Monthly Economic Indicators August 2009

Executive Summary#

Analysis#

At an aggregate level the economy has performed broadly in line with the Budget Forecasts. However, data released in August suggest that the world economy is experiencing a faster than expected pick-up in growth.  This appears to be flowing through to higher confidence and a stronger recovery in the New Zealand economy, although the likely composition of this growth poses questions as to its sustainability.

Global outlook improving#

The overall tone of international data released over August was of an improving global outlook.  GDP continues to contract in the US, but at a slower rate than expected, falling 1.0% in June (on a seasonally adjusted annualised rate).  Germany, France and Japan recorded positive quarterly GDP growth, as was the case in Australia where June quarter GDP surprised on the upside increasing 0.6%.  GDP fell further in the United Kingdom, down 0.7%.

Forward-looking indicators such as Purchasing Managers’ Indexes (or PMIs) provide an indicator of the economic health of the manufacturing sectors in different countries.  In general, results from such surveys have continued to increase, with those in Australia, Japan and China now greater than 50 (which indicates an expansion in activity).

Figure 1 – International PMIs

Source: Datastream

US housing market shows tentative signs of stabilisation#

There are tentative signs of stabilisation in the US housing market, regarded by some as a prerequisite for financial stability in the US given that the financial crisis was triggered by a fall in house prices.  Sales of both new and existing homes increased in July (up 9.6% and 7.2% in the month respectively) following small monthly increases in the Case-Shiller house price index in May and June.  Housing permits and house starts both eased in July following two months of large increases.  However, risks remain for a recovery in the US housing market.  The unemployment rate is expected to continue to rise from 9.4% in July, credit is tighter than normal, and there is still an over-supply of houses for sale with foreclosure rates continuing to increase.

China playing an important role#

The Chinese economy is playing an important role in leading the recovery.  Chinese industrial production increased 10.8% in the year to July, with retail sales up over 15% in the same period and fixed asset investment up 33%.  However, doubts about the sustainability of China’s growth were evident in some large falls in the Shanghai stock market during August which resulted in the market ending August down nearly 22% from the end of July. 

Despite falls in Chinese stocks, an increase in risk appetites generally saw global stock markets rally over August with the Dow Jones up 3.5%, the Australian market up 5.5% and the FTSE up 6.5%.  Commodity prices also increased as did long-term bond rates.  Stronger risk appetites continued to lead to an appreciation of the Australasian currencies over August.

But global recovery remains fragile#

While the data has been more positive, it is important to remember that activity levels are increasing from a low base.  Rates of unemployment are likely to continue to rise in most economies and there are question marks as to how sustainable the recovery will prove once monetary and fiscal stimulus is necessarily withdrawn.  Falls in world stock markets in late August and early September and increased demand for “safe haven” assets (such as US government bonds and gold) show that investors remain nervous about the strength of the recovery.

Stronger global demand will support export volumes…#

Overall, it is likely that the global outlook underpinning Treasury’s Half Year Update forecasts will be materially stronger than that which underpinned the Budget Forecasts.  This, combined with some components of exports, such as services exports, having been less negatively affected by global conditions, implies an upward revision to our export volume forecasts.  The extent of the revision will however be tempered by the impact of the higher New Zealand dollar, which over July and August has been 21% higher than the September quarter assumption. 

…although higher currency will dent returns#

The New Zealand dollar continued to appreciate against major currencies over August to be up 3.7% in the month on a trade weighted basis as the currency appreciated 2.5% against the yen, 2.8% and 4.8% respectively against the Australian and US dollars, and 6.4% against the British pound.  The run-up in the currency over the past six months has been the most rapid since the dollar was floated.  The high currency will act to dampen export receipts as well as hindering the volume of exchange rate-sensitive goods.

Figure 2 - Exchange rate

Source: RBNZ

Trade deficit narrows further…#

Merchandise trade data for July showed an annual trade deficit of $2.5 billion, a further narrowing from $3.1 billion in the year to June.  Lower imports more than offsetting lower exports have driven the deficit lower with imports in the July 2009 month $886 million (or 20.9%) lower than in the same month in 2008, while exports were $252 million (7.3%) lower.

… with Chinese demand supporting exports#

Relative to July 2008, lower oil prices drove the value of oil exports down.  Falling dairy prices meant that despite dairy export volumes being 54% higher, receipts were down 2%.  Strong demand from China has helped offset weaker demand elsewhere.  The value of exports to China in the year to July 2009 was up 61% when compared to the July 2008 year, largely due to increased exports of crude oil, milk powder and logs.  This increase has seen China become New Zealand’s third largest export market in the year to July.

