Monthly economic indicator

Monthly Economic Indicators August 2015


The Treasury has made every effort to ensure that the information contained in this report is reliable, but makes no guarantee of its accuracy or completeness and does not accept any liability for any errors. The information and opinions contained in this report are not intended to be used as a basis for commercial decisions and the Treasury accepts no liability for any decisions made in reliance on them. The Treasury may change, add to, delete from, or otherwise amend the contents of this report at any time without notice.

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Executive Summary#

  • GDP growth in the June quarter is expected to be around 0.6%, lower than the BEFU forecast. Annual growth in 2015 may fall to 2.0% as domestic demand softens.
  • Weakness in retail spending as employment growth declined points to softer private consumption growth in the June quarter than previously expected.
  • However, a buoyant housing market, elevated net migration gains and exchange rate depreciation are expected to continue to support growth.
  • Dairy prices remained low in August, pointing to further falls in the terms of trade.
  • Volatility in financial markets reflected concerns over China’s growth slowdown.

Key economic data released over August continue to point to a weaker growth outlook than forecast in the Budget Update (BEFU). Employment growth continued to slow as businesses reduced their demand for labour, while the labour force expanded solidly owing to population growth, together leading to a lift in the unemployment rate. Despite steady growth in labour incomes, weak retail trade data for the June quarter suggest that private consumption growth will be significantly lower than forecast in the BEFU.

GDP growth in the June quarter is expected to be around 0.6%, lower than its 0.7% forecast in BEFU. A decline in consumer confidence and a slowdown in employment growth are expected to dampen private consumption growth in the September quarter, which would weigh on GDP growth.

That said, most of the key drivers of GDP growth remain intact, with domestic demand supported by accommodative monetary conditions, high migration, robust construction activity and a steady expansion in business activity. The depreciation of the exchange rate is expected to partly offset the negative impact on export revenues from lower dairy prices. 

The inflation outlook remains weak. Prices fell further for both business inputs and outputs, driven by a large fall in dairy and dairy-based products. Even excluding dairy, input prices were flat and output prices dropped slightly. Growth in capital goods prices continued to be driven by construction, and price growth remained slow in most other categories, although prices for imported capital may lift in coming quarters owing to a lower exchange rate.

Dairy prices fell further in August despite a rally late in the month, to be down 39% from their recent peak in March 2015. Low dairy prices reflect a high level of inventory in China, increased global milk supply and concerns around the Chinese growth outlook. The sharp fall in dairy prices points to declines in the terms of trade over 2015 and 2016, and is expected to weigh on export revenues and widen the trade deficit.

Reflecting a softer growth outlook, the market has priced in an 80% probability of a further 25 basis point reduction in the Official Cash Rate at the Reserve Bank’s next policy announcement on 10 September.

Internationally, concerns have increased about the impact of the slowdown in China’s growth on the world economy, which impacted on financial market sentiment. Output declined in Japan in the June quarter, growth was below expectations in the euro area and Australia’s outlook was revised down. However, the US and UK recoveries remain on track, although the Federal Reserve and the Bank of England remain cautious about raising their policy rates.

This month’s special topic looks at the implications of the recent changes to China’s exchange rate.


The key data released in the month (for the labour market and retail sales) pointed to a modest increase in GDP over the June quarter (0.6%).  Forward looking indicators, including business and consumer confidence, suggest that growth is likely to continue at this slower pace (compared to the Budget Update (BEFU) forecast) over the remainder of 2015. Net migration inflows and international visitor arrivals, both of which strengthened further in July, combined with a weaker currency, are supporting growth.

Our current view is that, compared to the same quarter a year ago, growth in the December quarter 2015 may be around 2.0%, even with quarterly growth around trend (0.6% per quarter) over the remainder of 2015. Annual growth will gradually increase to around 2.5% by the second half of 2016. Risks that trading partner growth may slow markedly have intensified with increased concern that conditions in China are weaker than indicated by the official statistics.

However, most of the key drivers of growth remain intact. Accommodative monetary conditions will continue to boost activity. The depreciation in the New Zealand dollar (NZD) will support exporters and local producers, and the recent reduction in the Official Cash Rate (OCR) is expected to gradually lift domestic demand. High net migration, strong tourism expenditure and a robust level of construction activity are expected to remain the key drivers of growth.

Job growth slows as labour demand eases...#

In the Household Labour Force Survey (HLFS), total employment rose 0.3% in the June quarter, following an increase of 0.7% in the March quarter. Annual employment growth eased to 3.0% from 3.2% (Figure1), with the slowdown reflecting weaker demand for labour. All the measures of labour demand in the Quarterly Employment Survey (QES) fell in the June quarter, with paid hours down by 0.6%, filled jobs down 0.9% and fulltime equivalent employees down 0.7%.

The labour force participation rate declined slightly from 69.5% to 69.3%, but remained near its all-time high. The labour force increased 0.4% despite a lower participation rate, owing to high growth in the working-age population. The HLFS unemployment rate rose 0.1% point to 5.9%, as growth in the total number of people available for paid work (the labour force) exceeded employment growth.

