activity in the quarter continued to fall short of their own expectations. A net 7% of firms reported weaker trading activity in the September quarter, a deterioration from the balanced position in the previous quarter; a net 8% of firms had expected improvement for the quarter in the June survey (Figure 1). However, expectations for the next three months remained broadly steady at 7%, still pointing to above 2% annual GDP growth over the rest of 2012. There were also a range of indicators within the QSBO that backed this moderate outlook such as expectations for the use of building materials and volumes of services. Nevertheless, risks are still to the downside, with the QSBO not including sectors such as agriculture and government.

Figure 1 - Real GDP and QSBO activity indicators
Figure 1 - Real GDP and QSBO activity indicators.
Sources:  Statistics NZ, NZIER

Employment intentions for the next three months were steady, with a net 4% of firms expecting an increase in employee numbers. However, a net 9% of firms reduced their number of employees in the quarter, pointing to downside risk for the September quarter labour market release (Figure 2). Difficulty finding skilled labour remained above its long-run average, consistent with findings from our recent business talks.

Figure 2 - Employment expectations
Figure 2 - Employment expectations.
Source:  Statistics NZ, NZIER

...investment intentions weaker...

Of some concern is the fall in investment intentions for plant and machinery, while the investment intentions for buildings remained negative. Business profitability also declined in the quarter, although firms expect it to improve in the next three months.

The ANZ Business Outlook Survey (ANZBOS, formerly NBBO) headline measures showed a similar story to the QSBO. Of interest, it was the agricultural industry (not included in the QSBO) that showed the most pessimism about the future. Possible reasons include a high NZD that has eroded recent gains in dairy prices and a likely levelling out in production boosts provided by excellent growing conditions over the past season. Meat prices are also lower, driven by falls in lamb prices, which has been exacerbated by the high value of the NZD.

...and consumer confidence falls similarly...

Firms were not the only ones who reported a fall in confidence in the month, with consumer confidence also declining. ANZ-Roy Morgan confidence fell in October to its lowest reading since the end of 2011. Both future and current conditions deteriorated. Of note, however, households still consider it is a good time to buy major household items, consistent with strong durables consumption over the last year. The high NZD and strong competition have helped keep prices low, stimulating the quantity demanded. Electronic card transactions declined in September, but point to moderate consumption growth for the quarter as a whole.

...while activity indicators soften...

The Performance of Manufacturing Index (PMI) continued its soft run in October, rising slightly to 48.2, its third consecutive month pointing to contraction in the manufacturing sector. While the series can be volatile on a monthly basis, it is now showing a negative trend across 2012.

The services sector also appears to be slowing. The Performance of Services Index (PSI) fell to 49.6 in October, its first below-50 reading since a momentary blip in 2010. The new orders/business category has seen the largest fall over the last few months, falling from 62.6 in May to 52.0 in October, albeit still in expansionary territory. The composite index of the PMI and PSI (PCI) eased 0.1 point to 48.8 in October, and reinforces a picture of slowing quarterly GDP growth (Figure 3).

Figure 3 - Real GDP and PCI
Figure 3 - Real GDP and PCI.
Sources:  Statistics NZ, BNZ- Business NZ

...but medium-term drivers still positive

While slower growth is appearing more likely in the second half of 2012, medium-term drivers are still positive and should help to generate moderate growth in the future. The most obvious driver of growth over the next few years is the Canterbury rebuild. We have already started to see signs of the rebuild picking up pace, with residential investment rising 5.7% in the June quarter. Building consents rose a robust 7.8% in the September month, to be 23% higher in the year. Canterbury was the main driver, with new dwelling consents up 80% on an annual basis.

Recent reports from government and market contacts suggest that the Canterbury rebuild will be a more long-lasting and sustainable endeavour than previously thought, rather than a fast "boom-bust" cycle. This suggests lower peaks in growth rates and a slower profile to investment and GDP, but more sustained activity over the medium term. This should also help to alleviate supply constraints, assisting in keeping prices of the rebuild in check to some extent. Continued low interest rates are also providing a boost to the wider housing market.

The other significant driver of medium-term growth is the terms of trade. While we have seen the terms of trade decline over the last year from record highs as export prices eased, the terms of trade remain historically high. Commodity prices have recently started to pick up again, with a stabilisation of growth in China and the drought in the US contributing. We expect the terms of trade to trough during the second half of 2012, before increasing again thereafter. This should provide a boost to incomes, helping to drive growth in the economy over the medium term. However, this outlook is not without risk, and is dependent on ongoing strong demand from emerging markets, particularly China.

