Monthly Economic Indicators November 2015

Executive Summary#

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Analysis#

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Data released in November continue to point to a stabilisation in the growth outlook for the New Zealand economy, supported by consumption, residential investment and services exports, although the outlook remains weaker than forecast in the Budget Update (BEFU). Treasury expects quarterly GDP growth to pick up to around 0.6% in the second half of 2015 from 0.4% in the June quarter, although December quarter growth from a year ago is still expected to fall below 2.0%. Solid growth in labour incomes, despite a fall in employment, supported spending. Housing demand slowed as markets adjust to new regulations. Inflation showed signs of increasing, as earlier falls in the New Zealand dollar (NZD) drove increases in business prices.

However, a fall in the September quarter terms of trade and dairy prices in November, and a further rise in the unemployment rate, continued to reinforce risks to the economic outlook. An updated assessment of the New Zealand economy will be available in the Half-Year Update scheduled for release on 15 December 2015.

Employment falls on lower labour demand...#

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The number of people employed fell in the Household Labour Force Survey (HLFS) in the September quarter after eleven consecutive lifts. Employment fell 0.4% in the quarter, following a rise of 0.2% in the June quarter, and annual growth slowed to 1.5% from 3.0% (Figure 1).

Figure 1: Employment and the unemployment rate

Source: Statistics NZ

The fall in employment was driven by part-time positions, with full-time positions up slightly, and the HLFS total hours worked expanded 0.4%. Similarly, the seasonally adjusted paid hours in the Quarterly Employment Survey (QES) rose 0.9%, suggesting that total labour demand held up in the quarter, although was still softer than a year ago. Most other indicators of labour demand in the QES also recovered in the quarter: seasonally adjusted filled jobs grew 0.7% in the September quarter and regained their March 2015 level, as full-time equivalent employees increased strongly in construction, wholesale trade, and hospitality and food services.

...leading to higher unemployment rate...#

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The participation rate in the HLFS dropped to 68.6% in the September quarter from 69.3% in June. The fall in the participation rate appears to have occurred among the same groups of workers as the fall in employment, suggesting that workers who were no longer employed were not seeking work. The declines in employment and the participation rate were also widespread across the labour market. A lower participation rate led the labour force (people available for work) to contract 0.3% in the September quarter, its first decrease since early 2013, despite strong working-age population growth of 0.6% in the quarter. The unemployment rate ticked up 0.1% point to 6.0% in the quarter (Figure 1), as the fall in employment was larger than the drop in the labour force.

...but solid growth in labour incomes...#

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Headline wage growth remains soft, reflecting increased spare capacity in the labour market. Annual growth in ordinary-time hourly earnings in the QES fell to 2.3% in the September quarter from 2.8% in June, with the slowdown driven by private sector earnings.

Figure 2: Gross earnings and paid hours

Source: Statistics NZ

However, annual growth in total labour earnings remained solid at 5.5% in the September quarter owing to strong growth in hours paid (Figure 2). Meanwhile, low annual inflation (0.4% in the September quarter) points to real wage growth of around 2.0%, despite low nominal wage growth. Solid growth in total labour incomes and real wages is expected to support private consumption growth in the second half of 2015.

...expected to support private consumption...#

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The Retail Trade Survey showed continued positive momentum in household spending. The seasonally adjusted total volume of retail sales rose 1.6% in the September quarter, with annual growth broadly steady at 5.7%. Core retail sales (excluding motor vehicles and fuel) expanded by a smaller 1.0% in the quarter, but still up from a flat outturn in June, driven by electronic goods, restaurant services, and supermarket and grocery sales. Motor vehicle sales volumes surged 5.0% in the September quarter, driving growth in total retail volumes, while fuel retailing also rebounded 1.3%.

Retail sales values grew 1.4% in the September quarter, also driven by motor vehicle sales, reflecting higher prices as well as volumes. Core retail values grew 0.9%, while fuel retail values dropped 0.5%. The retail price deflator declined 0.2%, reflecting low consumer price inflation.

Figure 3: Retail sales and private consumption

Source: Statistics NZ

All told, data point to moderate private consumption growth in the September quarter (Figure 3). However, part of the rise in retail volumes may reflect increased spending by overseas visitors, as indicated by the International Visitor Survey (discussed below), and will be included in services exports rather than private consumption.

...and September quarter GDP growth#

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A moderate pick-up in private consumption and solid growth in residential investment are expected to lift domestic demand over the second half of 2015, and Treasury expects GDP growth in the September quarter 2015 to pick up to 0.6% from 0.4% in the June quarter. However, growth from the September quarter 2014 is expected to slow to around 2.0% from annual growth of 2.4% in June. Growth from a year ago is projected to be driven by consumption and residential investment, which offset softer growth in business investment. September quarter GDP figures will be released on 17 December.