Migration inflows strengthened further in July and increased growth in the working age population.   If the participation rate remains high, but employment growth continues to decline, the unemployment rate could rise above 6% in coming quarters.

Figure 1: Employment growth and gross earnings
Figure 1: Employment growth and gross earnings.
Source: Statistics NZ

Despite the decline in labour demand in the quarter, total labour income continued to grow strongly as wage growth increased, possibly as a result of compositional changes. Total weekly gross earnings rose by a solid 5.3% from a year ago (Figure 1). Annual growth in QES ordinary time hourly earnings rebounded from 2.1% in the March quarter to 2.8% in the June quarter, the fastest since March 2012, and total hours paid increased grew 2.5%.

...contributing to soft consumer spending...#

While labour income growth was solid, household spending showed only modest growth. Retail sales values rose 0.1% in the June quarter, as accommodation, and food and beverages spending fell following the boost from the Cricket World Cup in the March quarter. Furniture, flooring and houseware fell 3.5% in the June quarter, partly reflecting easing home sales in Canterbury. The main driver of growth in total retail values was a 3.2% rebound in fuel sales, as a rise in petrol prices led to only a moderate fall in fuel retail volumes (of 0.9%). Total core retail values (excluding fuel and motor vehicles) fell 0.2% in the June quarter, suggesting weak growth in nominal private consumption expenditure.

The seasonally-adjusted volume of retail sales rose 0.1% in the quarter (Figure 2), with overall retail prices broadly unchanged despite the rise in fuel prices. Sales volumes fell in around half of the categories, and others showed only slow growth. In addition to a fall in fuel sales volumes, tourism-related sales volumes declined sharply.

Figure 2: Retail sales and private consumption
Figure 2: Retail sales and private consumption.
Source: Statistics NZ

Private consumption may remain soft in the September quarter. The ANZ Roy-Morgan consumer confidence index dropped 4.2 points to 109.8 points in August, continuing its decline from April’s peak. Although retail card transactions values rose 1.1% in July, owing to growth in services and apparel sales, it is questionable whether this will be sustained in light of the weaker confidence backdrop.

...while inflationary pressures remain subdued#

Reflecting softer demand in the Retail Trade Survey and lower commodity prices, producer price pressures continued to be muted. Business input and output prices fell 0.3% and 0.2% in the June quarter, respectively, driven by lower prices for dairy outputs and dairy manufacturing inputs, as well as a large fall in wholesale electricity prices. Growth in input costs was moderate across retail trade, transportation and telecommunications. Excluding dairy, total input prices were flat in the quarter and output prices contracted 0.1%, still showing weak price pressures facing businesses.

The capital goods price index rose 0.6% in the June quarter, driven by residential and non-residential construction. Annual growth in building costs appears to have peaked in December at 5.3%, and has eased to 5.0% in the June quarter, where we expect it to remain over the coming year. Prices of transport equipment contracted 0.2% in the quarter, and were flat for plant, machinery and equipment. While the NZD has fallen 12.5% in trade-weighted terms since mid April, its impact on the cost of capital goods has not shown up yet, but may emerge in the September quarter.

Meanwhile, the Labour Cost Index (LCI) grew 1.6% in the June quarter from a year ago, with growth easing from 1.7% in the March quarter although continuing its trend since 2013. Overall, the LCI points to low growth in unit labour costs.

Weak growth in business costs points to lower non-tradable inflation than in the BEFU forecasts, although tradables inflation is likely to be higher owing to exchange rate depreciation. Overall annual inflation may be similar to the BEFU forecast as these two effects offset each other. Meanwhile, median household inflation expectations for the year ahead rose to 2.2% in the September quarter from 2.0%, but remain lower than 3.0% in 2014.

Business confidence falls sharply...#

In the July ANZ Business Outlook, business confidence fell sharply to a net 15.3% of firms pessimistic about the outlook from a net 2.3% in June (Figure 3). The agricultural industry led the decline, reflecting large falls in dairy prices. However, firms’ outlook for their own activity remains positive at a net 19% (Figure 3). Reflecting low price pressure, firms’ inflation expectations (1.7%) are significantly lower than in mid 2014 (2.5%). The next ANZ Business Outlook is scheduled for release on 31 August.

Figure 3: Business confidence and activity
Figure 3: Business confidence and activity.
Source: ANZ

...but activity continues to expand...#

Growth in business activity remained solid in July, although it continued to slow. The Performance of Manufacturing Index was at 53.5 (a reading above 50.0 indicates an expansion), down 1.6 points from June, but showed manufacturing activity expanding for the 34th consecutive month. The Performance of Services Index dipped 1.6 points in July to 56.5, but nevertheless indicated solid expansion in services. The PMIs so far suggest that GDP growth may remain at around 0.6% in the September quarter.

