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Monthly Economic Indicators

Analysis

Economic data released in September showed that real GDP expanded broadly in line with the Treasury’s forecasts in the 2017 Pre-election Economic and Fiscal Update (PREFU). GDP grew 0.8% in the June quarter with strong exports growth and solid growth in consumption being partially offset by weaker residential investment and an unexpected decline in stocks. It is less clear the extent to which this momentum has continued into the current quarter, consumer confidence remains strong but business confidence has recently fallen. Growth in electronic card transactions has remained subdued while building consents are off their recent peak. In some areas measured activity may be more volatile than usual as the impact of the Lions tour enters and then drops out of the data. The current account narrowed in the June quarter, due to a strong services surplus, as well as some historical revisions that reduced earlier deficits. There is some upside risk to September CPI (which is released on the 17th of October) compared to our PREFU forecast following strong food price data, rising petrol prices, and recent falls in the exchange rate.

GDP growth picks up in the June quarter

Real GDP grew 0.8% in the June quarter, midway between our most recent estimate of 0.7% and the PREFU forecast of 0.9% but matching the market expectation. This saw annual average growth (growth in GDP for the whole year to June 2017 relative to GDP for the whole year to June 2016) ease to 2.7%. Real expenditure on GDP increased 1.1% in the quarter, with strength in exports and consumption partially offset by falls in investment and declining stock levels.

Despite the solid real GDP outturn, nominal GDP expanded by a modest 0.2% as the GDP deflator declined 0.8% and the gross national expenditure deflator fell 1.1%. This was despite prices rising for consumption and investment, suggesting that the valuation of stocks had a significant impact on the outturn. Growth in nominal GDP was materially weaker than the 1.2% quarterly growth in PREFU and therefore means our starting point for the Half Year Update (HYEFU) will be around $700 million lower. The main contributor, the change in inventories, is volatile so an important call will be the extent to which the impact is permanent or just timing related. The PREFU forecasts incorporated a large negative contribution from inventories in the September quarter so it may be that this just occurred earlier than we anticipated.

The low nominal GDP growth was also surprising given the SNA goods terms of trade rose 1.5% in the June quarter, driven by a rise in export prices of 2.1% outpacing the rise in import prices of 0.7%.

With the population growing 0.5%, real GDP per capita grew 0.3% in the quarter. This continues a run of weak quarterly growth and meant annual average growth eased to 0.6%.

Solid demand by New Zealand consumers and strong demand from tourists, whose numbers were boosted by the World Masters Games and Lions tour supporters, saw growth in the services sector of 1.0% in the quarter. Growth was particularly strong in the retail trade and accommodation industry (+2.8% - the largest in a decade) and transport, postal and warehousing (+3.5%). The primary sector was more mixed, falling 0.8% overall, as increases in forestry and logging and dairy production were more than offset by falls in oil extraction and cattle and lamb farming.

Residential investment declined 1.0% in the quarter, broadly in line with the 0.6% decline in the PREFU forecasts and consistent with our read of the residential consents data. Investment in other fixed assets also fell, down 0.4% in the quarter, with falls across most asset types with the exception of transport equipment.

Figure 1: Quarterly real GDP grew 0.8% in June 2017
Figure 1: Quarterly real GDP grew 0.8% in June 2017  .
Source: Haver

Outlook for Q3 is mixed…  

So far, indicators for the September quarter have been mixed. Consumer confidence remains elevated and business confidence had been strong until the most recent data. The Lions tour will continue to support services exports, but the timing of its main impact will vary across different measures and data. Electronic card transactions and building consents have remained subdued.

…with a weak outlook for investment…

House price growth continues to ease, with annual growth in the REINZ national House Price Index (HPI) dropping to 0.5% in August. The Auckland HPI was 2.9% lower than a year ago, while the national ex-Auckland HPI was 7.0% higher than a year ago. Seasonally adjusted median house prices were up 1.7% nationally in the month.

The volume of house sales dropped across every region in the country compared to a year ago, a rare phenomenon that has only occurred three times in the last seven years, with the national volume 20.0% lower than a year ago in August.

Dwelling consents fell 0.7% in July, following a 1.3% fall in June. A fall in multi-unit dwelling consents drove the fall. Consents for stand-alone houses rose 8.5% in July, following a 4.0% fall in June. 

