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Monthly Economic Indicators

Analysis

Domestic data released over September continue to show robust economic activity.  GDP and Balance of Payments data for the June quarter were stronger than expected in the Budget Economic and Fiscal Update (BEFU), with construction and services the main drivers of growth.  High population growth from record net migration has supported aggregate demand.

Indicators of more recent activity were generally positive and point to reasonable growth prospects for the remainder of 2016.  Consents data suggest construction activity will continue to increase, particularly later in the year.  Consumer confidence lifted, as did key export commodity prices.  Interest rates remain low, with the Reserve Bank holding the Official Cash Rate (OCR) at 2.0%. However, the high New Zealand dollar may be creating some headwinds for tourism and putting downwards pressure on inflation, and house price growth remains high.

Solid GDP growth in the June quarter…

The major data releases in September were the June quarter GDP and Balance of Payments figures.  Real production GDP rose 0.9% in the June quarter (Figure 1), largely in line with market expectations but stronger than in the BEFU (0.6%).  Annual average growth lifted to 2.8% (BEFU 2.6%), partly owing to revisions to previous quarters (including the March quarter, revised from 0.7% to 0.9%).  Construction and services remain key growth drivers, with overseas tourism less prominent in the June quarter.

Figure 1: Real production GDP
Figure 1: Real production GDP   .
Source:  Statistics NZ

Real expenditure GDP growth was stronger than production GDP growth at 1.2% in the quarter, lifting annual average growth to 3.3% (BEFU 3.5%).  Nominal GDP growth was strong at 2.1% in the quarter, despite a 1.9% fall in the SNA terms of trade.  Annual average growth in nominal GDP lifted to 4.2%, exceeding the $250 billion mark for the first time.  Nominal GDP was around $1.7 billion higher than forecast for the year to June, in line with the $0.4 billion positive tax variance in the 11 months to May[1].

Real gross national disposable income, which adjusts GDP for terms of trade movements (ie, a measure of the average real purchasing power of New Zealand’s disposable income), increased by 2.6% in the June year.  Aggregate GDP growth figures continue to be bolstered by rapid population growth (2.0% higher than a year ago), which in turn has been supported by high net migration.  Real GDP per capita growth was 0.7% in the year to June.

Annual permanent and long-term (PLT) net migration lifted marginally from its previous peak in June to 69,100 in August (Figure 2).  Seasonally adjusted monthly net inflows have been stable at around 5,600 in recent months.  There are some signs that net migration is peaking.  After rapid growth, annual net inflows of non-New Zealand and non-Australian citizens have started to flatten off.  This has largely been driven by slowing growth in student visas, which fell in the year to August, the first annual decline since overseas student work rights were relaxed in 2013.  Similarly, the decline in net New Zealand and Australian citizen outflows has tapered off in recent months.

Figure 2: Annual PLT net migration by citizenship
Figure 2: Annual PLT net migration by citizenship   .
Source:  Statistics NZ

…driven by construction…

Construction was a major driver of growth in the quarter, underpinning both measures of GDP growth.  The construction industry accounted for one third of the increase in the production measure of GDP, growing 5.0% in the quarter to be up 6.3% in the year to June (Figure 3).  Industries related to construction and the housing market more broadly also made significant contributions.  Rental, hiring and real estate services contributed 0.2 percentage points to growth, while manufacturing (including the manufacture of glass, cement and concrete) and retail trade (where growth was driven by non-durable goods such as hardware and furnishings) contributed 0.1 percentage point each. 

Figure 3: Construction and residential investment
Figure 3: Construction and residential investment   .
Source:  Statistics NZ

Much of the investment growth in the expenditure measure of GDP was construction-related.  Residential building investment lifted by 6.0% in the quarter, non-residential building investment by 4.5% and other construction, which includes infrastructure investment, by 4.9%.  Overall investment growth accounted for a little over half of the growth in expenditure GDP for the quarter.

Construction is expected to underpin growth through the remainder of 2016.  A slight slowdown in the volume of consents issued earlier in the year, together with the greater share of apartments (which typically take longer than houses to move from consent to construction), suggests that the pace of growth may ease a little from recent quarters.  Nonetheless, construction is expected to remain solid through the second half of 2016 and into 2017.