… and imports particularly weak on the back of low domestic demand#

Reflecting weak domestic demand, the value of imports of capital, intermediate and consumption goods were all down on July 2008 levels.  Imports of passenger motor cars were particularly weak at the start of 2009 and despite some recent slight increases, were still 43% below July 2008 levels.

Recent declines in the trade deficit will contribute to a narrowing in the current account deficit over the short term.  However, there are several factors that suggest that the pick-up in New Zealand’s growth that is likely to occur through late 2009 and 2010 may again be domestically oriented.  This is likely to see more of a recovery in imports than was expected in the Budget Forecasts.  Ultimately this will mean less of a narrowing of the current account deficit and continued dissaving by households.  With this occurring at a time of significant fiscal deficits, New Zealand’s net international liabilities are likely to continue to trend upwards over the medium term, from the March figure of 98% of GDP.

Commodity prices are increasing in foreign price terms#

Price developments in international markets for New Zealand’s exports and imports will also influence the exact nature of movements in the current account deficit.  The ANZ commodity price index recorded its sixth consecutive monthly increase in August, increasing 4.2% in world price terms to be 12.3% higher than in February.  The appreciation of the New Zealand dollar has more than offset these gains with commodity prices in New Zealand dollar terms down 12.5% in the past six months. 

Fonterra’s monthly online auction showed further increases in foreign dairy prices.  The weighted average price rose 24.2% from the previous month to US$2,858 per tonne, its highest level since October 2008.  September’s rise follows a sharp increase of 25.8% in the August auction.

Business confidence increases further#

More positive news about the New Zealand and world economies is resulting in increasing levels of business confidence.  The National Bank’s Business Outlook (NBBO) for August showed another surge in reported confidence.  A net 34% of respondents expect better economic conditions over the next 12 months, up 16 percentage points on July.  A net 26% expect their own activity levels to improve over the next year, up 13 percentage points and close to a five year high. The improvement in sentiment was broad-based across all major sectors.  Profit expectations have turned slightly positive for the first time since October 2007.  Investment intentions have also turned slightly positive and firms expect an easing in the availability of credit.

Migration levels providing boost to demand…#

Net permanent and long term migration added 2,500 people to New Zealand’s population on a seasonally adjusted basis in the July month.  In the year to July 2009 net migration was 14,500, up from 5,200 a year earlier.  This increase has predominantly come from a drop in departures which are down 9% from a year ago.  Arrivals have increased to a lesser degree, up 3% over the past year. 

Net migration levels are currently significantly ahead of those assumed in the Budget Forecasts of an increase to 10,000 by June 2010.  It seems likely that the annual population gain from net migration could increase to around 20,000 to 25,000, before easing as improved global economic conditions encourage an increase in departures.  Stronger population growth will spur greater levels of economic activity in New Zealand.

Figure 3 - Permanent and long-term migration

Source:  Statistics NZ

… and are one factor stimulating the housing market#

The housing market is one area that is sensitive to shifts in net migration.  Activity in the housing market remains at low levels although there are signs that the worst may be over with activity stabilising and some early signs of recovery.

Seasonally adjusted house sales increased 4.2% in the month of July.  At just under 6,600 sales (seasonally adjusted), activity is significantly stronger than was experienced last year when sales troughed at just over 3,700 in November.  The past six months have also seen a significant shortening in the average time taken to sell a house.  This has fallen (when seasonally adjusted) from 55 days in February to 36 days in July.  These figures are consistent with commentary suggesting a return of buyers to the market and relatively few listings.  A reluctance to place houses on a market which was in decline will have been one factor behind low listing numbers.   

… with house prices increasing slightly#

The REINZ’s Monthly House Price Index increased 1.0% in July.  On a 3 month average basis, house prices on this measure peaked in November 2007, then fell just under 10% by February 2009.  Generally positive growth since then has meant that house prices in the three months to July are now only down around 7% from their 2007 peak. 

Building consents for new dwellings increased 5.0% in July.  Excluding the more volatile apartment series, new dwelling consents were up 11.2% to 1,075, the first time monthly consents have exceeded 1,000 since November last year.  Data in coming months will show whether this modest recovery is sustained (during 2006 and 2007 seasonally adjusted monthly ex-apartment consents in the range of 1,800 to 2,000 were the norm).   Further discussion on the housing market is provided in this month’s Special Topic.

