Monthly Economic Indicators August 2013

Executive Summary#

Analysis#

The New Zealand economy continues to show resilience and has not been significantly affected by shocks in the form of further earthquakes and the whey protein concentrate issue. Households and businesses are becoming increasingly optimistic about the economic outlook, with consumers in particular beginning to spend more. These factors add some upside risk to the 0.2% June quarter real GDP growth forecast in the May BEFU, although the impact of the drought could be more negative than initially expected.

The outlook for the second half of 2013 remains positive, with improving confidence, and other indicators pointing to a continuing pick-up in economic activity. However, there are risks to the outlook, including the possibility of lower demand from many of our Asian trading partners as their growth slows.

Retail sales strong in the June quarter…#

Core retail sales volumes (excluding vehicle-related spending) grew a robust 2.3% in the June quarter, to be 4.5% higher than a year ago (Figure 1). The strength was broad-based, with 11 of the 13 core industries showing increases in volumes; food and beverage services (up 4.5%) and department stores (up 5.4%) were the main drivers. These two industries are suggestive of consumers becoming more willing to spend, consistent with ANZ-Roy Morgan Consumer Confidence rising strongly in the June quarter to 124.0. Consumers also believe it is a good time to purchase large household items, with the series at highs not seen since 2007, although it has eased slightly in July and August.

Including motor vehicles and fuel retailing, total volumes rose 1.7%, with fuel sales volumes – which are not seasonally adjusted but tend to decline in the June quarter – dragging down the total, falling 5.0% in the quarter.

In keeping with the June quarter Consumers Price Index (CPI) released last month, pricing pressures remained subdued. Core retail sales values rose 2.0% in the quarter, implying an overall fall in core retail prices (Figure 1). Pricing pressure has been held down by several factors, including spare capacity in the economy, strong competition between retailers, and an elevated exchange rate. However, there are some signs that these influences are beginning to fade, with some industries’ deflators beginning to increase (or becoming less negative) on an annual basis and evidence of slightly less discounting in the June CPI.

Figure 1 – Retail Sales - volumes, values and deflator

Source:  Statistics NZ, the Treasury

We expect this trend to continue as the economy grows more strongly, absorbing spare capacity. The impact of the elevated New Zealand Dollar (NZD) is also expected to decrease, resulting in fading downwards pressure on tradables prices. The expectation of rising inflation was supported by the Reserve Bank’s survey of expectations for the September quarter, which revealed a sharp increase in 2-year-ahead inflation expectations to 2.3%.

...supported by a strengthening labour market...#

The strong retail sales outturn was supported by a modest strengthening in the labour market in the June quarter. According to the Household Labour Force Survey (HLFS), the number of people employed rose by 0.4% (8,000, Figure 2), which was a particularly positive outcome given the large 1.7% increase in the March quarter was not reversed. Annual employment growth rose to a still-modest 0.7%, but is well above the -1.4% in the December 2012 year. The Quarterly Employment Survey (QES), which surveys firms rather than households, showed a similar strengthening in the number of filled jobs. On a regional basis, Canterbury continued to provide the majority of the strength in both surveys, accounting for half of the total filled job growth in the QES in the June quarter.

It is worth noting that the number of youths in the labour force continued to decline, as job opportunities remain limited for those with little job experience. On the more positive side, the NEET rate – the number of youth not in employment, education or training as a proportion of the working-age population – fell to its lowest rate since 2008, as more youth entered education.

The national unemployment rate edged up 0.2% points to 6.4% in the June quarter, but remained below its 2012 average (6.9%). The modest increase came after a 0.6% point fall in the March quarter. The driver of the increase in the unemployment rate was an increase in the number of people returning to or entering the labour force, increasing the participation rate. This signals greater confidence in labour market conditions and increases the pool of available labour for firms to draw on.