…and supported by services

Services industries expanded by 0.7% in the quarter, to be 2.8% higher in the year to June.  Much of the growth in the quarter was driven by industries supporting the construction sector.  Non-residents’ expenditure in New Zealand (chiefly tourism-related activity) fell 1.7% in the quarter but together with population growth remains the main driver of annual growth in services.  Slowing growth in international tourism (partly due to the headwinds of a high NZD) suggest that services sector growth in coming quarters may be driven more by domestic factors.

Growth in the primary sector was positive for the first time since June 2015, as increased dairy production more than offset a reduction in mining activity.  The rise in primary production also benefitted food processing industries.

Private consumption growth lifts…

Household consumption expenditure spiked 1.9% in the June quarter, following relatively subdued growth of 0.4% in the March quarter.  Consumption of services and durable goods both rose strongly in the quarter, with the latter reflecting housing activity as well as improved purchasing power from the higher NZD.  Real household consumption increased by 2.6% in the year to June, underpinned by population growth, with per capita consumption growth remaining fairly weak.  Nominal household consumption increased by 2.3% in the quarter, stronger than our expectations and contributing much of the positive variance from our GST forecasts.

Consumption indicators for the September quarter have been more mixed.  Seasonally adjusted total electronic card spending fell 0.8% in August, with retail spending down 0.4%, following gains of just 0.3% and 0.2% respectively in July.  However, consumer confidence has improved more recently, with the ANZ-Roy Morgan survey lifting in September after falling in July and August (Figure 4) and the Westpac McDermott Miller consumer confidence index increasing slightly for the September quarter. 

Figure 4: Consumption and consumer confidence
Figure 4: Consumption and consumer confidence   .
Source:  ANZ-Roy Morgan, Statistics NZ

Overall, we expect consumption growth to slow in the September quarter, partly reflecting a pull back from high growth in the June quarter, before picking up again in the December quarter.  Low interest rates, high net migration and solid labour income growth should sustain aggregate private consumption growth at a reasonable rate.  This month’s special topic provides a more detailed look at recent household debt developments.

…while net exports continue to drag on growth

Exports of goods increased by 7.6% in the quarter, with large increases in both dairy and meat exports.  However much of this growth, particularly of dairy exports, was met from a reduction in inventories, suggesting the pace of exports is unlikely to be sustained into the September quarter.  This has been borne out so far in the overseas merchandise trade data, with seasonally adjusted dairy export volumes falling 12.9% in August, after increasing just 0.6% in July.  Exports of services fell 1.6% in the quarter, mostly due to the fall in tourism-related activity.  Overall, exports contributed 1.1 percentage points to growth but this was offset by the fall in inventories (also 1.1 percentage points).

Imports also rose strongly in the quarter, up 2.6%, largely reflecting strong domestic demand.  Growth was driven by consumption goods (up 4.3%) and capital goods (up 6.1%), in line with the broader drivers of economic growth in the quarter. Services imports were also strong, with many New Zealanders making the most of the high NZD to increase their household expenditure overseas. All told, imports detracted 0.7 percentage points from GDP growth. 

Net exports are expected to remain a drag on growth in coming quarters.  Import growth is likely to remain solid in light of strong domestic demand and the Air New Zealand fleet upgrade.  Meanwhile, export volumes are likely to pull back a little.  Dairy, beef and sheep meat production are all expected to ease in the coming agricultural season and the high NZD may present headwinds for exporters of manufactured products and services (including tourism).  A good season for horticulture and wine may provide some offset.

The current account deficit narrowed in June…

Despite the terms of trade falling, the annual current account deficit narrowed to 2.9% of GDP in June from 3.1% in March (Figure 5).  The deficit was at the high end of market expectations (median 2.7%) but significantly lower than expected in BEFU (3.5%).  Last month’s special topic provides some insight into why the current account deficit has been relatively low in recent years.[2]

The annual goods deficit narrowed slightly to 0.9% of GDP (from 1.0% in March).  Thanks to the inventory-related surge in export volumes, nominal goods exports rose 4.4% in the quarter, while nominal goods imports rose 3.7%, also on higher volumes. 