Increasing retail sales are an early sign of stronger consumer spending…#

More positive signs were also recorded on the retail front.  Nominal retail sales increased 1.1% in the June quarter, the first quarterly increase for a year, while retail sales volumes recorded their first increase since September 2007, increasing 0.4% in the June quarter.  Big ticket items such as cars have been particularly affected by the downturn, with nominal sales of motor vehicle retailers falling 25% between September 2007 and March 2009 and therefore a 3.0% increase in June 2009 needs to be kept in perspective.

Electronic Card Transactions (ECT) suggest a continuation of the recent more positive retail sales.  Total ECT rose 1.2% in July, with sales in the retail sector rising 0.8%.

Figure 4 - Retail sales volumes

Source:  Statistics NZ

…the persistence of which will depend on consumers’ debt appetites#

Stronger migration, higher household wealth levels, as house prices show modest growth, and increases in consumer confidence suggest that private consumption spending may not experience as sustained a period of consolidation as was incorporated in the Budget Forecasts.  At this stage we do not expect a return to the rapid rates of growth experienced in the five years to 2007; however this will in part depend on New Zealand households’ appetite for debt-funded spending. 

Recently there has been a shift back to the advertising and availability of interest-free deals (some with interest free periods of up to four years) for consumer durables.  The extent to which this encourages households to take on further debt will depend on confidence about the future.  With respect to this, households should note that even with the more positive signs that have emerged of late, income growth will be constrained by slower wage growth and rising unemployment over the next year.

Stronger outlook but recession’s impact still being felt…#

Real GDP in March was 3% below its December 2007 level.  It will take some time for this loss of activity to be recovered and as a result the labour market is expected to remain weak, with unemployment continuing to rise through to the second half of 2010.

…through falling employment#

Employment fell 0.4% (10,000 people) in the June quarter following a 1.4% fall in the March quarter. Employment is down 0.9% (20,000) from June 2008 – the largest annual fall since December 1998.  The fall in employment in the June quarter was due to falling full-time employment with part-time employment increasing.  This saw total hours worked fall by 1.9% in the quarter.

Figure 5 - Unemployment and participation

Source:  Statistics NZ

… and rising unemployment#

The fall in employment in the June quarter was accompanied by a rise in the number of people in the labour force.  The rise in the labour force, combined with a fall in employment, led to a 20.6% (24,000 people) increase in the number of unemployed to 138,000, its highest level since June 1999, and the largest quarterly rise since the survey began.  As a result, the unemployment rate increased to 6.0%, a larger increase than incorporated in the Budget Forecasts.

Weak labour market sees wage growth ease#

Figure 6 - Wages

Source:  Statistics NZ

Annual wage growth eased markedly in the June quarter from elevated rates.  Growth in the Quarterly Employment Survey’s average ordinary-time hourly earnings eased to 4.5% in the June 2009 year from its recent peak of 5.5% in the year to September 2008. The Labour Cost Index recorded a 0.3% rise in the June quarter, the smallest increase since 2000, resulting in annual growth easing from 3.4% in March to 2.9% in June.

Stronger growth to see lower peak in unemployment#

Overall, signs of renewed growth in the economy mean it is likely that activity levels and labour demand will exceed those in the Budget Forecasts.  This is likely to result in a lower peak in the unemployment rate (perhaps around 7.5% next year, compared with a peak of 8% in the Budget Forecasts).  The August NBBO is consistent with a slowing in the rate of job losses going forward.

With underlying tax revenue currently running behind forecast, stronger growth in economic activity may have a more limited impact on the fiscal position (given additional economic growth will be required to return tax revenue to levels previously forecast).  In addition, the composition of growth is not likely to be favourable for the unwinding of imbalances, such as the large current account deficit and high debt levels.  This could constrain longer run growth prospects and would make it more difficult for the economy to respond to future shocks, while at the same time remaining exposed to shifts in investor sentiment abroad. 

September will see the release of June quarter GDP and Balance of Payments data, while partial data relating to July and August will help assessments of the momentum behind the current recovery.  In addition, the Reserve Bank will release its September Monetary Policy Statement.  A small decline in real GDP in the June quarter is likely to represent the last quarter of contraction in the current sequence which dates back to March 2008.

Special Topic: Housing market developments#

Nation-wide house prices have begun to rise and other indicators of housing market activity show a recovery over the past few months.  This Special Topic looks at the reasons behind the recovery and the implications for our economic forecasts.     