Ongoing growth in private consumption...#

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Private consumption growth appears to have continued in the December quarter at a steady pace. Household sentiment recovered in the December quarter, with the ANZ Roy-Morgan consumer confidence index surging 5.1 points in November to a six-month high of 123.2, bringing its average so far in the December quarter up to 120.7 from 113.6 in the September quarter. As confidence improved, the seasonally adjusted electronic card transaction values remained high in October following strong outturns in the September quarter.

...and migration boosts domestic demand...#

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The seasonally adjusted net inflow of migrants reached a record high in the October month (6,200). Compared to October 2014, total arrivals were up 12.4%, driven by students, migrant workers, and New Zealand and Australian citizens, while departures were broadly flat. Annual net migration also rose to a new high of 62,500 from 61,200 in September, as arrivals in the year to October expanded 12.1%, driven by students and workers. A fall in departures of 3.1% over the period also contributed to the net migration gain, primarily on the back of fewer departures to Australia. Net inward migration from Australia in October remained positive for the seventh consecutive month, leading to the first annual net gain since November 1991, of 100 migrants. The turnaround contrasts with the net outflow to Australia of 5,300 people in the October 2014 year.

Net migration is estimated to have contributed around three-quarters of New Zealand's population growth of 1.8% in the year to June 2015, which was up from 1.1% in 2014. Strong population growth will contribute to domestic demand, particularly for housing. That said, a higher concentration of migrant arrivals in the younger age groups than previous migration cycles may limit the impact on house prices and domestic demand.

...and will add to housing demand despite the slowdown in October...#

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Housing demand slowed sharply in October as markets adjust to regulatory changes. The seasonally adjusted stratified house price index fell 4.2% – the largest price decline on record for a single month – led by falls of 4.7% and 6.2% in Auckland and Canterbury, respectively. Annual price growth slowed to 14% in October from 20% in September, but remained historically elevated (Figure 4). Excluding Auckland, the (unadjusted) median house price rose 1.4% in October to a record high. The fall in house prices reflected weaker demand, as the seasonally adjusted number of house sales fell 5.1%, led by a large 15.3% drop in Auckland in October, and sales elsewhere fell just 2.6%.

Figure 4: REINZ house price growth

Source: REINZ

Slower housing demand reflects greater caution as markets adjust to tighter government rules around property taxation which applied from 1 October, and the Reserve Bank's investor loan-to-value restrictions (LVR) for Auckland which took effect on 1 November. Housing demand may have been boosted in the period prior to the implementation of the regulatory changes and is adjusting now. However, LVR restrictions outside of Auckland were relaxed, which is expected to support housing demand elsewhere, and it is too early to conclude what the net effect of the regulatory changes is on demand. Treasury expects housing demand to recover over coming quarters, as the fundamental drivers - strong population growth and low interest rates - are expected to persist.

...supporting residential investment growth#

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Residential investment growth is expected to pick up in the second half of 2015, contributing to the lift in quarterly GDP growth. Seasonally adjusted dwelling consents rose 5.1% in October, following healthy expansion in the September quarter, to be up 8.1% from a year ago. Across regions, growth from October 2014 was driven by the upper North Island, with Auckland and Waikato up 36% and 34% respectively, as construction resources respond to supply shortages in these regions. Meanwhile, consents in Canterbury fell 29%, as the residential rebuild passed its peak. While residential construction activity remains strong, housing demand is likely to continue to outpace supply over the coming year, maintaining pressure on house prices and construction costs.

...supporting December quarter GDP growth#

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A pick-up in domestic demand and ongoing strength in tourism spending supported activity in the December quarter.  Firms' expectations of their own activity in the ANZ Business Outlook continued to recover in October and November from their low in August. The BNZ-BusinessNZ Performance of Services Index in October (56.2) showed strong expansion in services, partly reflecting strength in the retail sector, although it fell from 59.0 in September. However, the Performance of Manufacturing Index dropped 1.7 points to 53.3, its lowest since May and showing a more moderate pace of growth. On balance, available data point to GDP growth of around 0.6% in the December quarter, driven by private consumption and residential investment.

