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Monthly Economic Indicators

Analysis

As expected, the impact of last summer’s drought weighed on growth in the June quarter. However, drought aside, the rest of the economy showed clear signs of momentum – particularly the services sector. Looking ahead, the outlook for the rest of the year remains positive, with robust domestic conditions and an expected bounceback from the drought. All told, the Treasury and other commentators expect quarterly real GDP growth to accelerate to around 1% in each of the two remaining quarters of 2013.

The annual current account deficit narrowed to 4.3% of GDP in the June quarter, driven by lower-than-expected income outflows, and a range of revisions to the historical data. While the current account deficit is still expected to widen over the course of our five-year forecast horizon – principally as the Canterbury rebuild gathers pace – a range of forthcoming revisions are expected to result in a further narrowing of the current account deficit in the near term.

Drought detracts from real GDP growth…

The 0.2% gain in real production GDP in the June quarter was largely as anticipated by the market, although some expected a weaker result, and was the same as Treasury’s 2013 Budget Economic and Fiscal (BEFU) forecast, (Figure 1).

Figure 1 – Real GDP (production measure)
Figure 1 – Real GDP (production measure)   .
Source:  Statistics NZ

The negative impact of last summer’s drought was the main factor behind the slowdown in the pace of quarterly growth. Agricultural production and related food processing industries both experienced large falls in the June quarter, in keeping with the drop-off in milk production seen at the end of last season and the inevitable decline in meat slaughter. Drought impacts aside, other parts of the economy showed clear signs of momentum in the June quarter – particularly the services sector. Eight of the 11 service industries recorded an increase in activity and the sector as a whole contributed around 1 percentage point to quarterly growth. The retail trade and accommodation industry grew for the third consecutive quarter, up 2.1%, reflecting higher sales of durable goods and a rise in international tourist arrivals. Construction activity also picked up, largely owing to increased heavy and civil engineering work. This more than offset a fall in residential building work.

On the expenditure side, real quarterly GDP growth slowed to 0.1% in the June quarter, down from 0.3% in the previous period. As indicated by the prior release of the Overseas Trade Indices (OTI) for the June quarter, net trade was a sizeable drag on quarterly growth. Total exports dropped by 5.9%, driven by declines in dairy and meat volumes of 16.8% and 6.9% respectively. Residential investment also fell slightly, consistent with other signs of a ‘pause’ in growth in construction activity in the middle of the year.

These negative factors were offset by another strong showing from private consumption (+1.5% qpc), driven by a 4% quarterly rise in durable goods sales. The latter was the third largest quarterly increase on record and is likely to reflect the effect of rising housing wealth on consumption.

...but nominal GDP posts another strong rise

Following a 2.6% increase in the March quarter, nominal GDP posted another strong quarterly rise (1.7%) in the June quarter. This was underpinned by the continued rebound in the terms of trade, with the headline OTI measure up 4.9% in the quarter. The level of nominal GDP was close to that expected in the BEFU and year-end tax revenues are expected to be close to forecast. (The Financial Statements of the Government of New Zealand for the year ended 30 June 2013 are scheduled to be released on Monday 7 October.)

The turnaround in the terms of trade since the end of 2012 has also driven an acceleration in growth of real gross national disposable income (RGNDI) – a broader indicator than GDP that measures the real purchasing power of national disposable income. RGNDI grew by 1.6% from the March quarter, and 5.2% from June 2012. In a reflection of the recent divergence in the performance and outlook for the New Zealand and Australian economies, annual growth in New Zealand’s RGNDI in the June quarter accelerated ahead of that in Australia (Figure 2). The slower growth outlook for the Australian economy, and its implications for New Zealand, was the subject of a special topic in last month’s Monthly Economic Indicators.

Figure 2 – Real Gross National Disposable Income [1]
Figure 2 – Real Gross National Disposable Income   .
Source:  ABS, Statistics NZ, the Treasury

Sizeable revisions to the current account

The other headline macroeconomic release from the past month – the June quarter Balance of Payments – was dominated by a range of revisions to the historical data.

On a positive note, the current account deficit over recent history was revised to be narrower than previously estimated, mainly on the back of higher estimates of the returns that New Zealanders have earned on overseas investments. The annual deficit in the March 2013 quarter is now estimated to have been 4.5% of GDP compared to 4.8% previously. A separate set of revisions to reinvested earnings by foreign direct investors in New Zealand widened the deficit during the time of the global financial crisis (Figure 3).

