Monthly Economic Indicators February 2009

Executive Summary#

Analysis#

The slowdown of the economy continued as both domestic and international economic conditions deteriorated. Data released in February showed weak retail sales growth in the December quarter, a weakening housing market, an increase in unemployment, and further declines in commodity prices. There are pressures on both households and firms, with indicators of both consumer and business confidence continuing to fall in February. These conditions, combined with easing of inflationary pressures, are expected by markets to lead to more cuts in the OCR, following further cuts by other major developed economies that brought their policy rates to record lows.

Labour market weakens further…#

The labour market continued to weaken in the December quarter, according to the Household Labour Force Survey (HLFS), as the unemployment rate increased 0.4 percentage points to 4.6%, its highest level since the December 2003 quarter (Figure 1). The increase in the unemployment rate was driven by an increase in the number of people actively seeking and available for work, possibly to support household budgets, combined with weaker demand for labour from firms.

Figure 1 – Participation and unemployment rates

Source: Statistics NZ

…despite an increase in employment#

The number of people employed increased 0.9% in the quarter. Most of the increase was due to a 3.5% increase in part-time employment, which suggests that firms are responding to the slowdown by having staff work fewer hours or less over-time rather than layoffs. Employment growth was recorded for males and females at 1.1% and 0.8% respectively, in the quarter.

Despite the overall increase in employment, there is great variation by age and industry. On an annual basis, employment increased for those aged 65 and over and decreased significantly for those aged 15-19 years. This is another indicator that the labour market is weakening as typically those with limited labour market experience find it harder to find jobs in a downturn. Declines in employment were recorded in primary industry, manufacturing and construction, whereas health and community services, education and other services experienced an increase in employment on an annual basis.

Overall, hours worked fell, indicating that total labour demand was weak, suggesting a weak outlook for December GDP figures. The increase in employment and unemployment rates led to a 0.6% rise in the labour force participation rate to a record high of 69.3%. Male and female participation rates both increased in the quarter, to 75.8% and 63.2%, respectively. A high participation rate combined with weakening labour demand will lead to higher rates of unemployment.

Wage pressures on firms ease slightly but remain elevated#

The increase in the participation rate shows that more people want to work, partly in response to the downturn in the economy. However, a fall in labour demand led to an increase in the unemployment rate. In line with this, wage growth eased slightly but remained at a high level (Figure 2).

Figure 2 – Wage growth

Source: Statistics NZ

The Labour Cost Index (LCI), which holds the quantity and quality of labour fixed, recorded an increase of 3.3% in ordinary-time salary and wage rates on an annual basis. However, growth in wages moderated as the annual increase in September 2008 was a record high of 3.6%. Labour markets typically follow other economic indicators with a lag in their response to the downturn. Both private and public sector wages rose and were 3.2% and 3.5% higher than a year ago, respectively. Wage growth in the unadjusted LCI (which includes merit increases but for a fixed composition of labour) was 5.4% in the year to December.

Looking at the Quarterly Employment Survey (QES), which includes merit increases and reflects composition changes in employment, average ordinary-time hourly earnings eased to 5.4% in the year to December 2008 from its recent peak of 5.5% in the year to September 2008. Total hours paid decreased 1.4% in the year so that total gross earnings increased only 4.1% annually and were unchanged in the quarter. This is a sharp fall in total gross earnings, which contributed to slower growth in source deductions tax revenue in the December quarter.

Firms also face other pressures…#

On average, input prices fell in the December quarter, but the price falls were restricted to lower energy (oil and electricity) costs. The Producers Price Index (PPI) inputs prices decreased 2.2% in the December quarter, following increases of 3.7% and 6.0% in the September and June quarters, respectively. The fall in the PPI inputs index was driven by the wholesale trade index, which fell 11.7%, reflecting the fall in oil prices.

Figure 3 – PPI input and output prices, construction

Source: Statistics NZ

The PPI outputs index increased 1.4% in the December quarter, suggesting at an aggregate level an increase in margins of firms. However, a closer look shows that the largest contribution to the increase in the outputs index came from the dairy manufacturing index, which was up 19.2% in the quarter. This can be explained by the large depreciation of the New Zealand dollar, driving up the price of dairy exports in NZ dollars. Furthermore, a comparison of input and output prices across industries such as construction, retail sales and personal services shows that the growth in output prices was offset by the growth in input prices, putting pressure on firms (Figure 3).

Another indicator of firm costs, the capital goods price index increased 1.1% in the December quarter, taking annual growth to 4.1%. The increase was mainly due to the fall in the New Zealand dollar, leading to higher prices for plant and machinery equipment. The cost of residential and non-residential building fell due to lower prices of steel and lower margins, reflecting weaker demand in the construction industry.