...and house price growth remains elevated...#

Housing demand continues to be strong, led by Auckland and the surrounding regions. The seasonally adjusted number of nationwide house sales rose 6.3% in July from June, to be up 37.8% from July 2014. Growth in sales was driven by Auckland, where sales rose 11.0% in July and 41.1% from a year ago. Annual growth in sales volumes was slower in Wellington (9.5%) and Canterbury (12.2%). The REINZ stratified house price index rose 1.1% in July in seasonally adjusted terms following a 2.3% rise in June, to be up 14.9% from July 2014, driven by a 24.5% increase in the stratified median price for Auckland (Figure 4). In contrast, the median prices for Canterbury and Wellington grew at a slower rate of 4.9% and 0.8% respectively.

Figure 4: Regional house price growth
Figure 4: Regional house price growth.
Source: REINZ

Strong housing demand reflects elevated net migration gains, a fall in mortgage rates, Auckland buyers possibly bringing forward their purchases ahead of the Reserve’s Bank’s new loan-to-value restrictions in November, and spillover from Auckland to the surrounding regions. Fundamentally, fast house price growth in Auckland is the result of an underlying shortage in supply. Reflecting the divergence in regional demand, residential construction may have plateaued in Canterbury, while accelerating in Auckland. However, the supply response in Auckland is not expected to match increases in demand, pointing to continued strong house price growth ahead. net migration inflows surge further#

The net inflow of external migrants lifted to a seasonally adjusted 5,700 in July, the highest on record. Annual net migration also climbed to a record high of 59,640, driven by an increase in long-term arrivals and a slight decline in departures. The net migrant inflow from Australia was positive for the fourth consecutive month at 210, reducing the annual net outflow to 840 from 7,300 in July 2014.

Net migration may be slightly higher than forecast in BEFU over the next couple of years. The net impact of higher migration on domestic demand is positive through its support on private consumption and the housing market. However, migration would also contribute to additional capacity in the labour market in the near term.

Meanwhile, international visitor arrivals were up 5.7% in July from July 2014, driven by increased arrivals from China, Australia and the United States. Solid growth in visitor arrivals and tourist spending, supported by a weaker NZD, point to strong outlook for growth in services exports.

Dairy prices remain weak in August...#

The ANZ commodity price index declined 11.2% in July in US dollar terms, led by a 23% drop in dairy prices. Prices for other commodities experienced smaller declines or were flat. Commodity prices in NZD terms fell by a smaller 6.7% in July, with dairy prices down 19%. NZD prices rose moderately for other commodities, reflecting the depreciation in the exchange rate boosting prices faced by exporters.

Since then, export prices have fallen further. Dairy prices plummeted 9.3% in the first GlobalDairyTrade (GDT) auction in August to their lowest level since December 2002, but rallied 14.8% at the second auction in August, the first rise since March.  Nonetheless, the average GDT price index remained 8% lower than in July. Weakness in dairy prices reflects high inventories in China, and concerns about increased global supply and a weaker outlook for Chinese demand.

Largely as a result of the dairy price decline, New Zealand’s merchandise terms of trade are likely to decline over the remainder of 2015 and early 2016 as export prices fall, following a small pick-up in the March quarter. This contrasts with forecasts of a gradual recovery in BEFU from around mid 2015.

...and may gradually dampen export revenue...#

The impact of the fall in dairy prices on export values is yet to flow through fully. Dairy export values were broadly unchanged in July from July 2014, owing to higher volumes, while meat exports rose 24.4%, supported by higher beef prices. Total export revenue was up 14% from a year ago, as NZD depreciation offset part of the pressure from a decline in key export prices. Import values rose 4.8% from July 2014, supported by a lower exchange rate, with the annual trade deficit decreasing slightly from $3bn to $2.7bn. However, the merchandise trade deficit is expected to widen over the coming year as the goods terms of trade fall.

...and markets expect further OCR reductions#

Market participants have priced in an 80% probability of a third consecutive reduction in the OCR by 25 bps in September, with just under two OCR cuts priced in by mid 2016. The Reserve Bank will announce its next policy decision on 10 September. The NZD was broadly steady over August in trade-weighted terms following the OCR reduction in July. The NZD/USD was volatile, driven by international developments, but remained around a trading range of 0.65 to 0.67, as financial markets pared back their expectations of a start to US monetary tightening in September (see the international section below).

Concerns increase about a slowdown in China#

Concerns have increased that growth is slowing in China and that this will affect the world economy.  These concerns are being transmitted through financial markets, particularly for equities, commodities and foreign exchange.  Further deepening of the Chinese slowdown is a risk to New Zealand and key trading partners.

Output declined in Japan in the June quarter, growth was below expectations in the euro area and Australia’s outlook was revised down. However, the US and UK recoveries remain on track, although the Federal Reserve (Fed) and the Bank of England are cautious about raising rates.

Chinese economy slowing...#

Data from China indicate that growth is slowing: trade data were softer than expected, with exports falling 8.3% in the year to July; industrial production grew 6.0% in the year to July, down from 6.8% in June; retail sales grew 10.5% in the year to July, below expectations; CPI inflation remains low at 1.6% in the year to July, and producer prices fell 5.4% and have been declining for more than 3 years, indicating deflationary pressures in the economy; the preliminary August PMI fell further after reaching 2-year lows in July, indicating the economy may slow further.