NZD depreciation lifting business prices...#

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The earlier depreciation in the NZD is flowing through to higher business costs. Producer prices rose in the September quarter, with input and output price indices up 1.6% and 1.3%, a sharp turnaround from falls of 0.3% and 0.2% respectively in the June quarter. In annual terms, input and output price growth remains slow at -0.2% and 0.2%, respectively, despite a rise. Higher input costs were evident across most industries, which reflect higher prices for petrol and imported machinery, largely as a result of the exchange rate depreciation.

Higher output prices were led by agricultural output prices and also reflect the broader pass-through of higher costs associated with a weaker exchange rate. Quarterly growth in construction output prices eased, partly reflecting reduced pressure from residential construction in Canterbury, but annual growth in construction output prices (2.3%) remains significantly higher than growth in total output prices (0.2%). The pick-up in output prices in the quarter points to higher inflation in coming quarters (Figure 5).

Figure 5: PPI and CPI inflation

Source: Statistics NZ

The capital goods price index rose 1.4% in the September quarter to be up 3.6% in the year to September. The quarterly rise was driven by plant and equipment, and transport equipment, and showed the impact of NZD depreciation. Growth in residential building prices (1.1%) in the quarter was less than growth in total capital goods, but annual growth in residential building prices (5.2%) remains higher than total capital goods prices.

...although labour costs remain subdued#

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However, growth in labour costs remained soft, continuing to point to low non-tradables inflation, as labour represents a greater proportion of total costs in the non-tradables sector than in tradables. Growth in the labour cost index, which approximates unit labour costs, was broadly unchanged at 1.6% in the September quarter.

Lower terms of trade in September quarter...#

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Higher price pressures were also evident in the Overseas Trade Indices. Goods export and import prices both increased, driven by a lower NZD.  The goods terms of trade fell 3.7% in the quarter, as import prices rose by more than export prices. Dairy export prices fell 0.1% in NZD terms, as large falls in GlobalDairyTrade (GDT) auction prices earlier in the year were largely offset by the fall in the NZD, while non-dairy prices mostly expanded in NZD terms. Positively, goods export volumes rose 6.9% from a year ago, faster than the 3.2% rise in import volumes, which supports net exports.

The services terms of trade fell 5.4% in the September quarter, as NZD depreciation led to a bigger boost to services import prices than for export prices, as the latter are measured largely in NZD terms.

...and dairy price falls dampen receipts...#

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The earlier falls in GDT auction prices continued to weigh on export receipts. The seasonally adjusted merchandise trade deficit widened to $446 million in October from $369 million in September, as export values fell 0.6% in the month, driven by lower prices for dairy, forestry and meat. Total import values were broadly flat. The goods trade deficit is expected to continue widening over 2016, driving an increase in the current account deficit.

Dairy prices retrace after a lift in October...#

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The ANZ world commodity price index rose 6.8% in October in USD terms to be up 12% from its post-GFC trough in August, owing to a rebound in dairy prices. The NZD index is up 3.4% in the year, owing to NZD depreciation, contrasting with the USD index which fell 8.6% over the period.

Dairy prices have since retraced their increase, with the average GDT auction price declining 12% in November to US$2,457/mt, owing to slow global demand growth and easing concerns around supply. All product prices declined, with skim and whole milk powders (WMP) both down 8.0%. However, dairy prices remain more than 30% higher than their post-GFC low in August, and rebounded modestly in the first GDT auction in December. Auction volumes in recent months were around 25% lower than a year ago, as Fonterra responds to falling milk production and redirects product away from the GDT auctions.

Following the fall in GDT prices in November, some bank analysts revised down their farm-gate milk price forecasts, with the analyst range down from $4.25-5.30/kg MS to $4.25-4.60/kg MS. Fonterra's current forecast is on the upper end of this band at $4.60/kg MS, which requires WMP prices to rise to around US$3,000/mt in the first half of 2016. Fonterra will review its farm-gate milk price forecast on 9 December.

...but tourism revenue provides support#

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The drag on national incomes owing to falls in dairy prices over the past year is offset to some extent by strength in tourism revenue. According to the International Visitor Survey, foreign visitor spending increased 38% in the year ending September 2015, which reflected both strong growth in visitor arrivals and spending per visitor. Short-term visitor arrivals expanded 8.9% in October from a year ago, driven by growth in Chinese and Australian visitor arrivals. Strong spending by foreign visitors is expected to maintain services exports at an elevated level in the second half of 2015, but may not contribute to further growth in services exports or real GDP.

Monetary policy remains supportive of growth#

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Markets have priced in around a 50% probability of a 25 bps reduction in the Official Cash Rate to 2.50% at the Reserve Bank's next monetary policy review on 10 December. The economic outlook has weakened over 2015 and inflation remains subdued overall, but recent data point to a pick-up in growth, and currency depreciation is gradually flowing through to higher inflationary pressure.