However, while the current account was revised narrower for the recent period, revisions to the balance sheet of the international accounts increased previous estimates of the amount of foreign investment in New Zealand. As a result, New Zealand’s net international debtor position was revised 2.5 percentage points of GDP higher than was previously estimated (ie, 71.8% of GDP at the end of the March quarter compared to 69.3% before).

Figure 3 – Revisions to the annual current account balance since the March 2013 release
Figure 3 – Revisions to the annual current account  balance since the March 2013 release   .
Source:  Statistics NZ, the Treasury

Further changes to the Balance of Payments and wider macroeconomic accounts are in the pipeline to be incorporated in late-2013. These will reflect improved measurement of spending by international visitors and students in New Zealand, as well as a new estimate of households’ goods imports for items valued under $1,000 (a known area of undercoverage encompassing items bought online from overseas). These changes will increase previous estimates of both exports of services and imports of goods, with the net impact expected to result in a further narrowing in the measured current account deficit.

By attributing some expenditure that is currently counted as household consumption to spending by international visitors and students, the revisions will also have implications for household and national saving. Based on guideline figures issued by Statistics NZ, household consumption could be revised around $1.2 billion a year lower than previously measured. Notwithstanding any potential revisions to household disposable income, this would be consistent with increasing the household saving to disposable income rate from around zero in 2012 to closer to +1%. The changes are a positive step but will not materially change New Zealand’s position relative to other advanced economies.

Lower-than-expected income outflows in the current account...

Looking past the historical revisions, the annual current account deficit narrowed to 4.3% of GDP in the June quarter, driven by a narrower income deficit. This mainly reflected lower profits being recorded by foreign-owned companies in both the corporate and banking sectors.

On the face of it, lower income outflows appear in keeping with the drought-affected GDP outturn in the June quarter. However, the weakness in income outflows has been a feature of the past four quarters and appears at odds with indicators such as corporate taxes and profitability readings from business surveys. Indeed, while the relationship is far from perfect, the trend in growth in income outflows has gone in the opposite direction from that suggested by the QSBO (Figure 4). It is unclear exactly what the drivers of the fall are, but given the underlying momentum apparent in the economy, we expect income outflows to pick up over second half of year.

Figure 4 – Income outflows in the current account and QSBO profitability measure
Figure 4 – Income outflows in the current account and  QSBO profitability measure   .
Source:  NZIER, Statistics NZ, the Treasury

...more than offset the negative impact of the drought

Following last summer’s drought, the annual goods surplus narrowed in the June quarter. Goods exports were $468 million (3.7%) lower than in the March 2012 quarter, although this was offset in part by a corresponding $275 million (2.5%) fall in goods imports. The annual goods surplus is expected to increase over the coming quarters, on the back of good growing conditions and high dairy prices (see later on).

The annual deficit on services remained unchanged at $1 billion (0.5% of GDP) from the March quarter. Exports of services increased slightly from the June 2012 quarter, but this was broadly offset by a similarly-sized increase in imports.

A sizeable net errors and omissions item has opened up in the Balance of Payments over the past year or so, with the annual total climbing to $6.9 billion (3.3% of GDP) in the June quarter. The nature of the net errors balance suggests that there have been inflows of capital into New Zealand that have funded the current account deficit and have not been measured by the reporting framework. To the extent that this is the case, New Zealand’s stock of international liabilities will also be underreported. It will be interesting to see what happens to the balance over the coming quarter, particularly in light of the forthcoming round of revisions.   

Near-term outlook for GDP remains positive...

Looking ahead, the near-term outlook for GDP remains positive, with the economy appearing to have carried a sizeable degree of momentum into the second half of the year. This is owing in large part to the strength of domestic conditions including private consumption.

Admittedly, consumer confidence has eased for three consecutive months after reaching a three-year high in June. This may in part reflect the prospect of higher mortgage rates following the rise in long-term bond yields since earlier this year. However, with a tightening labour market and wealth effects from the housing market, conditions remain strong. All told, while the pace of quarterly growth in private consumption is expected to moderate in the September quarter from the strong 1.5% rise seen in June, annual growth is likely to remain supported in the region of 4% – around its fastest pace in six years.