There were further falls in China’s share market in August following the volatility in July, and in a surprise move the People’s Bank of China (PBoC) changed the way the value of the currency is set in the foreign exchange market, allowing it to fall in value.  These changes fuelled further speculation that the economy is slowing more than official figures have indicated to date. See the special topic for further discussion of the changes to the exchange rate.

Following large falls in the share market towards the end of August, the PBoC announced a 0.5% point reduction in banks’ reserve requirement ratios (freeing up capital for lending), a 0.25% point reduction in 1-year lending and deposit rates, and removed the ceiling on rates for deposits of more than 1 year.  These moves brought some stability in the share market.

...and Australian data soft on balance#

Australian data were soft as the economy gradually rebalances from mining investment to other areas of domestic demand.  Weaker commodity prices and concerns about the slowdown in China are also weighing on sentiment.  Iron ore prices have fallen more than 20% over the month.  However, there is some evidence to suggest non-mining sectors are picking up some of the slack. Employment growth was solid, rising 0.3% in July (2.1% apc), but the unemployment rate increased to 6.3% from 6.1% in June, driven by higher participation. Wage cost indices show there was little pressure on private sector wages.

The RBA lowered its growth forecasts, reflecting lower export prices and population growth, and noted that global risks, particularly around China, are skewed to the downside. That said, the RBA’s inflation forecasts remain in line with the target band, which kept market pricing for a rate cut stable. However, further deterioration in the outlook associated with China has since led markets to price in a higher probability of a rate cut by the end of the year.

US momentum remains stable...#

US GDP increased 0.6% in the June quarter and growth was revised up to 0.2% in the March quarter. Growth in the second quarter was underpinned by consumer spending, reflecting a solid labour market as non-farm payrolls increased 215,000 in July and the unemployment rate was unchanged at 5.3%. Industrial production rose 0.6% in July from June driven largely by increased vehicle production. Core inflation, which excludes energy and food, increased 1.8% in the year to July, largely driven by housing costs.

On balance, US data have been positive over the month. That said, while labour market outturns and other data were solid, Fed minutes from late July indicated that most members would like to see more evidence that economic conditions are consistent with the Fed’s medium-term inflation target of 2% before raising the Funds Rate. Market pricing for a September lift-off by the Fed has reduced over the month as concerns about the impact of a slowdown in China affected sentiment.

...and the euro area gradually recovers...#

The euro area continues to recover at a slow pace as GDP grew 0.3% in the June quarter and was up 1.2% in the year – just below expectations of 0.4% and 1.3% respectively. Industrial production decreased 0.4% in June, but was 1.2% higher than a year ago. The decrease was largely driven by a slowdown in Germany, France, and Italy.  The unemployment rate was unchanged at 11.1% in June, and continues a very gradual decline from its peak of 12.1% in June 2013. Also reflecting a gradual recovery, core inflation remains soft, at 1.0% in the year to June. Meanwhile, Greece has concluded an agreement with its creditors, but PM Tsipras resigned, triggering an early election which could be held as soon as 20 September.

...but UK recovery may be slowing#

UK GDP grew 0.7% in the June quarter, although there are signs that the recovery is easing. Industrial production fell 0.4% in June, with mining and quarrying falling 3.8% on the back of lower commodity prices. Manufacturing production increased 0.2% in June, up only 0.5% in the year. Retail sales rose 0.1% in July, up 4.2% in the year and higher than 2.8% a year ago, indicating domestic demand remains solid.

However, employment has declined recently, although the unemployment rate remained steady at 5.6%. Core inflation rose to a 5-month high, reaching an annual rate of 1.2% in July and supporting expectations of tightening. However, on balance the recovery appears to be slowing slightly and market pricing for a rate increase by the end of the year has reduced over the month as the combination of a strong pound and low commodity prices suppress inflationary pressure.     

Japan slowing, rest of Asia expected to follow#

Japanese GDP contracted 0.4% in the June quarter, driven by weak exports, reflecting the slowdown in China, and weak consumer spending, following subdued wage growth and bad weather. Exports fell 1.3%, 0.4%, and 0.2% to China, the rest of Asia, and the US respectively. The slowdown in China is expected to weigh on other economies in the region and growth outlooks for the region have been revised down in the past couple of months.

Figure 5: US, euro area, UK and Japan GDP growth
Figure 5: US, euro area, UK and Japan GDP growth.
Source: Haver

Financial markets reflect weaker outlook#

The economic developments for the month have been viewed pessimistically by markets, particularly equities. China’s CSI 300 declined 21% from the end of July to 26 August, falling back to its December 2014 levels, despite intervention by authorities to stem the decline. The S&P 500 has fallen 7.8% over the same period. Commodity prices dipped, with the CRB index falling to a 13- year low, led by the price of oil which has dropped 21% since late July. Consequently, appetite for safe-haven securities increased with US 10 year bond rates falling 10 basis points. There was some recovery in many financial markets following policy measures announced in China on 25 August.