…and business confidence declines further#

Despite interest rate cuts and a lower value for the New Zealand dollar, weak domestic and international demand and lower profit margins led to a pessimistic view of the economy by firms. The National Bank Business Outlook for February showed that business confidence became more negative, falling to a net 41% of firms expecting the conditions to deteriorate. The activity outlook improved a little with a net 20% of firms expecting worse times for their own business, from its 21% record low in December 2008 (Figure 4).

In terms of employment intentions, a net 29% of firms expect fewer staff over the year compared to 22% in the previous survey. Together with weakening labour markets, this is another indicator for a weak outlook for real GDP growth in 2009. Investment intentions hit a new low, with a net 15% expecting to reduce investment over the coming year. This month’s special topic examines the outlook for business investment.

Figure 4 – Business confidence

Source: National Bank

Inflation pressures continue to ease…#

As firms face challenges from weak domestic and international demand, inflation pressures decline further. Large drops in the price of fuel and falling construction costs led to a 0.5% fall in the Consumer Price Index (CPI) in the December 2008 quarter, resulting in 3.4% annual inflation. The RBNZ survey of inflation expectations for the March quarter shows that average one-year-ahead inflation expectations fell 0.6 percentage points from the December quarter survey to 2.2%. Two-year-ahead expectations also fell to 2.3%, bringing their level above one-year-ahead expectations for the first time since 2004, suggesting that inflation is expected to increase over time (Figure 5).

Figure 5 – Inflation expectations

Source: RBNZ

This suggests that weak domestic demand is expected to continue and offset the pressure on tradables inflation due to the falls in the exchange rate -- the depreciation of the exchange rate will probably not be fully passed on to consumers immediately. Easing inflation pressures and the weak outlook for the economy have seen the Reserve Bank cut the Official Cash Rate (OCR) to 3.5% in January.

…partly due to slower domestic demand#

The falls in the OCR have led to lower mortgage rates. Despite these lower mortgage rates, lower fuel prices and tax cuts that provided consumers potential extra spending power, the volume of total retail sales fell 0.6% in the December quarter and the volume of core retail sales remained unchanged (Figure 6). Motor vehicle retailing, which has been the largest contributor to the fall in total volumes in each quarter in 2008, fell by 4.9% in the December quarter, reflecting an increase in prices due to higher exchange rates as well as weak demand for consumer durables. This was partially offset by the increase in the volume of fuel sales by 3.5% due to the fall in petrol prices.

Figure 6 – Retail sales volumes

Source: Statistics NZ

A further slowdown in retail sales can be expected in the first quarter of 2009, given the figures released for January for a few leading indicators. For example, the price of food increased 0.8%, resulting in a 9.5% increase since January 2008. This was mainly driven by a 3.6% monthly increase in the price of fruit and vegetables. Electronic card transactions for January fell in both total (-0.6%) and core retail stores (-0.3%). January figures for total domestic credit card billings also fell 2.7% from a year ago (-4.3% previously), although they were up 2.0% from last month. This recent monthly increase follows three months of decline due to falls in petrol prices and consumer confidence.

Despite this monthly increase in credit card billings in January, other indicators suggest further declines in consumer confidence. The Roy Morgan consumer confidence rating decreased by 3.3 points in February to 100.4, bringing it 17.4 points below that of February 2008.

Housing sector remains weak…#

The increase in uncertainty and the fall in confidence affecting retail sales are also reflected in the housing market, as households want to be cautious and reduce debt. Weakness in labour markets and weak net migration also contributed to further declines in the housing market, despite decreases in mortgage rates.

According to the Real Estate Institute of New Zealand (REINZ), house sales for January recorded an 8.6% monthly decrease and days to sell fell 1 day to a seasonally adjusted 48 days (Figure 7). According to the Quotable Value (QV) measure, in January, house prices decreased by 8.3% from a year ago (-7.4% previously).

Figure 7 – House sales and price growth

Source: REINZ, QVNZ

The weak data relating to sales continued to feed through to residential building consents. Tighter credit conditions, declining confidence and falling house prices resulted in new dwelling consents excluding apartments falling by 8.2% in January, bringing this series to its lowest level in 17 years.

… due, in part, to slowing net migration#

Another factor affecting the ongoing slowdown in the housing market is net migration. The annual net gain of permanent and long-term migrants was reduced to 4,500 in the January 2009 year, compared to 4,800 in the January 2008 year, with a seasonally adjusted net monthly gain of 700.