Figure 5: Annual current account deficit
Figure 5: Annual current account deficit   .
Source:  Statistics NZ

The annual services surplus remained stable at 1.7% of GDP.  Nominal services exports fell 1.8% in the quarter but remain at a high level thanks to strong growth in preceding quarters. Nominal services imports increased 1.0% in the quarter, with a 1.9% increase in travel services imports reflecting an increase in spending by New Zealanders on holidays overseas. 

The annual primary income deficit (investment income flows) narrowed from an upwardly revised 3.6% of GDP in March to 3.4% of GDP in June. The smaller annual deficit is chiefly the result of a reduction in investment income from foreign investment in New Zealand (smaller investment income outflows).
New Zealand’s net international liability position increased from 63.9% in the March quarter to 64.9% in June. New Zealand’s liabilities increased in the quarter more than its assets held offshore, as the NZX performed relatively well compared to overseas indices (increasing New Zealand’s external liabilities via market price changes) and global market volatility stemming from the Brexit vote led to a devaluation of New Zealand-held assets overseas. That said, market price changes are calculated on a quarter-end basis which, in June, closely followed the Brexit vote.

…and commodity export prices continue to pick up

The annual overseas merchandise trade deficit widened slightly in August to $3.1 billion, although it remains slightly lower than the $3.3 billion deficit recorded in the year to June.  On a seasonally adjusted basis exports fell 8.6% from July, with a particularly large fall in dairy values (-11.7%) due to lower volumes (-12.9%).  Seasonally adjusted imports fell 3.0% (-2.3% excluding petrol).

Prices for New Zealand’s key commodity exports continue to pick up.  The ANZ world commodity price index increased 3.2% in August, its fourth consecutive monthly gain, with the index 10.2% higher than its April low.  Increases have been fairly broad-based, with all the commodities measured lifting since April.  Gains have been less pronounced in the New Zealand dollar index, which increased 1.9% in August and 4.3% since April, because of the 6% appreciation in the NZD TWI since April.

Dairy prices continued to gain ground on the GDT auction platform.  The GDT index increased 10% in September, following a 20% increase in August (Figure 6).  Increases in September have been mostly concentrated in the fat-based products, with key product whole milk powder (WMP) lifting only 3.2% to around US$2,780/mt.  The lift in prices to date has been a little faster than our expectations in BEFU.  There may be a small retracement in one or two upcoming auctions, following the large gains recently, but the broad direction of prices is expected to remain upwards as global supply continues to adjust.

Figure 6: Dairy prices
Figure 6: Dairy prices   .
Source:  Global Dairy Trade

In response to improving prices and the ongoing global milk supply adjustment, Fonterra lifted its forecast farmgate milk price from $4.75/kg milk solid (MS) to $5.25/kg MS.  The new milk price forecast is above the average breakeven of around $5.00/kg MS; however, most farmers will still face negative cash flows during the current season given the low retrospective payment from the 2015/16 season.

Seasonally adjusted short term overseas visitor arrivals in August fell compared to a month ago
(-1.9%) but remain close to their recent high levels.  Growth in annual arrivals remains strong at 11.3%, with annual arrivals of 3.36 million.  New Zealand resident departures rose compared to a month ago (1.6%), with growth in annual departures of 6.1%.

The current account deficit is expected to widen in the September quarter, due to an increase in the goods deficit as dairy volumes moderate further (before higher prices begin to show up in the December quarter). The services balance is expected to hold up around current levels, with travel services exports supported by a sustained high number of Chinese visitors as well as high levels of education exports. That said, the current account deficit is not expected to widen over the remainder of 2016 to the extent forecast in BEFU. 