Pricing pressures subdued...

Pricing pressures remain subdued in the economy. This is illustrated in survey measures of pricing intentions, with just a net 15% of firms surveyed in the ANZBOS intending to lift prices over the next year, a three-year low. This result was backed up by a similar result in the QSBO, where a net 14% of firms expect to increase prices, well below the 33% long-run average. Although expectations of cost increases are higher, firms are finding it difficult to raise prices, with strong competition, particularly in retail. This has led to continual heavy discounting. This is likely also a factor contributing to the falling profitability experienced by firms, with retailers in particular experiencing a large fall in profitability.

The higher-than-expected discounting led to a lower-than-expected inflation outturn in the September quarter. Prices rose only 0.3% in the quarter according to the Consumers Price Index (CPI), taking the annual increase to 0.8% - its lowest annual rate since 1999 (Figure 4). The main drivers for the quarterly increase were food prices and property rates. Food prices, which usually rise in the September quarter, were up 1.1% in the quarter, but 0.9% lower for the year. This partly reflects commodity prices falling 12% over the year to September according the ANZ commodity price index.

Figure 4 - CPI inflation
Figure 4 - CPI inflation.
Source:  Statistics NZ

Tradables inflation was the primary driver of the subdued outturn. Tradables prices were flat in the quarter and fell 1.2% in the year. The elevated NZD, discounting of durables, and declining commodity prices have been the main reasons behind this.

Non-tradables inflation was 0.5% in the quarter and 2.3% annually (Figure 5). Insurance costs, a hike in the tobacco tax, electricity prices and local-authority rates were the main contributors to the increase on an annual basis. While non-tradables inflation seems relatively high on an annual basis (especially compared to tradables inflation), it is substantially lower than the rates seen during the boom in the 2000s, when it averaged above 4% for a significant period. Weaker domestic demand is undoubtedly the main reason for the lower rates now.

Figure 5 - Tradable and non-tradable inflation
Figure 5 - Tradable and non-tradable inflation.
Source:  Statistics NZ

...but expected to pick up in line with domestic demand...

While inflation is low at present, most signs point to it returning towards the middle of the target band (2%) over the medium term. Non-tradables inflation is expected to increase over time as demand increases, unemployment falls and the output gap closes. Tradables inflation will increase as the effect of the appreciation of the NZD fades and commodity prices start to increase more. We also forecast the NZD to depreciate over the next 5 years, which should contribute some additional inflationary pressures.

Another driver is expected to be the Canterbury rebuild, with supply constraints raising wages and prices for construction materials. Admittedly, pressures have been low thus far, but as Figure 6 shows, capacity is a much larger constraint in Canterbury than the rest of the country.

Figure 6 - QSBO Capacity as a constraint
Figure 6 - QSBO Capacity as a constraint.
Source:  NZIER

...keeping the Reserve Bank on hold for now

As expected by most economists, the Reserve Bank kept the OCR on hold, in the first policy rate decision from the new Governor, Graeme Wheeler. The statement was more hawkish than some in the market expected, leading to a reduced expectation for OCR cuts. The Governor cited a more balanced profile for global risks, while domestic growth was going ahead at a modest pace.

The Reserve Bank also referred to the housing market, with activity proceeding as expected. Activity in September was soft according to the REINZ data, with sales down 6.4% in the month. The reason for the drop was put down to a lack of new listings, as the usual rush of spring listings failed to appear. House sales are still up 8.0% in the year, with Auckland sales the main driver. Prices were flat from August, with annual growth easing to 5.0%. The government announced plans to help reduce the supply constraints on the housing market, particularly in Auckland. This will be achieved through releasing additional land and reducing the regulatory burden on new developments.

Divergences in global growth apparent...

There were few major international developments during October, but divergences in global growth across regions became more apparent (Figure 7). While growth in the US looks to be accelerating - albeit to only moderate rates - the euro area is languishing. After losing growth momentum in the first half of the year, the Asian region looks to be stabilising somewhat, although risks remain to the downside. This month's special topic takes a closer look at the global economic outlook, with the focus on the recent IMF World Economic Outlook (WEO).

Figure 7 - Country growth rates
Figure 7 - Country growth rates.
Source:  Haver

...with US growth accelerating slightly...

Data released for the US were broadly positive in October, pointing to a slight acceleration in growth, although risks around the presidential election and fiscal cliff could derail the recovery. September quarter GDP was above market expectations, growing 0.5% in the quarter and 2.3% in the year. Consumption growth was the main driver, while business investment was soft, likely reflecting the hesitancy of businesses to invest with so much policy uncertainty at present. The housing market continued its recovery, with housing starts showing strength and prices rising. Consumer confidence also improved.