Figure 2 – HLFS headline statistics

Source:  Statistics NZ

We expect the labour market to continue to show moderate improvement over the rest of 2013 and into 2014. Business surveys indicate that firms are becoming more willing to hire workers. The Canterbury rebuild should continue to provide a strong impetus for hiring too. These factors are expected to drive a gradual decline in the unemployment rate over the next few years, as forecast in the May BEFU.

...and moderate real earnings growth#

Nominal wage growth in the June quarter remained subdued, with average hourly earnings rising 2.1% in the year (QES measure). Much of this softness is originating from the public sector, with hourly wages up 1.6% on a year ago, as the government looks to restrain expenditure growth. However, growth in total weekly gross earnings was stronger, growing 1.2% in the quarter and 3.8% for the year as the total number of weekly paid hours grew.

While nominal wage growth remained subdued in the quarter, this must be kept in the context of the subdued pricing environment, as discussed earlier. With annual CPI inflation at 0.7%, real annual wage growth is around 1.4%, similar to the mid-2000s. Using weekly gross earnings, real incomes are about 3.1% higher over the year, reflecting higher wages and more paid hours (Figure 3). This is contributing significantly to the retail sales growth, especially given falling retail prices overall.

Figure 3 – Real weekly earnings and retail sales growth

Source:  Statistics NZ, the Treasury

Higher net migration and more overseas visitors add to demand#

The strong turnaround in migration continued in July, with a seasonally-adjusted net inflow of 2,000 migrants, bringing the annual total to 10,600 (Figure 5). As discussed in last month’s MEI, the turnaround in net migration over the last year has been caused by both a fall in departures to Australia as well as an increase in arrivals. The increase in arrivals has come from a number of sources, including Asian and European countries, but there have also been increasing numbers of New Zealanders returning from Australia. The July net migration figures saw a continuation in these trends. The acceleration in net migration over the past year has been faster than we had anticipated at BEFU, and is one factor contributing to the stronger domestic demand seen in the June quarter.

In addition to impetus from more net migrants, short-term visitor arrivals have also been steadily rising over 2013. The June quarter total was only about 5% below the peak in visitor arrivals seen during the Rugby World Cup in 2011 (Figure 4). The increase in visitors has come primarily from Australia and China; visitor arrivals from China are at record highs and are expected to continue to increase as incomes rise. The growth in visitors from Australia is expected to slow to some extent in the second half of 2013 as the higher NZD against the AUD takes effect. The overall increase in visitors has contributed to the strong June retail sales, in particular to the strength in the food and beverage services category, which includes restaurants and cafes.

Figure 4 – Short-term visitor arrivals (3-month moving sum)

Source:  Statistics NZ, the Treasury

Housing market strength continues...#

Higher house prices continue to flow through to general confidence and to household spending. The REINZ stratified house price index rose 0.5% in July and is 8.6% higher than a year ago (Figure 5). In keeping with recent releases, annual price growth was strongest in the Auckland region, up 13.9%. Housing turnover at a national level has also been rising strongly, with house sales volumes up 3.9% in July and 14.7% for the year. Again, this pick-up was driven by an 8.5% increase in house sales in Auckland for the month, supported by a greater number of listings. This could be an early sign that prices are reaching levels that are encouraging more people to sell, as well as a greater supply of houses being built. Higher net migration is also likely to be contributing to increased demand in the housing market.

Figure 5 – House prices and net migration

Source:  Statistics NZ, REINZ, the Treasury

Increasing house prices over the past year have likely been contributing to the strength in retail sales owing to a wealth effect. However, it is difficult to pinpoint how much this is contributing compared to other factors such as the labour market and migration. In addition, the increased turnover of houses will be contributing to retail sales growth, as purchasing a house is typically a time when households upgrade durable goods.

…but LVR restrictions may have an impact#

During August the RBNZ announced new restrictions on high loan-to-value lending. From 1 October banks will have to restrict new residential mortgage lending with loan-to-value ratios (LVRs) over 80% to no more than 10% of the value of their new housing lending. It is estimated that around 30% of new lending this year has been in the high-LVR category. The main purpose of this policy is to improve macroeconomic and financial stability by reducing the possible detrimental impact of a housing downturn on bank balance sheets.