We expect residential construction to remain relatively flat over the remainder of 2017 given the flattening we have seen in consents. However, we expect a pick-up in consents towards the end of the year to provide a lift in construction for 2018.

…and uncertainty around consumption.

Consumer confidence continues to lift, reaching a three year high in September on both the raw and seasonally adjusted ANZ-Roy Morgan consumer confidence index results. Confidence lifted on both the current and future conditions measures.

Business confidence had also been strong before falling sharply in September. Further outturns will be necessary to see if this fall is sustained or represents volatility associated with events in early September. 

Total electronic card spending rose 0.6% (sa) in August, unwinding the dip in July and taking annual growth to 4.7%. The increase was concentrated in non-retail industries (excluding services) which rose 1.3%, with both core and total retail down 0.2%. Movements within the core retail industries were fairly minor, including hospitality where there was little indication of a post-Lions tour pull back.

The effects of the Lions tour on the New Zealand data continues to be felt and has introduced a degree of additional data volatility. The impact varies across different measures, both in terms of the size and timing. For example, retail sales data received a substantial boost in the June quarter, some of which will persist into September. Retail sales captures a wider range of transactions (i.e. not just card based) than electronic card transactions for which the impact of the tour was less pronounced. Data on tourist spending is collected when visitors leave New Zealand and is factored into the services exports component of expenditure GDP. As a result the major impact on services exports will be felt in the September quarter as most Lions tour supporters will have left New Zealand in July.

Adding to this is continued robust population growth coming from high levels of migration.  Annual net migration fell slightly to 72,100 in August from 72,400 in July, but still up from the 69,100 in the year to August 2016. The fall from July was driven by a larger net outflow of New Zealand citizens which increased to 1,500 from 1,100. The net inflow of non-New Zealand citizens was unchanged at 73,500.

Figure 2: Electronic card transactions remain weak though it is uncertain if this will be reflected in retail trade data
Figure 2: Electronic card transactions remain weak though it is uncertain if this will be reflected in retail trade data .
Source: Statistics New Zealand

Current account deficit narrows in June

The annual current account deficit narrowed from a revised $7.7 billion (2.9% of GDP) in the March 2017 quarter to $7.5 billion (2.8% of GDP) in the June quarter, narrower than expected by the market. Compared to the PREFU, the annual deficit printed $0.6 billion narrower than forecast with data revisions accounting for around two-thirds of the difference.

On a quarterly basis the current account deficit was a $0.6 billion, but after seasonal adjustment was $1.6 billion. Compared to the PREFU, the quarterly seasonally adjusted balance was $0.2 billion narrower than forecast, owing largely to stronger services exports.

As forecast in the PREFU, the seasonally adjusted goods deficit narrowed to $0.4 billion from a revised $1.1billion in March, with quarterly growth in exports (8.6%) outpacing growth in imports (2.9%). The pickup in exports partially reflected a rebound in agricultural production (particularly dairy) from late last year. In the year to June 2017, the goods deficit widened to $2.8 billion from $2.5 billion a year ago, with annual exports up 3.3% to $50.1 billion and imports up 3.7% to $52.9 billion.

In seasonally adjusted terms, the services surplus widened $0.3 billion to $1.3 billion in June, with quarterly growth in exports of 5.9% outpacing imports growth of 0.7%. Travel services exports (chiefly tourism) grew 7.9% from March, boosted by the World Masters Games and followed a broadly flat March quarter. Compared to the PREFU, the services surplus was $0.3 billion wider than forecast, with services exports a little stronger (owing partially to revisions) and services imports marginally weaker. The boost to travel services exports from the Lions tour is expected to show in the September quarter.  In the year to June 2017, the services surplus narrowed $0.1 billion from a year ago despite the quarterly seasonally adjusted services surplus hitting a record-high.

New Zealand’s net international liability position increased by $1.2 billion to $154.2 billion (57.5% of GDP) as New Zealand’s international assets rose 2.0% to $249.8 billion and liabilities rose 1.5% to $404.0 billion.

Figure 3: Current account deficit narrows in June
Figure 3: Current account deficit narrows in June .
Source: Statistics New Zealand

Monthly trade deficit widens and commodity prices fall  

Data for the September quarter thus far has suggested some potential weakness in exports, although more data is needed before the full picture becomes clear.