Special Topic: China's liberalisation and devaluation of its currency#

In August the People’s Bank of China (PBoC) announced changes to the way the value of the renminbi (RMB) or yuan[1] (CNY) is set in daily trading and at the same time devalued the currency against the US dollar.  These changes surprised markets and led to speculation about the reasons for them and their implications for China and the rest of the world economy.  This topic looks at the changes, the immediate market reaction to them, and their possible implications, including for New Zealand. 

It concludes that, while the changes raise concerns about the strength of China’s economy, they were undertaken primarily to allow markets a greater influence in setting the value of the currency.  Although some further devaluation of the currency may occur, the impact on New Zealand is not expected to be great at this stage.  However, further falls in China’s share market in late August, following July’s volatility, have compounded concerns about the underlying strength of China’s economy.

The yuan appreciated over the past decade...#

Since 2005 (apart from October 2008 – June 2010 during the global financial crisis) the PBoC set a daily “fixing rate” for the yuan against the USD.  Over that ten year period the yuan appreciated 35% against the US dollar (Figure 1), but by more on a trade-weighted basis recently as the USD appreciated against other currencies, including the New Zealand dollar (NZD). 

Figure 1: CNY/USD and CNY/NZD appreciation
Figure 1: CNY/USD and CNY/NZD appreciation.
Source: Haver

In nominal trade-weighted terms the yuan rose by around 40% over the past decade[2] and by a similar amount against the NZD (Figure 1).  It rose by considerably more in real terms as China’s inflation rate was higher than its trading partners’ over that period.  Chinese authorities appreciated their currency in response to claims (particularly from the US and IMF) that it was undervalued, giving China’s exports an unfair advantage in world markets.  In June this year, the IMF stated that the yuan was close to its equilibrium level.

...but regime liberalised and yuan devalued#

In a surprise move on 11 August, the PBoC announced that the daily central rate for the yuan would be set on the basis of the previous day’s closing rate “in conjunction with demand and supply conditions in the foreign exchange market and exchange rate movement of the major currencies.”  Previously the PBoC set the central rate around which rates were allowed to vary by plus or minus 2%; that trading band will remain, supported by PBoC intervention if needed.[3]

Figure 2: CNY/USD – recent devaluation
Figure 2: CNY/USD - recent devaluation.
Source: Haver

At the same time, the PBoC devalued the yuan by changing the central rate from 6.116 CNY per USD the day before to 6.23 CNY, a devaluation of 1.9% and the largest one-day change since market trading began in 1993.  The following day and in accordance with the new mechanism, the central fixing rate was increased (i.e. the yuan was devalued) by a further 1.6% to 6.33 CNY per USD, with a further devaluation of 1.1% on 13 August to 6.40 CNY, taking the cumulative devaluation for the three days to more than 4%.  The rate has been relatively stable since then (Figure 2 above).

Immediate market reaction was negative...#

The change to the foreign exchange regime and devaluation of the yuan followed the release of figures at the end of the previous week showing that China’s exports in July were down 8.3% from a year ago, particularly exports to Japan and Europe.  In that context, the immediate financial market reaction to the changes was negative as they were viewed as an acknowledgement of risks to the outlook for China’s economy.  International equity markets fell 1-2%, commodity prices and commodity currencies declined (oil prices fell 2-4% and the NZD fell nearly 1 cent to 65.33 cents US), and bond rates fell (US 10-year Treasuries fell 9 basis points to 2.14%).

Figure 3:  CSI300 and PBoC 1-year lending rate
Figure 3: CSI300 and PBoC 1-year lending rate.
Source: Haver

A renewed bout of volatility occurred in global financial markets later in the month following a further fall in China’s share market.  On 24 August the Chinese share market fell nearly 9% and by 7% on the following day, negating the gains in the first half of 2015 (Figure 3).  The falls may have been triggered by a weaker than expected PMI released at the end of the previous week and the lack of an effective response by Chinese authorities to stabilise the stock market. 

These developments compounded concerns about the strength of China’s economy and led to falls in equity prices globally, lower commodity prices and commodity currencies (including the NZD and AUD), and further falls in US bond rates.  Global markets recovered somewhat over the following days after the PBoC announced further monetary easing (see p.5 above).

...amid speculation about reasons for the changes#

There has been considerable speculation about the reasons for the recent changes to China’s currency.  At face value, the liberalisation of the regime appears to be aimed at gaining approval for the yuan to be included in the IMF special drawing rights (SDR) basket.  Chinese authorities have been pressing for that for some time as it would indicate acceptance of the yuan as a global reserve currency (like the USD).  The IMF welcomed the latest changes, but postponed any decision on including the yuan in the SDR basket until later this year, and effective from late 2016.

However, the devaluation of the yuan led many to speculate that the more important reason for the changes was to counteract weakness in the economy by gaining a competitive advantage in export markets.  The fall in exports in July tended to support this interpretation and further weak data were anticipated.  Other economic data released in August showed a slowing in growth, but not a sharp decline (see p.5 above).  There is increasing concern about the accuracy of some Chinese economic statistics and that growth is weaker than reported in official statistics.  This view led many to expect further devaluation in the yuan in the days following the changes.