In addition to improving stability, the RBNZ expects the new restrictions to limit credit growth and to relieve some pressure on the housing market, reducing house price inflation. This may also have implications for monetary policy, reducing the need to increase the OCR by as much as otherwise might have been the case. However, market rates still imply, and economists largely still expect, the first OCR rise to occur in March 2014. In the leadup to and following the announcement, the NZD fell by around one cent against the USD owing to the expected lower asset price pressure and a lower interest rate outlook. The overall impact of the LVR restrictions is uncertain and will in part depend on how banks and borrowers react and how long the policy is in place.

Real GDP growth expected to be moderate in June quarter...#

All of the points above, including strong retail sales growth, supported by a strengthening labour market, higher net migration, more visitor arrivals and a strengthening housing market, point to a moderate outturn for June quarter real GDP. The ANZ regional trends release was also positive, reporting a national 1.2% pick-up in activity for the quarter. While this is not always an accurate read for the quarterly GDP outturn, it is suggestive of more economic momentum. However, the drought is expected to have its main negative impact in the June quarter, which could detract around 0.5%- 0.6% points from quarterly growth. Overall we assess a small upside risk to the BEFU forecast of 0.2% real growth for the June quarter. This comes after lower-than-expected real GDP growth of 0.3% in the March quarter.

Growth in nominal GDP (including price as well as volume changes) could be softer than real GDP in the June quarter, given the subdued pricing pressures evident during the quarter. However, we expect this will be temporary given the fading influence of the elevated exchange rate, the absorption of spare capacity in the economy, and higher commodity prices leading to higher terms of trade in the quarter.

...with outlook positive for the second half of the year#

The outlook for the second half of 2013 remains positive, as the economy bounces back from the drought. Several of the trends discussed earlier are expected to continue, such as increasing net migration and more strength in the housing market, providing more impetus for growth. Other indicators are also pointing to strength: surveys for the manufacturing and services sectors rose significantly in July, while business confidence according to the ANZ Business Outlook remained elevated in August.

The terms of trade also remain on course to continue to rebound in the September quarter, which will lend support to the nominal economy. While the trade balance posted a deficit of $774m in July (from a surplus of $334m in June), this appears to be largely the result of the timing of shipments and is expected to reverse out over the coming months. Coming into the seasonal peak production period, dairy prices in NZD-terms are close to their 2008 peak and reinforce Fonterra’s recent upward revision of the milk-price payout to $7.80 per kg of milk solids.

One factor that could detract from growth in the future is the recent whey protein concentrate issue. We assess that the short-term impacts will be minimal, with the banned dairy products making up only a small proportion of total dairy exports. Further, dairy prices at the GlobalDairyTrade auctions have held up during August, suggesting the market has not lost confidence in New Zealand’s products. In addition, tests have shown that the identified products were not contaminated with bacteria that can cause botulism. Nevertheless, the issue has the potential to lower the demand for New Zealand’s dairy products in the future given sensitivity to food safety concerns.

A mixed month for the world economy#

A further broadening of economic recovery in the developed world was evident in August, while China’s growth outlook stabilised, but the outlook for other Asian emerging economies weakened.

Demand remains subdued in Australia...#

Household demand remained soft in Australia. The volume of retail sales and retail prices were largely unchanged in the June quarter, suggesting flat consumer demand. The lack of growth is partly attributable to weaker job prospects, confirmed by low employment growth in the six months to July (0.25%). While house prices are responding positively to historically low interest rates, this has not translated into stronger household spending. This month’s special topic examines the weaker outlook for the Australian economy and its implications for New Zealand.

...but may be helped by stabilisation in China...#

Developments in August were consistent with lower risk of a sharp slowdown in China’s growth. The growth of industrial production (IP) recovered to 9.7% on a year ago in July, owing partly to renewed activity in heavy industries after earlier destocking by firms. The HSBC manufacturing PMI climbed back to a neutral reading in August, showing growth returning to trend for manufacturing, while the two major services PMIs were at above-trend readings in July. Growth is stabilising, in line with the slower GDP growth in the year to June of 7.5%.