Overseas merchandise trade data posted a seasonally adjusted deficit of $211 million in August following a $147 surplus in July.  Exports came in weaker than expected, falling 10.3% in the month with much of weakness owing to a drop in dairy volumes (down 38% sa). However, this is expected to be a timing issue, and will likely bounce back in September. Imports fell 2.9% s.a. from July. The annual balance was essentially unchanged at -$3.2 billion.  

The ANZ Commodity Price Index slipped 0.8% in August from a month ago, matching the fall in July, to be up 16.3% from 12 months ago. Meat prices led the fall (-3.2%). Dairy prices traded largely sideways during August and that continued in September’s GDT auction (+0.3%). The dip in the NZD against most major peers during August helped buffer local returns (+0.2%), with the NZD index also 16% higher than 12 months ago.

Overall, the annual current account deficit is expected to remain sub-3% of GDP in the year ahead, supported by further gains in services exports (particularly in the September quarter owing to the Lions tour) and ongoing strength in the terms of trade. The income deficit is expected to widen slightly as higher global interest rates and improving domestic profits increase payments to non-resident investors.

Food prices, petrol prices and exchange rates put upward pressure on inflation

Food prices increased slightly on a seasonally adjusted basis, up 0.2% in August to be 2.3% higher than a year ago. The monthly increase was chiefly driven by the grocery subgroup (0.8%), with fruit and vegetables (-0.9%), meat (-0.2%) and non-alcoholic beverages (-1.2%) providing partial offsets.

Petrol prices have also increased by more than anticipated. 91 unleaded petrol (the most common, accounting for around 80% of total petrol used) has increased 4% over the month of September. We still estimate that petrol prices will provide a negative contribution to the CPI in the September quarter, although our estimates of the size of this contribution are falling. A higher petrol price at the end of the month also suggests a positive contribution to inflation in the December quarter (as the average price is likely to be higher than the average price in the September quarter).

These changes, combined with the falls in the exchange rate, suggest some upside risk to our forecasts in the PREFU. However, we still expect annual inflation to gradually decline in the near term, as large quarterly increases (driven by petrol price rises in late 2016 and early 2017) fall out of the annual calculation. This should drive annual inflation towards the bottom of the Reserve Bank of New Zealand’s (RBNZ’s) target band by early 2018, before slowly increasing back towards 2%. September CPI will be released on the 17th of October.

The RBNZ leaves rates on hold in September

As widely expected, the RBNZ kept rates on hold at 1.75% at the September rate announcement. The press release revealed no significant change in policy or tone from the previous Statement. Market reaction was fairly muted.

Global outlook remains positive…

Growth in New Zealand’s top 16 trading partners, which is our preferred measure of aggregate trading partner growth, picked up further in the June quarter. Growth was steady in New Zealand’s two largest trading partners, China and Australia, but accelerated in the world’s three largest advanced economies and across much of Asia. The expansion in activity has become more synchronised across countries, as noted by the OECD in its September Interim Economic Outlook. The OECD projects global GDP growth to increase to 3.5% in 2017 and 3.7% in 2018 from 3.0% in 2016, slightly higher than was projected by the OECD three months ago.  

Globally, monetary policy continues to provide significant support to activity, although rates have increased in the United States and the process of balance sheet normalisation is underway. The move to begin normalising monetary policy is a positive development. It is a sign that economic growth, in the US at least, has become more self-sustaining. However, the OECD cautions that stronger growth in private investment is required to secure strong and sustained medium-term growth. Moreover, core inflation has remained subdued across advanced economies and wage growth has been muted.

…as trading partner growth picks up

Data over the past month has completed our suite of GDP results for our top 16 trading partners.  Table 6 shows that Trading Partner Growth has remained broadly steady at just above 3.5% since the end of 2016 (Table 1).   

Table 1: Annual trading partner GDP growth
Table 1: Annual trading partner GDP growth .
Source: Haver

Australian GDP increases 0.8% in Q2, but wages flat

Australian real GDP grew by 0.8% in the June 2017 quarter to be 1.8% higher than the same quarter a year ago (Figure 4). This follows weather-affected quarterly growth of 0.3% in the March quarter. 

Figure 4: GDP growth in Australia
Figure 4: GDP growth in Australia .
Source: Haver

Within the headline annual figure, the data showed positive signals of a continuing shift towards business investment and public investment. Household final consumption expenditure rose 0.7% in the quarter to be 2.6% higher than a year ago. However, with household incomes rising a lesser 2.0% over the year, the household saving ratio declined to 4.6% – a nine-year low – raising questions around the sustainability of consumption growth. Average compensation of employees, a broad measure of wages, declined 0.1% in the quarter and rose just 0.1% in the year, although with employment growing 1.9% in the year, total compensation of employees was up 2.1% on a year ago. Other measures of income growth generally slowed in the quarter, reflecting a 6% decline in the terms of trade, although the terms of trade remain up 14.9% on a year ago. The terms of trade are expected to decline further this year. 