It is a similar picture for the business sector. The BNZ/Business NZ Performance of Services Index (PSI) dropped sharply in August, driven by falls in the new orders and current activity components. However, the indicator is volatile and the fall in August came after the indicator reached a five-year high in July. The bigger picture is that the PSI and its counterpart from the manufacturing sector both point to robust, ongoing growth in the business sector.

...with support from turnaround in migration

The ongoing, strong turnaround in net migration is also expected to continue to support demand in the domestic economy over the near term. There was a seasonally-adjusted net inflow of 2,100 migrants in August, bringing the annual total to 12,800 – the highest level since September 2010. The acceleration in net migration over the past year or so has been faster than we had anticipated at BEFU, and we now expect the annual net inflow of migrants to peak at a similar level to that seen in 2010.

In keeping with trends in recent months, the bulk of the turnaround in annual net migration over the year to August was driven by a slowdown in net migrant outflows to Australia, mainly reflecting fewer departures from New Zealand. This ties in with the recent divergence in the outlook for the two economies mentioned earlier.

Drawing a line under the drought...

The external and agricultural sectors are also expected to bounce back strongly from the drought in the second half of the year, and lend additional impetus to growth. Milk production this season to date is tracking well ahead of last year, and milk output over the season as a whole is expected to increase by around 4-5% from 2012/13. This would take dairy production to a record season-high.

Meanwhile, although lambing rates over the spring will be affected by the drought’s impact on ewe condition and feed availability, the total impact also looks likely to be less negative than we previously expected. Beef and Lamb NZ forecast a 7.7% reduction in the lamb crop this season compared to the Treasury’s estimate made at the time of BEFU of a 10% decline.

Based on developments since last summer, the Treasury is confident that the impact of the drought on real GDP will be broadly in line with the estimate outlined at BEFU of a net 0.7% hit in the 2013 calendar year. While the recovery currently looks on track to be faster than we expected, a full assessment of the drought’s impact will have to wait until the set of annual national accounts for the year ended March 2014 are released late next year. These will include more complete information about the extent of intermediate consumption throughout the drought (eg, imported feed/fertiliser) and will therefore determine its overall impact on value-added GDP.

...with an ongoing bounce in the terms of trade

That said, the one area where our estimates of the impact of the drought look to have been too negative is nominal GDP. Estimating the impact of the drought on nominal GDP was always more difficult than estimating the direct impact on production, as it involved taking a view on a range of highly uncertain price impacts. On balance, we assessed the nominal impact to be similar to the real impact (ie, around 0.7% of nominal GDP).

However, tighter-than-expected global supply conditions have supported dairy prices at a higher level than we assumed and have provided a significant offset to farm incomes. Fonterra recently revised up its forecast payout for the 2013/14 season by 50c to a record $8.30 per kilogram of milk solids. Dairy prices are expected to fall back from their current levels as and when global supply conditions recover. However, any sharp correction looks unlikely to occur until early next year, with higher prices remaining a feature throughout the peak-production window. Indeed, indicators point to continued strong annual growth in the goods terms of trade over the rest of the year (Figure 5), with the index set to surpass its 2011 peak in the September quarter.  

Figure 5 – Goods terms of trade and ANZ commodity prices
Figure 5 – Goods terms of trade and ANZ commodity  prices   .
Source:  ANZ, Statistics NZ, the Treasury

This will directly support growth in nominal GDP, and the additional income will have positive second-round effects in the real economy too. All told, the outlook for the second half of 2013 remains positive with the Treasury anticipating quarterly real GDP growth of around 1% in each of the two remaining quarters of 2013.

Developed world monetary stimulus left intact owing to softer economic developments

Softer developments in advanced economies led major central banks to maintain supportive policies, including the US Federal Reserve (Fed), which chose not to initiate the widely-expected September tapering of quantitative easing (QE). Activity and financial markets in emerging Asia were more stable.  This month’s special topic looks at the rebalancing of global growth from emerging market economies to developed economies and its implications for New Zealand.

US employment growth on the weaker side...