The earlier restrictive measures by the People’s Bank of China (PBoC) seem to have led to more caution in lending, reflected in July’s slower credit growth. If modest credit growth is sustained, the build-up of future credit risks can be slowed. The PBoC lifted its restrictive policies in late July by injecting liquidity into the interbank market.

...however, financial market volatility intensifies in emerging Asia#

Falls in asset prices and exchange rates in emerging Asia intensified in late August, as the expected tapering of asset purchases by the US Federal Reserve (Fed) draws closer. Large declines in equity prices occurred, with Indonesian stocks down by 14.3% over the second half of August, and Singapore’s down 7.5%, while longer-term interest rates rose as bond prices fell. The depreciation of key currencies in the region accelerated during the same period, particularly for the Indian rupee (11.9%) and the Indonesian rupiah (6.0%), despite efforts by their central banks to stabilise their currencies.

Emerging market economies have been the main drivers of global growth in the last four years as they also benefited from the quantitative easing (QE) in the US by having access to ample liquidity and low interest rates. Now, however, the US and other major developed economies are starting to show signs of a sustainable recovery, leading the Fed to flag reductions in QE.

Anticipation of the withdrawal of this stimulus has led to some abrupt adjustments in emerging economies, not only in Asia, as some of the money invested in them earlier is withdrawn. The nature of these adjustments has led some analysts to draw comparisons with the Asian Financial Crisis of 1997/98 when similar conditions applied. However, there are key differences from that period with emerging Asian economies now having larger foreign exchange reserves and floating exchange rates. Their imbalances in terms of current account deficits and foreign debt are also not as great, making them better able to withstand the adjustment.

Continued recovery in the US reinforces expectations of tapering in September...#

Recovery continued in the US labour and housing markets. July’s solid non-farm payrolls outturn maintained the 6-month moving average of payrolls growth at roughly 200,000 for the sixth consecutive month (Figure 6), in line with the Fed benchmark for labour market improvement. In the housing market, demand is under some pressure from higher mortgage rates, but is holding up for now (30-year fixed rates are 120 bps higher since early May in anticipation of reduced monetary stimulus). The Case-Shiller house price index rose solidly on a year ago in June (12.1%), although home sales data declined in July. On the supply side, July’s housing permits and starts regained some of their losses in June. Overall, the underlying housing recovery appears intact, although there are concerns that rising mortgage rates may slow demand in the months ahead.

Positive developments supported expectations of a September start to the Fed tapering of QE. These expectations were reinforced by less dovish comments from Fed leaders, and by the 2.0% annual inflation in July that eased Fed concerns of undershooting its inflation target. Market reactions in the US, Japan and Europe were modest, with longer term interest rates rising but no major moves in equities, suggesting that the prospective Fed tapering has already been priced in to a large degree.

Figure 6: US labour market

Source:  Haver

...as the euro area leaves recession...#

The euro area’s economy grew 0.3% in the June quarter, marking the end of a six-quarter recession. The stronger-than-expected growth was led by Germany (0.7%) and France (0.5%), while Italy (-0.2%) and Spain (-0.1%) contracted. The pick-up is consistent with the lift during the June quarter in IP growth and in the manufacturing and services PMIs, both of which have continued into the September quarter. Retail sales were also less negative in the June quarter, contracting at a slower annual rate. Promising developments aside, significant financial risks remain, reflected in Greece most probably requiring a third bailout, while the euro area unemployment rate is at an all-time high (12.1%). Still, developments in August provide clearer evidence of a gradual recovery in the euro area.