House prices rise#

The newly developed Real Estate Institute of New Zealand (REINZ) Monthly Housing Price Index (HPI) shows that average house prices in July 2009 were 0.9% higher than at the same time last year, the first annual increase since March 2008 (Figure 7). 

Figure 7 - House prices

Source:  QVNZ, REINZ

The HPI is constructed using a stratification method, which helps avoid the distortion that can arise when the proportion of sales of expensive houses rise in one period but fall in the next.  The HPI divides sales from each of REINZ’s 1,852 suburbs into one of ten price groups or strata, with each stratum containing 10% of total house sales.  A median sale price is calculated for each stratum and the average across all strata produces the price measure used to calculate the index.  

Figure 7 shows there is little difference in annual house price inflation between the new REINZ measure and the existing Quotable Value NZ Quarterly House Price Index (QHPI).  The main benefit of the REINZ measure is its timeliness.  The QVNZ measure, which is based on property title transactions, has the advantage of wider coverage but takes over 3 months to compile.  In comparison, the REINZ measure is based on sales reported by REINZ members, which enables it to be published around 14 days after the end of the month.    

Other housing market indicators recover#

Measures of housing market activity provide indications of the overall balance of supply and demand in the market.  Overall, the indicators in Table 1 show a modest recovery in both supply (new listings and consents) and demand in recent months.   

Table 1 - Housing market indicators

Source:  Reserve Bank, Real Estate Institute of NZ (REINZ), Barfoot & Thompson (B&T), Quotable Value (QV), Stats NZ

Mortgage approvals have eased following a surge in April, but are tracking 5% to 10% higher than in the same month a year ago and are at similar levels to 2005.  The fall in the average number of days to sell a property is indicative of a rise in demand that has not been fully met from the increase in new listings.   

Figure 8 charts house price changes against average days to sell and shows days to sell generally leading house prices.  The recent fall in days to sell points to further price growth.

Figure 8 - Housing activity and prices

Source:  REINZ, Treasury

Another indicator of the balance between supply and demand can be derived by comparing building consents and population growth.  This approach was used by the Prime Minister’s Department in its report on house prices.   Using data from 1995 to 2007, the report found no shortage in the stock of dwellings.  Table 2 updates their analysis and suggests that a shortage is emerging. Rising rental prices would help corroborate this view, but the latest data shows rents are flat to declining.  Moreover, the conclusions from the table are sensitive to assumptions on average household size and the proportion of consents that are completed.  For example, if the desired household size is below the average of 2.7 recorded in the 2006 Census, any shortage is exacerbated.  On the other hand, a higher ratio of completions to consents ameliorates any shortage. The regional dimension to the growth in dwellings and population is also important, and some observers have noted a shortage of dwellings in Auckland. 

Table 2 - Housing supply and demand

Source:  Statistics NZ, Treasury

The recovery in the housing market could reflect a number of related factors.  First, buying property has become more affordable:  house prices are below their 2007 peaks, construction costs are down and the cost of secured borrowing has fallen. Second, credit availability has improved a little.  Third, concerns about the severity of the recession may have abated: households’ confidence has picked up from the levels seen around the end of last year.  Fourth, net migration has surged from around 3,500 in the year to November 2008 to 14,500 in the year to July 2009. 

Reflecting these factors, July’s ASB Housing Confidence Survey recorded a net 54% agreeing that now is a good time to buy a house, over twice the proportion recorded in December 2008 and the highest reading since 2002.    

Implications for the economic outlook#

The outlook for house prices has changed markedly since the Budget when we forecast house prices to fall by around 10% over the year ahead.  Net migration inflows, which are now expected to rise to 20,000-25,000 (well ahead of the 10,000 forecast in the Budget), and relatively low levels of dwelling consents and new listings will put upward pressure on prices.  But beyond the short-term, slowing wage growth, high levels of household debt, an expanding supply of houses for sale and rising interest rates will forestall a return to the rates of house price inflation seen earlier in the decade. 

Figure 9 - Forecast residential investment

Source:  Statistics NZ, Treasury

In terms of GDP we continue to expect residential construction activity to record a further decline in the June quarter – a reflection of the lags between consents and activity and some catch-up from the surprisingly small decline recorded in the March quarter (Figure 9).  Nonetheless, the recovery in the housing market is indicative of a return to growth in residential investment over the second half of 2009.  In addition, residential investment may play an even more prominent role than forecast in the expected recovery over 2010.  

Our Half Year Update provides an opportunity to factor these developments into our economic forecasts. 

New Zealand Key Economic Data#

Quarterly Indicators#

Monthly Indicators#