Non-farm payrolls rose a modest 114,000 during September, in line with expectations, with the surprise being a large fall in the unemployment rate. The unemployment rate, which is derived from a different survey, fell 0.3% points to 7.8%, its lowest point since January 2009. While this was a step in the right direction, volatility could mean a partial correction in October's data.

...while the euro area continues to weaken

Little progress was made during the month in the resolution of the euro crisis, although there were some more signs of stability. Reports suggest that Greece had come to agreement with the Troika (ECB, EU and IMF) on additional consolidation required to get the next tranche of its bailout package. The news led to a fall in Greek bond yields, as risks of a near-term exit were perceived to have fallen. EU leaders agreed to have a framework in place for common banking supervision by 1 January 2013, but it is likely this will get pushed back given the ambitious target and disagreement on detail up to this point.

Meanwhile, the economy of the euro area continues to weaken. Retail sales were soft, while industrial production remains weak. There is little prospect of a turnaround in the near term, with the manufacturing PMI falling further during October. The services PMI increased slightly, but continues to indicate contraction in the service sector. Accordingly, the composite PMI points to ongoing negative GDP growth for the rest of 2012 (Figure 8). Divergences are evident within the euro area, with unemployment rates of around 25% in Greece and Spain, while the German unemployment rate is at 5.5%, its lowest rate since reunification in the early 1990s.

Figure 8 - Euro area GDP and Composite PMI
Figure 8 - Euro area GDP and Composite PMI
Source:  Haver

Chinese growth at a trough...

China's output increased 7.4% in the September quarter from a year ago, in line with most analysts' expectations. It was boosted by the end of destocking, new infrastructure projects and a stabilisation in exports. Other data for the September month showed a pick-up in activity at the end of the quarter: industrial production increased 9.2% from a year ago in September (8.9% in August), retail sales were up 14.2% (13.2%), fixed asset investment was up 20.5% (20.2%) and inflation was 1.9% (2.0%). Both exports and imports grew more than expected in September, pointing to stronger international and domestic demand and a pick-up in growth in the December quarter.

Most analysts now expect growth to have troughed, with a modest pick-up expected in 2013. Risks of a hard landing are lower, but not eliminated. However, it appears policymakers are aware of the main issues, and are attempting to rebalance the economy away from investment and exports, and towards consumption. We do not expect China to return to double-digit GDP growth, but to grow at a more sustainable rate of around 7-8% for the next five years or so.

...easing risks for Australia

A stabilisation in China helps to ease risks for Australia (and in turn New Zealand). This easing of risks is illustrated in recent moves in iron ore prices, which have rebounded after falling quite considerably during August, albeit not back to the levels seen at the start of the year. Significant investment is still in the pipeline over the next year, with large liquefied natural gas (LNG) projects still to be completed. The RBA has revised down its forecast of the peak of investment, but it is still expected to be a primary driver of growth for some time yet.

The RBA cut its policy rate 25 basis points early in the month to 3.25% as expected, citing weaker global growth and a softer mining sector. Inflation data later in the month showed prices increased 1.4% in the September quarter, above expectations. Although a high outturn was expected given the implementation of carbon taxes in the quarter, the actual rate was still on the upside, causing some analysts to rethink their expectation for another RBA policy rate cut before the end of the year.

The Australian government released its Mid-Year Economic and Fiscal Outlook during the month, which showed a smaller forecast surplus than previously in 2012-13, with tax revenues lower as falling commodity prices affected incomes. Further spending cuts were announced to secure the surplus in this and following years.

Markets end month lower

After a generally positive start, global equity markets fell late in the month, but remain elevated in comparison to the previous three months. Worse-than-expected earnings reports weighed on sentiment as the month wore on, and lack of progress in the euro area led to some frustration. Bond yields followed a similar profile for the majors, rising early in the month, but later retreating as markets re-entered a risk-off mode. Global commodity prices fell, with the CRB index down around 5%; oil prices were a significant driver of the fall. The NZD was relatively unchanged, hovering around US $0.82 during the month.

Overall, while domestic growth may be softer in the near term, New Zealand's growth performance is expected to remain favourable when compared to many other countries. Medium-term prospects are also positive, with the Canterbury rebuild expected to be a significant driver of growth for many years. Global risks remain to the downside, but October saw more stabilisation, particularly in China, with extreme downside risks lower than earlier in 2012.

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