...while demand in Japan remains solid#

Japan’s economic growth in the June quarter was a softer-than-expected 0.6%, but private consumption grew 0.8% while changes in inventories subtracted 0.3% points off growth, suggesting that underlying demand growth was more robust in the quarter. However, the latest data were weaker. IP contracted 3.3% in June to be down 4.8% annually, while leading indicators of retail sales suggest a softer sales outturn in July. There are concerns that the government’s planned sales tax hike for April 2014 may cause the stimulus-led recovery to falter.

Tensions in the Middle East continue to add volatility to global markets#

The Syrian situation has led to a rise in oil prices, and some safe-haven demand for the USD. The unrest in Egypt has also led to higher commodity prices, as market participants were concerned over access to the Suez Canal. Future developments in the region and their economic impact remain uncertain.

Special Topic: A slower growth outlook for Australia#

A transition period for Australia...#

The Australian economy has begun rebalancing away from mining investment and is likely to experience slower growth before activity in the non-mining sectors and mining production expands. This special topic discusses the outlook for the Australian economy and its implications for the New Zealand economy.

...after a decade of mining investment-led growth#

A feature of the Australian economy over the last decade has been the mining investment boom, driven by rising hard commodity prices owing to strong growth in emerging economies, particularly China. Mining investment growth accelerated, as mining firms took advantage of Australia’s recordhigh terms of trade, which increased by 98% from mid-2002 to the September quarter of 2011, an alltime peak. Mining capital expenditure (capex) as a share of total capex peaked at 60% in the December quarter of 2012, up from just 10.5% in 2002. Investment growth in other sectors, particularly manufacturing, was subdued over the same period.

Mining investment is expected to decline#

The level of mining investment may have reached its peak in the December quarter of 2012, reflected in the large fall in mining capex in the March quarter of 2013. This is sooner than some analysts expected, but the data are lumpy so the peak may be still to come. The decline in mining investment is linked to slowing growth in China and expanding global supply of hard commodities. Investment growth is expected to decline in coming quarters, as capex in the non-mining sectors shows no signs of picking up so far.

Figure 7 – Private investment and mining capex

Source:  Haver

Household demand weaker in recent years...#

Growth in household demand has been falling since 2011; annual growth in household consumption fell from 4.0% in the March quarter of 2011 to 2.0% in the March quarter of 2013.

The slower consumption growth is owing to a combination of factors. The Reserve Bank of Australia (RBA) hiked its policy rate by 175 basis points (bps) between October 2009 and November 2010 in response to inflationary pressure. This led to higher mortgage rates that contributed to lower house prices from mid-2010 to late 2011, reduced household wealth, and constrained disposable income. Also, benefits from the mining boom were concentrated in specific regions, and did not support demand in the less affected areas against adverse shocks on income, such as the Global Financial Crisis. The ongoing fiscal consolidation by the Australian government since 2010 means that weak public sector demand growth will be another drag on overall demand in coming years.

...consistent with the softening jobs market#

The labour market has been on a weakening trajectory since late 2010, in line with softness in demand. The unemployment rate has risen from 5.1% at the start of 2012 to 5.7% in July 2013, and is forecast by the Australian Treasury to rise to 6.3% in the June quarter of 2014. The Australian Treasury expects the unemployment rate to remain elevated as mining projects move to the less labour-intensive production phase. Employment grew by a subdued 1.1% in the year to June 2013, below the rate of growth of the labour force.

Easy monetary policy supporting the housing sector...#

The RBA cut its policy rate between November 2011 and August 2013 by a cumulative 225 bps to 2.5%, leading to falling interest rates. Historically low mortgage rates supported housing demand, leading to accelerated growth in the value of new housing finance and house prices. Meanwhile, the supply side of the housing market responded positively to rising prices, with higher housing approvals and housing starts. However, the housing pick-up is still modest, with demand from first-home buyers still relatively low.

Figure 8 – Australia housing market

Source:  Haver

...but credit demand weak in other areas#

Credit growth is weak for other sectors besides housing, and for households, despite easy monetary conditions. Annual growth of business credit has fallen steadily since mid 2012, to 0.3% in June 2013; growth of personal credit excluding mortgages has been negative throughout 2012, and just recently edged into positive territory. The outlook for investment and credit growth in the private sector is weak despite the currently low interest rates, as firms and households repay debt.