Overall, the Australian outlook appears positive and growth is likely to accelerate further. Business conditions remain robust, and consumer confidence lifted in September.  Employment growth has firmed, rising 2.7% in August from a year ago, led by a 3.1% lift in full-time employment. Despite quicker employment growth, unemployment has yet to fall.  With spare capacity still to be absorbed, it is likely to be some time before wage and price inflation accelerates notably.   

US Fed moves to reduce securities holdings…

In the United States, headline inflation picked up to 1.9% in August, following a run of weaker inflation outturns, while core inflation remained at 1.7%. Sentiment improved in both the manufacturing and non-manufacturing ISMs to levels consistent with growth around 2.5%. However, the recent hurricanes are expected to trim growth somewhat.  

The September meeting of the Federal Open Market Committee (FOMC) resulted in no change in the federal funds rate. Given recent weakness in inflation, financial markets were surprised that the short-term outlook for a further rise in the fed funds rate in 2017 was maintained, leading to a rise in interest rates and the currency. The FOMC upgraded its 2017 growth outlook to 2.4% from 2.2%, likely reflecting the weaker dollar recently and the improved global outlook. The 2018 growth outlook was unchanged at 2.1%.    

In a widely anticipated move, Federal Reserve Chair Yellen announced that the balance sheet normalisation programme would begin in October. This programme will gradually reduce the Federal Reserve’s securities holdings accumulated over the past ten years under its quantitative easing (QE) programme. The guidelines for the programme were almost exactly as outlined in June and thus did not affect markets. 

…while ECB discusses the end of QE…    

The European Central Bank (ECB) kept interest rates on hold at its September meeting, as expected. Of more interest to the market was the announcement by ECB president Mario Draghi that the Committee had discussed some scenarios around the phasing out of QE. Analysts expect firmer details at the October meeting. The ECB also updated its forecasts. The main change was to the inflation forecasts, which were revised down given the recent higher exchange rate. Nonetheless, Draghi commented that the ECB was becoming more confident that inflation would move to a rate consistent with its target although a “very substantial” degree of policy support is still needed.   

Elsewhere, Germany’s Federal elections showed support for Angela Merkel’s Christian Democrat led bloc (CDU/CSU) had faded to 33% from 41% in 2013 and that support had increased to 13% for the Alternative for Germany (AfD) party, making it the 3rd largest party in the Bundestag. Exploratory talks to form a government between the CDU, Social Democratic Party (SPD), Free Democratic Party (FDP, a “pro-business” party”) and the Greens are expected to take some weeks. This uncertainty was reflected in a lower EUR/USD.

In Japan, Prime Minister Abe confirmed that an election will be held on 22 October. He also announced that his Economy Minister was drawing up a JPY2 trillion package of new spending on education and care for elderly funded through a scheduled rise in the consumption tax in October 2019.

… and Bank of England contemplates rate hike

In England, CPI inflation increased to 2.9% in August, the same as in May, after a fall to 2.6% in July. Crucially, the increase was supported by underlying factors with core CPI also increasing by 0.6% in the month and 2.7% over the past year. Unemployment is also historically low, at 4.3%. At its September meeting the Bank of England noted that some reduction in monetary stimulus was likely to be appropriate over coming months, although it kept rates at 0.25%. Market pricing suggests rates are likely to rise by year end.

Figure 5: UK inflation and unemployment
Figure 5: UK inflation and unemployment .
Source: Haver

Momentum eases ahead of China’s 19th Communist Party Congress

Further signs of easing growth in China continued with August growth figures for retail sales, industrial production and fixed asset investment all slowing for the third consecutive month. Nonetheless, China continues to provide support for other Asian economies with the latest trade data revealing a rebound in imports in August. Concerns about the build-up of debt led the rating agency Standard and Poors (S&P) to downgrade China’s long-term credit rating to A+, mirroring fellow rating agency Moody’s.

The 19th Chinese Communist Party Congress begins on 18 October and is expected to induct a new line-up of leaders.

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