Private consumption is expected to continue to decrease#

Slower growth in house prices is generally accompanied by weaker consumption growth (Figure 8). Higher fuel and food prices in January, weak electronic card transactions, signals of a weaker labour market, and a decrease in consumer confidence all suggest a weak start to private consumption in the March quarter.

Figure 8 – House prices and consumption

Source: REINZ, Statistics NZ

Risks have increased that economic growth will be below our downside December Update scenario, where real GDP was forecast to shrink 0.2% in 2009 and 0.3% in 2010 (March years). There is a wide range of possible outcomes for growth at this time, both for New Zealand and other major economies.

The global economy deteriorates sharply...#

GDP data released this month saw major advanced economies contract sharply in the last quarter of 2008, as did a number of emerging economies. All G-3 economies are now in a synchronised recession. For the US, the 3.8% annualised contraction in Q4 2008 was chiefly the result of weakness in private spending and business investment. GDP in Japan and the Eurozone fell even faster, at annualised rates of 14.7% and 5.9% respectively (Figure 9). Elsewhere in Asia, there were also some strikingly weak GDP figures, with the Taiwanese economy contracting by a record 5.4% in Q4 2008.

Figure 9 – Real GDP growth

Source: Datastream

…threatening emerging markets#

The collapse in global commodity prices and the sharp decline in external demand have started to weigh heavily on emerging economies. The problem has become more acute in Central and Eastern Europe. A loss of capital inflows is putting downward pressure on the region’s financial markets and currencies, threatening the region with deep declines in output and a deluge of debt defaults.

Negative developments in Eastern Europe place enormous pressure on the Eurozone, given the large exposure of Eurozone banks to emerging market debts. As a result, not only is the cost of insuring government debt soaring for Eastern European economies and those weaker countries on the periphery of the Eurozone such as Greece and Ireland, but it is now rising for countries at the core of the Eurozone, such as France and Germany.

Financial markets reach new record levels#

Concerns about an intensifying global downturn and new threats of banking failures sent equity markets lower this month. In the US, the Dow Jones and S&P 500 indices reached 12-year lows before recovering slightly, while the Nikkei approached a 26-year low in Japan. Domestically the New Zealand Stock Exchange (on an NZX50 basis) fell 9% in the month.

The weak outlook for global demand also undermined oil prices with WTI prices down 7% in the month. On the other hand, growing concerns about the global financial system helped send safe-haven commodities higher. Gold prices traded briefly above US$1,000 in late February and have risen 4.5% in the month.

Governments introduce new policy responses#

Policy responses to stabilise the financial system and bolster the global economy continued this month. The latest of these are the enactment of the US fiscal stimulus package (US$787 billion, equivalent to 5.5% of GDP) and the passage of the Financial Stability Plan, estimated to be worth up to US$2 trillion. The Australian government has also responded to the deteriorating domestic conditions with a range of new spending measures totaling A$42 billion (3.5% of GDP).

Looking at monetary policies, there were more aggressive rate reductions with the Bank of England and the Reserve Bank of Australia lowering policy rates to 1% and 3.25% in early February. Asian central banks, including in Malaysia, Thailand and Taiwan, also lowered rates substantially in response to deteriorating economic conditions.

Forecasts are revised down further....#

The worsening outlook for the world economy was also evident in the February Consensus Forecasts. Compared with the January publication, global growth projections were scaled back by 0.6 percentage points to -0.8%. This represents a downward revision for New Zealand’s main trading partners from the January forecasts to -0.9% in 2009 and 2.2% in 2010 and is below our December Update downside scenario.

The prospects for global economic growth remain uncertain, reflecting the exceptional economic and financial factors affecting the outlook. The risks for growth are judged to be heavily weighted on the downside.

…as weak global conditions affect the domestic economy#

The January ANZ commodity price index reported a 4.3% monthly decline in the world price of our commodity exports, corresponding to a 26.5% fall annually. The largest falls were in wood pulp and dairy prices, with declines of 13.1% and 12.3%, respectively.

The annual merchandise trade deficit decreased slightly from NZ$5.6 billion in December 2008 to $5.5 billion in January (Figure 10). The January 2009 monthly deficit was the smallest January month deficit since 2001, indicating a slowing in growth of import values relative to export values.

Figure 10 – Merchandise trade – 12 month totals

Source: Statistics NZ

The value of exports was up 3.0% from a year ago, while the value of imports was down 0.9%. The fall in imports was mainly due to a 48.3% annual decrease in car imports. A bigger increase in the value of exports could be expected given the large falls in the TWI in the recent months, but these data are an indication that international demand will be the dominating factor in trade figures for 2009.