The PBoC’s support for the currency on the second day’s trading under the new regime by intervening to hold up its value suggested that a gradual devaluation was not its main aim.  An ongoing devaluation seems unlikely as it could lead to further capital outflows (in anticipation of a weaker currency).  It would also not necessarily lead to a gain in competitiveness against other Asian currencies given that most of them fell against the USD when the yuan was devalued.

However, given the dual nature of the changes (liberalisation and devaluation), the reasons for them are likely to include both aspects.  The liberalisation of the regime may have been brought forward to coincide with the devaluation on concerns about the weakness of the economy.  The devaluation is consistent with the PBoC’s other moves to ease monetary policy to support the economy.  The timing of the changes may also have been influenced by the expected tightening of monetary policy by the US Federal Reserve which may lead to further appreciation of the US dollar – and so the yuan – against other currencies.

Impact on China’s economy unclear...#

Regardless of the reasons for the changes, their impact on China’s economy is not clear at this stage.  So far, the extent of the devaluation of the yuan is less than 5% but it takes it back to its rate against the US dollar four years ago.  However, on a trade weighted basis, it reverses only the most recent appreciation of the yuan.  The devaluation might be expected to increase China’s competitiveness in export markets, particularly vis-à-vis its Asian competitors. 

However, these other currencies also generally fell against the US dollar on the announcement because of the perceived negative impact of China’s devaluation on them, nullifying any gain in the short term.  The recent weakness in China’s exports is owing more to weak demand than a lack of competitiveness on China’s part, so the devaluation is likely to have little impact in this regard in the short term.  If the yuan continues to depreciate under the new regime, China may gain some competitiveness against its neighbours.
The devaluation of the currency should support traded sectors in the Chinese economy (exports and import substitutes) at the expense of non-traded sectors.  However, that would run counter to the authorities’ aim of making the economy more consumption-driven.  Any boost to growth should have a flow-on to consumption, though.  With weak inflation and producer prices falling for the past three years, there is scope for easier monetary conditions to support the economy. are implications for world economy...#

The implications of the changes for the world economy are complex and also uncertain at this stage.  Only some of these implications are discussed here.  The main impact expected as a result of the devaluation of the currency is weaker commodity demand.  China is the major player in many commodity markets and so weaker demand and lower prices were reflected immediately.  The currencies of the main commodity-exporting economies (including New Zealand) were also affected immediately. 
The changes have come at a time of general weakness in commodity prices as a result of a combination of rapidly increasing supply and weak demand.  The CRB Index, a broad-based commodity price index, fell to a 13-year low in the wake of the yuan changes.  As well as affecting New Zealand and Australia, weaker commodity demand would affect commodity-exporters in Southeast Asia, such as Indonesia and Malaysia, as well as emerging market economies such as Brazil and South Africa, many of which are already experiencing weak growth.

The devaluation of the yuan is an easing of monetary policy in China and implicitly a tightening of policy elsewhere, so one effect of the fall in the value of the currency could be to increase the need for monetary easing elsewhere or to postpone tightening.  The uncertainty created by the move may be a factor in any postponement of the Federal Reserve’s first rate hike; market expectations of an increase in September were scaled back after the yuan changes.

Lower Chinese export prices as a result of the devaluation of its currency could add to global deflationary pressures at a time when many central banks are still aiming to boost demand and inflation in their economies.  This reinforces the point above about the impact of the move as an implicit relative tightening of monetary policy elsewhere. 

Other possible impacts of the changes are on capital flows.  If the yuan continued to depreciate on an ongoing basis it might lead to increased capital outflows from China in anticipation of further depreciation.  On the other hand, a weaker Chinese currency may lead to less foreign direct investment from China.  There should be no threat to USD-denominated debts as long as long as the fall in the currency is not too great.

...and the New Zealand economy...#

The potential impacts of the currency changes on the New Zealand economy are similar to those for other economies discussed above.  The main impact is expected to be weaker demand for commodity exports, particularly dairy products.  So far the changes in the value of the yuan are less than recent movements in some commodity prices.  The net impact on the NZ economy will depend on a number of factors including other influences in global commodity markets and movements in exchange rates.

Given the 20% weight of the yuan in the NZD TWI basket, a fall in the value of the yuan should lead to a rise in the NZD TWI, all else equal.  However, the devaluation also led to a fall in the value of commodity currencies (including the NZD) against the USD and most other currencies except other commodity ones (such as the AUD).  As a result, the NZD has appreciated slightly against the yuan since its devaluation, but because the NZD has depreciated more against the USD, the NZD TWI has depreciated slightly.  However, there are many influences at work on these exchange rates in addition to the devaluation of the yuan, including other developments in China.

The New Zealand economy is also likely to be affected indirectly via Australia.  China is a more important goods export market for Australia than for New Zealand and Australia is an equally important export market for New Zealand, so there would be indirect effects via that channel.

...but it may also have wider implications#

However, the most important implication of the changes to China’s currency, especially in the short term and when considered in conjunction with the subsequent volatility in the share market, is the concern it raises about the strength of China’s economy and the potentially destabilising impact of the changes on global financial markets at a time when the US Federal Reserve is considering increasing its policy rate.  Significantly slower growth in China, at the same time as higher interest rates in the US, would increase uncertainty about the outlook for world growth.