The outlook for growth is downbeat#

While growth has not yet weakened significantly, the outlook for the next two years has. The RBA presented a downbeat assessment of the economy in August, revising down its growth forecast for 2013 to 2.25%, the lower end of the 2.25-3.25% forecast range it articulated in November 2012. The Australian Treasury cut its growth forecast for the 2013/14 fiscal year by 0.5% points to 2.5%, down from its Mid-year Economic and Fiscal Outlook released in October 2012. Consensus forecasts for Australia have fallen since the start of the year, by 0.2% points for 2013 and 0.4% points for 2014, to 2.4% and 2.6% respectively.

However, AUD depreciation should facilitate the transition to tradables sectors...#

Continued depreciation of the AUD should provide some support to activity. The AUD has fallen by 14.3% against the USD since mid April, and is expected to fall further as the US Federal Reserve finalises its plans to taper quantitative easing, and as the terms of trade continue to ease. Currency depreciation is expected to lift competitiveness in the manufacturing and other tradables sectors, facilitating the rebalancing into these areas.

...while fundamentals remain solid compared to other developed economies#

The Australian outlook is still solid compared to the other major developed economies. The unemployment rate remains low compared to the US and the euro area, while financial risks are contained. Growth in Australia is slowing from its rapid pace in the past decade, but remains higher than in most other developed economies.

Short-term impacts on NZ exports negative...#

A softer Australian economy in the short run will negatively impact on NZ’s growth. Despite China’s growing importance, Australia still accounted for the largest share of total NZ goods exports in the year to June 2013, at 20.8%, and therefore falling demand growth in Australia will be a drag on external demand for New Zealand. Somewhat positively, the drag will be more limited for the two largest categories of exports to Australia in 2012 (crude oil and gold), as volume changes in these items are primarily driven by supply-side factors, while prices are dictated by world supply and demand. However, other goods that form a significant share of exports to Australia, including wine, dairy, processed food, fish and wood products, and services are likely to experience lower growth both in volume and value terms.

...but positive in the long term after a successful rebalancing...#

A successful, gradual rebalancing into the nonmining economy in the long run should be positive for New Zealand. A recovery of competitiveness in the non-mining regions along Australia’s eastern seaboard will lead to a pick-up in employment and wage growth, which will restore the growth of household demand. A stronger pick-up in Australia’s housing supply as the recent RBA rate cuts take effect will directly benefit NZ exports of wood products and other building materials, and also have a positive effect on private consumption. These developments should bolster the demand for NZ exports to Australia, most of which are destined for the eastern states.

...while emigration to Australia is expected to ease#

In the near term, weaker employment prospects and reduced wage growth across the Tasman should lower the outflow of New Zealanders to Australia. Indeed, the number of net long-term migrants to Australia has already dropped back in the first half of 2013 and the fall is expected to continue. However, net migration to Australia remains at an historically high level. While it is expected to fall in the near term as mining investment slows, renewed growth in Australia’s non-mining sectors after a successful transition is expected to maintain the historical pattern of more New Zealanders leaving for Australia than Australians coming in or Kiwis returning.

However, a high NZD/AUD exchange rate will lower NZ competitiveness#

The NZD has appreciated 12.4% against the AUD in the year to August, on the back of easing hard commodity prices and RBA policy rate cuts. The NZD/AUD exchange rate is expected to remain high, and may rise further as the monetary policy outlook is likely to continue to diverge between the RBNZ and the RBA. A stronger NZD relative to the AUD will reduce the competitiveness of NZ exports to Australia, and of local services provided to visiting Australians. However, there may be some positive savings for consumers of imports from Australia, for example motor vehicles and pharmaceuticals, and cost-reduction for firms dependent on inputs originating from Australia.

New Zealand Key Economic Data#

2 September 2013

Quarterly Indicators#

Monthly Indicators#