Coming up#

In March figures will be released for the balance of payments and gross domestic product in the December 2008 quarter.

Special Topic: Outlook for investment#

Investment is an important driver of both short-term GDP fluctuations and the economy’s long-run growth potential. This special topic looks at recent trends in business investment and assesses the risks arising from the ongoing economic downturn. In the short term, business investment is likely to suffer a sharp cyclical correction because of weak demand and the higher cost of capital goods. Lower borrowing costs are unlikely to outweigh the other negative factors. Investment is expected to recover from mid-2010 as the economy strengthens again.

Business investment the largest category …#

Total investment is generally split into three categories according to the sector of the economy undertaking the investment: residential investment by households, investment by firms (including local authority and state-owned enterprises) and central government investment. Different factors influence the investment decisions of each of these three sectors. This topic focuses on business investment by firms, which is the largest category of investment.

Figure 11 – Real GDP and investment

Source: Statistics NZ

… and one of the most volatile#

Business investment is one of the most cyclical components of GDP (along with residential investment), making judgements about its growth in the short term important in forecasting the extent of the current recession (Figure 11). This volatility reflects the nature of investment decisions. Business investment has grown faster than real GDP in the past decade and consequently it has increased its share of total GDP from around 15% in 1998 to around 20% in mid-2008. Residential investment accounts for approximately 5% of GDP and central government investment approximately 2%.

Business confidence a major determinant …#

The main determinants of business investment are current and expected demand for a firm’s outputs. The latest Quarterly Survey of Business Opinion (QSBO) showed that business confidence and firms’ own activity in the December 2008 quarter and their expectations for the March 2009 quarter were all at their lowest levels in seasonally adjusted terms since at least 1970. Capacity utilisation fell to its lowest level since mid-1999.

The weak outlook for activity, combined with limited ability to pass on large input cost increases because of the weak demand, led to a fall in expectations of profitability to its lowest level in 26 years. As a result, intentions to invest in plant and machinery fell to their lowest level since 1975. This survey series correlates well with investment in plant and machinery in the national accounts (Figure 12). These survey results (which were supported by the latest National Bank Business Outlook survey) point to a sharp fall in investment.

Figure 12 – Plant and machinery investment

 

Source: Statistics NZ

… along with the cost of capital goods …#

The cost of investment goods is also relevant to investment decisions. Capital goods prices have increased by 2% - 4% per annum over the past five years as increases in the price of locally-sourced capital goods more than offset falls in the cost of imported capital items (Figure 13). The price of non-tradable capital goods (primarily building and land improvements) increased rapidly in the recent period as a result of the boom in construction, especially residential construction. However, the price of imported capital goods (eg, plant and equipment) fell in the early part of this decade and – until recently – grew more slowly than locally-sourced goods because of the appreciation of the New Zealand dollar. Recently, with the fall in the NZ dollar, the cost of plant and equipment, much of which is imported, has started to increase more rapidly. This trend is likely to continue and will constrain investment in imported capital equipment in the coming period.

Figure 13 – Capital goods price inflation

 

Source: Statistics NZ

… and the cost and availability of credit …#

The cost and availability of finance are also relevant to investment decisions. Recent falls in interest rates have made it cheaper for New Zealand businesses to borrow, but the reduced availability of credit and tighter lending criteria may restrict credit growth. The increase in the annual growth in business sector credit from below 10% in August 2008 to more than 12% in January 2009 may reflect merely an increased need for working capital and refinancing of existing credit. Lower interest rates may encourage some firms to invest; for others, however, they are unlikely to outweigh the weak demand they face.

… as well as the availability of labour#

The availability of labour is also relevant to investment decisions. Some investment is undertaken to make labour more productive (capital deepening) while some is in response to a shortage of labour. Until recently, firms found it increasingly difficult to hire both skilled and unskilled labour. However, that situation has changed recently with the fall in both domestic and external demand and the increase in unemployment (Figure 14). With labour the easiest to find since the 1990/91 recession, investment is expected to be lower in the future.

Figure 14 – Ease of finding labour

 

Source: NZIER

Investment expected to decline sharply#

Business investment is expected to contract sharply in the near term as a result of the factors discussed above. In our December Update, we forecast it to decline by 15% in the year to March 2010 and by 24% in the downside scenario. Business investment was weaker than we expected in the September quarter 2008 and we now expected it to follow a path similar to the downside scenario (Figure 15).

Figure 15 – Business investment forecasts

Source: Statistics NZ, NZ Treasury

New Zealand Key Economic Data#

Quarterly Indicators#

Monthly Indicators#