  • [1] The yuan is the unit of currency (equivalent to “dollar”), while the “renminbi” (“people’s currency”) is the name of the currency (equivalent to kiwi or sterling).
  • [2] JPMorgan broad nominal effective exchange rate.
  • [3] The trading band has been progressively widened from ±0.5% in early 2012 to ±2.0% in early 2014.

New Zealand Key Economic Data#

26 August 2015

Quarterly Indicators#

Quarterly Indicators
    2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2

Gross Domestic Product (GDP)

Real production GDP qtr % chg[1] 0.5 1.1 0.7 1.0 0.7 0.2 ...
  ann ave % chg 2.2 2.5 2.8 3.0 3.3 3.2 ...
Real private consumption qtr % chg[1] 0.9 0.4 1.2 1.4 0.7 0.7 ...
  ann ave % chg 2.9 2.9 2.8 3.0 3.2 3.7 ...
Real public consumption qtr % chg[1] 0.5 1.2 0.5 0.8 0.6 0.2 ...
  ann ave % chg 1.9 2.7 3.3 3.3 3.4 3.0 ...
Real residential investment qtr % chg[1] 0.2 10.3 0.0 -0.2 4.9 0.6 ...
  ann ave % chg 16.6 16.6 18.0 16.0 16.2 12.3 ...
Real non-residential investment qtr % chg[1] -0.3 0.4 1.9 3.8 -1.3 -2.8 ...
  ann ave % chg 6.2 8.4 8.7 7.4 6.2 4.6 ...
Export volumes qtr % chg[1] 2.5 2.6 -2.8 0.4 5.9 1.5 ...
  ann ave % chg 1.0 0.3 0.6 2.0 3.3 3.9 ...
Import volumes qtr % chg[1] 0.2 2.0 2.9 0.3 2.8 1.0 ...
  ann ave % chg 6.3 8.0 8.9 7.9 7.8 7.5 ...
Nominal GDP - expenditure basis ann ave % chg 5.4 6.8 8.1 7.6 5.5 3.9 ...
Real GDP per capita ann ave % chg 1.4 1.5 1.7 1.6 1.8 1.5 ...
Real Gross National Disposable Income ann ave % chg 4.4 5.8 6.3 5.9 4.5 2.9 ...

External Trade

Current account balance (annual) NZ$ millions -7,350 -6,005 -5,814 -6,093 -7,798 -8,604 ...
  % of GDP -3.3 -2.6 -2.5 -2.6 -3.3 -3.6 ...
Investment income balance (annual) NZ$ millions -9,027 -9,338 -9,770 -9,956 -9,996 -9,706 ...
Merchandise terms of trade qtr % chg 2.5 1.8 0.1 -4.5 -2.4 1.4 ...
  ann % chg 20.2 17.3 12.2 -0.3 -5.0 -5.4 ...


CPI inflation qtr % chg 0.1 0.3 0.3 0.3 -0.2 -0.3 0.4
  ann % chg 1.6 1.5 1.6 1.0 0.8 0.1 0.3
Tradable inflation ann % chg -0.3 -0.6 0.1 -1.0 -1.3 -2.8 -2.0
Non-tradable inflation ann % chg 2.9 3.0 2.7 2.5 2.4 2.3 2.0
GDP deflator ann % chg 7.7 5.6 4.5 1.2 -2.1 -0.8 ...
Consumption deflator ann % chg 0.9 0.9 1.0 0.6 0.7 0.7 ...

Labour Market

Employment (HLFS) qtr % chg[1] 0.8 1.0 0.5 0.8 1.2 0.7 0.3
  ann % chg[1] 2.9 3.7 3.6 3.2 3.5 3.2 3.0
Unemployment rate %[1] 6.1 6.0 5.7 5.5 5.7 5.8 5.9
Participation rate %[1] 68.6 68.9 68.7 68.8 69.4 69.5 69.3
LCI salary & wage rates - total (adjusted)[5] qtr % chg 0.5 0.3 0.5 0.5 0.5 0.3 0.5
  ann % chg 1.6 1.5 1.6 1.7 1.7 1.7 1.6
QES average hourly earnings - total[5] qtr % chg 0.2 0.5 0.2 1.4 0.5 0.0 0.8
  ann % chg 2.9 2.5 2.5 2.3 2.6 2.1 2.8
Labour productivity[6] ann ave % chg -0.7 -0.9 -0.9 -0.7 -0.3 0.1 ...