Weaker US developments raised uncertainty over the sustainability of the economic recovery. Non-farm payrolls grew by a weaker-than-expected 169,000 in August, while growth in June and July was revised down. This brought the average rate of growth over the past six months to 160,000 – below the Fed’s benchmark for labour market improvement (200,000). Figure 6 shows that the decline in the unemployment rate has been partly due to falling participation rates, as discouraged job-seekers have left the labour force and baby-boomers are starting to retire. Retail sales growth was soft in August, and consumer confidence dipped in September, possibly owing to weaker jobs growth and rising mortgage rates. Positively, both the manufacturing and the non-manufacturing ISM indices were strong in August, indicating expansion in activity.

Figure 6: The US labour market
Figure 6: The US labour market   .
Source:  Haver

The US government is expected to reach its debt ceiling in late October. To continue funding the government, a bill raising the debt ceiling must be passed through Congress, including through the
Republican-controlled House. Analysts expect an eleventh-hour deal to be struck without major policy changes to avert a government shutdown, but risks are present and are likely to lead to financial volatility. The Congress must also agree on funding for the new fiscal year beginning 1 October.

...convincing the Fed to delay tapering QE...

The Fed maintained its asset purchases at US$85 billion per month, surprising the market, which had expected a $15 billion reduction. The Fed cited the elevated unemployment rate, rising mortgage rates, fiscal risks and low annual inflation (1.5% in August) as reasons to delay tapering QE. The market reacted sharply, with equities and bonds rising and the USD weaker. However, the market still expects a tapering in QE to start in the next few months, and QE to end by mid 2014.

...which supported emerging Asian markets

Emerging Asian financial markets stabilised during the month, with equity prices rebounding, and long-term yields declining from their peaks in late August, helped by the Fed delaying the reduction of asset purchases. However, central banks in some of the emerging market economies have increased policy rates to help stabilise their currencies, which may dampen activity growth.

Australian demand subdued despite reasonable June quarter growth...

The Australian economy grew by a solid 0.6% in the June quarter, but final domestic demand remains soft, growing just 0.3%. Net exports have made a historically large contribution to growth so far this year, and soft retail sales reflected the weakness of domestic demand.

The unemployment rate ticked up 0.1% points to 5.8%, owing to a fall in employment over the past six months. Positively, the housing market recovery continued, with rising housing finance and house approvals. The RBA meeting minutes in September presented a reduced easing bias, but the market has priced in an above 50% chance of a rate cut by May 2014.

The NZD is likely to remain strong against the AUD, as the outlook for hard and soft commodity prices and domestic policy rates diverges.

...but may be helped by stabilisation in China

Chinese developments were in line with the stabilisation in activity in recent months. Industrial production expanded 10.4% on a year ago in August – the strongest growth in 17 months – while retail sales were also above market expectations. Positive manufacturing PMI outturns also indicate at-trend growth in industrial activity.

Still-tentative euro area recovery prompts dovish ECB guidance

The near-term recovery in the euro area remains far from certain, leading the ECB to reiterate its dovish stance and consider further supportive measures. Euro area industrial production fell 1.5% in July, to be down 2.7% on a year ago, reversing the recent trend of slower annual contractions. Positively, the flash manufacturing and services PMIs (at 51.1 and 52.1, respectively) indicate positive growth in activity in September. The ECB left its policy rate unchanged at 0.5% in September and restated its commitment to keep rates low for an “extended period”. ECB President Draghi said that he is willing to use more long-term refinancing operations if needed to ensure liquidity for banks. Low inflation in August (1.3%) offers room for further ECB action to support lending.

However, Japan and the UK appear positive

Japan’s GDP growth in the June quarter was revised up by 0.3% points to 0.9%, on higher investment and inventories. Strong industrial production growth in July, as well as a solid PMI reading and a smaller trade deficit in August, reinforced analyst expectations of reasonable growth in the second half of 2013.

Positive developments also occurred in the UK, where the manufacturing and services PMIs reached historical highs in August. Housing demand continued to pick up, reflected by rising house prices and mortgage approvals.

Notes

  • [1] The Australian Bureau of Statistics does not produce a directly comparable series to New Zealand’s RGNDI, but rather a real net measure of national disposable income. The RGNDI series for Australia used in Figure 2 has been calculated by the New Zealand Treasury to ensure comparability between the series. Note that the difference between the gross and net measures reflects consumption of fixed capital.
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