House price growth remains elevated

House prices eased slightly in August but annual price growth remains high.  The REINZ stratified median house price index fell 2.2% in August, with falls in Auckland, Christchurch and Wellington as well as the rest of the North Island.  The monthly decline may have reflected the response by retail banks to upcoming tightening of LVR restrictions in October, although LVR data for August suggest the retail banks in aggregate are well below the “speed limits”.  On an annual basis, the index was 11.7% higher than a year ago.  Price pressures continue to spill over from Auckland, where annual growth eased to 8.2%.

Food prices, which make up about one fifth of the Consumers Price Index (CPI) basket, rose 1.3% in August, following a small decline in July (-0.2%).  However this increase is expected to be outweighed by the ACC levy decrease and declines in petrol prices in the September quarter.  As a result, CPI inflation is likely to remain low in the quarter and possibly be negative.  In the absence of further shocks, the high NZD is likely to continue exerting downward pressure on tradables inflation.

RBNZ left the OCR unchanged at 2.0%

The Reserve Bank left the OCR unchanged at 2.0% in September, in line with market expectations that the next cut will be delivered in November.  A further cut is around 20% priced in for February.

Less easy global monetary policy expected

Although most central banks held policy rates unchanged in September, the landscape of global monetary policy has changed with slightly more flexible policy targets in Australia and Japan, and lowered prospects for future easing by the ECB, BoJ and BoE, despite continuing economic weakness. Expectations of future hikes by the Fed have fallen on weaker outturns and a new Fed ‘dot plot’ showing a more gradual profile with two fewer 25 basis point hikes expected in 2017. With limits to monetary easing and what it can achieve, the OECD has called for increased fiscal stimulus and structural reforms to complement monetary policy, which it sees as insufficient for breaking out of the current “low-growth trap”.

Concerns about less monetary easing in the future, and heightened risk aversion led global financial market volatility to rise in September, with the VIX spiking to 20.5 mid-month, and averaging around 14 compared to 12 in August. Global 10-year government bond yields rose, but most have since retraced (Figure 7).

Figure 7: Ten-year government bond yields
Figure 7: Ten-year government bond yields   .
Source:  Haver

US data mixed, and Fed remains on hold…

US indicators of September quarter activity have been mixed, disappointing analysts. Surprising declines in the August business surveys mirrored a fall in industrial production (-0.4% mpc), and a disappointing September manufacturing PMI outturn implies more of the same. Despite a surge in consumer confidence in August and September, and increased personal income and spending in July, retail sales fell in August (-0.3% mpc). Non-farm payrolls showed jobs growth of 151,000 in August, well below growth of 275,000 in July, but the unemployment rate was stable (4.9%) and earnings growth robust (2.4% apc). Housing market indicators remained mixed.

Inflation outturns diverged, as PCE inflation (the Fed’s preferred measure) eased slightly to 0.8% in the year to July (core 1.6%), but annual headline CPI inflation rose to 1.1% in August (core 2.3%). At its September meeting, the Federal Reserve noted the case for a rate hike had “strengthened”, but kept policy settings unchanged in order to “wait for further evidence of continued progress towards its objectives”. The move was in line with expectations, and markets price a 44% probability of a hike in December.

…while Japan’s outturns were soft, and the BoJ changes monetary policy target

Japan’s June quarter GDP growth was revised up from 0.0% to 0.2%, with greater private capital expenditure and inventory investment. Activity deteriorated in July from a year ago, as trade declined (exports and imports fell 14% and 21% respectively), retail sales were down 0.2%, and industrial production fell 0.9%. Indicators of more recent activity appear mixed, as consumer confidence picked up in August, the manufacturing PMI expanded in September, and the unemployment rate eased slightly to 3.0%, but the August services PMI and small business confidence fell.

Japan’s consumer price deflation continued for the fourth consecutive month, with headline inflation of -0.4% and core inflation (ex. fresh food) of -0.5% in the year to July. The apparent ineffectiveness of monetary policy and the perceived costs of negative interest rates prompted the BoJ to undertake a Comprehensive Assessment of monetary policy. The Assessment pointed to external factors (such as oil prices and weak global demand) and backward-looking inflation expectations to explain Japan’s subdued domestic inflation. While negative interest rates had lowered borrowing costs in the economy, the associated flat yield curve was identified as having a negative effect on financial institutions’ margins – detrimental for both profitability and the ability of banks to pass on further rate cuts to deposit rates.
In response, the BoJ unveiled a new monetary policy framework focusing on controlling the yield curve. In particular, a new target was introduced aimed at maintaining 10-year yields around zero percent, and the Bank committed to overshoot the price stability target in an effort to strengthen the forward-looking component of inflation expectations. Markets remain sceptical about the chances of success of these new targets. The policy rate (currently -0.1%), quantitative easing and equity fund purchases were kept unchanged.