Retail Sales

Core retail sales volume qtr % chg[1] 1.1 0.8 1.5 1.4 2.1 2.5 0.1
  ann % chg 3.7 3.5 3.0 4.5 6.0 7.5 6.2
Total retail sales volume qtr % chg[1] 1.2 0.8 1.4 1.4 2.1 2.3 0.1
  ann % chg 3.9 3.6 3.6 4.7 5.9 7.4 5.9

Confidence Indicators/Surveys

WMM - consumer confidence[3] Index 120 122 121 117 115 117 113
QSBO - general business situation[4] net % 52.8 51.7 31.7 19.0 23.6 23.3 5.1
QSBO - own activity outlook[4] net % 30.8 33.2 29.7 33.9 26.7 25.0 9.3

Monthly Indicators#

Monthly Indicators
    2015M02 2015M03 2015M04 2015M05 2015M06 2015M07 2015M08

External Sector

Merchandise trade - exports mth % chg[1] 5.0 1.4 -3.1 0.3 5.8 2.8 ...
  ann % chg[1] -14.2 -2.5 -6.2 -4.7 -0.9 14.0 ...
Merchandise trade - imports mth % chg[1] -3.8 6.1 -2.4 3.8 -5.8 8.0 ...
  ann % chg[1] 1.8 2.8 0.3 -7.5 10.0 4.8 ...
Merchandise trade balance (12 month total) NZ$ million -2129 -2372 -2655 -2549 -2984 -2690 ...
Visitor arrivals number[1] 266,990 255,870 259,130 259,020 257,750 250,780 ...
Visitor departures number[1] 260,110 269,480 259,470 267,650 265,600 259,070 ...


Dwelling consents - residential mth % chg[1] -5.5 10.0 -1.1 0.0 -4.1 ... ...
  ann % chg[1] -0.6 13.6 1.4 2.2 2.0 ... ...
House sales - dwellings mth % chg[1] 4.0 4.8 0.6 -1.2 5.5 7.9 ...
  ann % chg[1] 12.6 20.3 27.6 21.6 29.1 37.8 ...
REINZ - house price index mth % chg 1.1 1.1 1.3 2.0 2.3 1.1 ...
  ann % chg 7.1 8.5 9.3 11.8 14.8 14.9 ...

Private Consumption

Electronic card transactions - total retail mth % chg[1] 1.0 0.7 -0.7 1.3 0.5 0.4 ...
  ann % chg 4.0 3.7 3.9 3.2 5.0 5.6 ...
New car registrations mth % chg[1] -0.3 2.5 -1.4 -0.1 5.5 0.8 ...
  ann % chg 12.1 11.8 11.2 6.8 11.2 10.7 ...


Permanent & long-term arrivals number[1] 9,550 9,880 9,630 9,950 9,870 10,620 ...
Permanent & long-term departures number[1] 4,740 4,880 4,840 4,840 4,980 4,870 ...
Net PLT migration (12 month total) number 55,121 56,275 56,813 57,822 58,259 59,639 ...

Commodity Prices

Brent oil price US$/Barrel 58.10 55.89 59.52 64.08 61.48 56.56 47.14
WTI oil price US$/Barrel 50.58 47.82 54.45 59.27 59.82 50.91 42.65
ANZ NZ commodity price index mth % chg 9.7 1.5 -9.0 -2.9 3.0 -6.7 ...
  ann % chg -6.5 -2.5 -6.9 -8.1 -4.2 -7.3 ...
ANZ world commodity price index mth % chg 4.2 4.6 -7.4 -4.9 -3.1 -11.2 ...
  ann % chg -15.8 -11.9 -15.3 -18.0 -19.7 -26.8 ...

Financial Markets

NZD/USD $[2] 0.7444 0.7473 0.7583 0.7394 0.699 0.6652 0.6565
NZD/AUD $[2] 0.9555 0.9658 0.9814 0.9368 0.9055 0.8963 0.8969
Trade weighted index (TWI) June 1979 = 100[2] 77.16 78.27 79.17 76.49 72.97 70.41 70.40
Official cash rate (OCR) % 3.50 3.50 3.50 3.50 3.25 3.00 3.00
90 day bank bill rate %[2] 3.63 3.63 3.63 3.53 3.33 3.13 2.96
10 year govt bond rate %[2] 3.27 3.30 3.25 3.66 3.77 3.47 3.30

Confidence Indicators/Surveys

ANZ Bank - business confidence net % 34.4 35.8 30.2 15.7 -2.3 -15.3 ...
ANZ Bank - activity outlook net % 40.9 42.2 41.3 32.6 23.6 19.0 ...
ANZ-Roy Morgan - consumer confidence net % 124.0 124.6 128.8 123.9 119.9 113.9 109.8
Performance of Manufacturing Index Index 56.4 54.7 52.0 51.9 55.1 53.5 ...
Performance of Services Index Index 56.1 57.6 56.7 57.9 58.1 56.5 ...



qtr % chg
quarterly percent change
mth % chg
monthly percent change
ann % chg
annual percent change
ann ave % chg
annual average percent change


  • [1] Seasonally adjusted
  • [2] Average (11am)
  • [3] Westpac McDermott Miller
  • [4] Quarterly Survey of Business Opinion
  • [5] Ordinary time
  • [6] Production GDP divided by HLFS hours worked

Sources: Statistics New Zealand, Reserve Bank of New Zealand, NZIER, ANZ, Haver, Westpac McDermott Miller, ANZ-Roy Morgan, REINZ, BNZ-Business NZ