Australia’s June quarter GDP growth eased…

June quarter GDP growth in Australia was 0.5% (3.3% annual), down from 1.0% in March. Housing and public expenditure drove growth, both of which are expected to remain at high levels given a backlog of consents and state spending commitments. Softer consumer spending growth, weaker net exports and declining mining investment dampened growth. Subsequent data for July were mixed, with flat retail sales, a rebound in dwelling approvals (11.3% mpc), and a narrowing trade deficit as exports rose (2.8%) and imports fell (-0.4%).

The Reserve Bank of Australia held its policy rate steady at 1.5% in September, as expected, and indicated the rate would likely remain stable in the near term (market implied probability of a cut in 2016 is 28%). The RBA adopted a new Conduct of Monetary Policy, with a “flexible medium-term inflation target” for “low and stable” inflation “over time” (slightly more flexible wording than the previous target for “low” inflation “over the cycle”).

…but China’s growth recovered in August

While the official and Caixin measures of manufacturing and services PMI were mixed in August, other outturns showed decisive improvements in contrast to July’s disappointing outturns across the board. Industrial production growth rose to 6.4% and real retail sales grew 10.6% (apc). Fixed asset investment growth remained at 8.1% (ytd) with higher construction investment. China’s exports eased 2.9% (in USD terms), while imports growth was the highest observed in almost two years, up 1.7%, which analysts relate to increased government infrastructure investment. However, price pressures remained muted, as CPI inflation declined from 1.8% to 1.3% (apc), driven by falling growth in food prices, and producer price growth was -0.8% (apc), its highest level since 2012.

Mixed activity in the euro area…

Euro area activity was mixed in July, as the unemployment rate remained flat (at 10.1%), but industrial production fell (-1.1%) and a range of business confidence indicators were weaker, possibly indicating some delayed Brexit impact.

The European Central Bank left its policy rates and asset purchase programmes unchanged in September, as headline and core annual CPI inflation were stable in August at 0.2% and 0.8% respectively. The second round of the ECB’s TLTRO-II operation was opened this month, offering 0% interest rate loans to banks, and saw an increased uptake compared to the first round, but lower than analysts expected.

...but UK growth appears unimpeded by Brexit

UK’s GDP growth in the June quarter was confirmed at 0.6% (2.2% apc), driven by private consumption. The August manufacturing and services PMIs rose sharply, supported by BoE stimulus and greater competitiveness due to the weaker pound. Unemployment in July remained stable at 4.9%, while August retail sales growth was stable at 6.2% (apc). Industrial production rose 2.1% in the year to July, but manufacturing output growth was weaker at 0.8%. Analysts continue to anticipate growth will slow post-Brexit, but these outturns indicate the short-term impacts of Brexit may be more modest than expected.

Consumer prices rose 0.6% in the year to August (1.3% core). The Bank of England left its policy rate unchanged at 0.25% at its September meeting, in line with market pricing, and seems less likely to ease further in the near term.

New Zealand fundamentals strong

New Zealand’s GDP growth and interest rates are amongst the highest in the advanced economies, reflected in a NZD TWI that currently sits 9% above its 10-year average. Markets expect further RBNZ easing aimed at lifting inflation, in line with other central banks around the world (Figure 8), which will strengthen New Zealand’s already robust growth outlook. Continued strong growth, in turn, is expected to maintain high demand for the New Zealand dollar and equities (with the NZD TWI up 11% and the NZX 50 Index up 29% in the past year).

Figure 8: Central bank policy rates
Figure 8: Central bank policy rates   .
Source:  Haver

Notes

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