US an exception in an otherwise soft month for global data#

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Global data in November reflected the divergence between the sustained recovery in the US and slower growth in the other major advanced economies. Accordingly, expectations for a rate hike by the US Federal Reserve (Fed) in December have increased, while the other major advanced economies are on hold or expected to ease further. US bond yields rose on rate rise expectations, share markets were fairly stable overall, but commodity prices remained low, especially oil. The Paris terror attacks have had limited impact on markets, although they may affect tourism and trade growth in the region in the medium term.

Figure 6: US labour market and Federal funds rate

 

Source: Haver

US data solid, December rate hike likely...#

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Solid data in November increased expectations that the Fed will begin tightening in December - the first time in almost a decade (Figure 6). Non-farm payrolls grew 271,000 in October, significantly higher than their September quarter average of 171,000 and driven by the services and construction sectors. The unemployment rate fell to 5.0% and annual wage growth accelerated to 2.5% from 2.3%, suggesting spare capacity in the labour market is reducing. That said, the Fed's preferred measure of core inflation remained weak at 1.3% in the year to September. November labour market data, due for release after this report is finalised, will be a key factor in the Fed's December decision.

...and Australian economy picks up momentum and RBA holds#

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Australia's GDP growth in the September quarter was 0.9% (2.5% apc), driven by a 4.6% increase in exports and a 0.7% increase in household spending. Investment continued to subtract from growth, reflecting the transition from the mining to non-mining sectors and a reduction in government investment. Employment grew 0.5% in October to be up 2.7% from a year ago and the unemployment rate fell 0.3% points to 5.9%. Annual inflation remained stable at 1.5% in the September quarter.  The Reserve Bank of Australia remained on hold at its early December policy review, but maintained an easing bias.

China's slowdown and rebalancing continue...#

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Data continue to reflect the slowdown in China while suggesting the economy is rebalancing from investment to consumption. Annual fixed investment growth in October was 5.7% points lower than a year ago at 10.2%. On the other hand, consumer spending has picked up with retail sales expanding 11.0% from a year ago in October, above expectations and increasing from around 10% in early 2015. Despite higher household spending, annual inflation remained low at 1.3% in October. The People's Bank of China eased policy again in November with further easing expected to follow.

...as the euro area recovery continues to slow...#

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The euro area recovery continues to slow with growth in the September quarter of 0.3% (1.6% apc), down from 0.4% in the June quarter. The weak outturn reflects the slowdown in emerging market economies which account for much of the region's export demand. The unemployment rate continued its sluggish descent, falling 0.1% points to 10.7% in October. Annual inflation remains weak, with headline CPI inflation at 0.1% in November and core inflation at 0.9%. Slowing growth, low inflation and a commitment from the ECB President have increased expectations that the ECB will ease further in early December.

Meanwhile, the UK recovery remains fragile with annual core inflation soft at 1.1% in October. That said, labour market conditions continue to improve with solid employment growth and a declining unemployment rate (5.3% in September), as well as positive, albeit volatile, wage growth. The Bank of England is expected to remain on hold for some time with only a low probability of tightening priced in for 2016.

...and Japan enters recession, but with solid consumption#

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The Japanese economy entered a technical recession with September quarter GDP contracting 0.2% – the fourth recession in five years. The outturn was driven chiefly by weak business investment, reflecting a slowdown in manufacturing activity and the general slowdown in the Asia region. Falling inventories also contributed. However, domestic demand remained upbeat with solid private consumption providing some offset, reflecting recent strength in the labour market. CPI inflation was 0.3% in the year to October. As expected, the Bank of Japan kept its policy rate on hold and QQE unchanged. The Bank continues to hold an optimistic view of when inflation will return to its 2% target, although this has been pushed out recently.

Elsewhere in Asia, Taiwan's economy contracted 1.0% in the year to September, driven by lower-than-expected exports, reflecting increased competition from China and the slowdown in the Asia region.

Global economy poses risks to New Zealand#

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The international economy continues to pose risks to the New Zealand outlook with uncertainty about the impact of US monetary policy tightening on financial markets, especially in emerging economies, weak growth in Asia generally, and a slow recovery in Europe. The pick-up in growth in Australia in the September quarter as its economy rebalances is a positive. However, commodity prices remain low in general as a result of oversupply and weak demand.

Special Topic: Tax Revenue recent history and outlook#

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The Financial Statements of the Government of New Zealand (FSG) for the year ending 30 June 2015 were released on 14 October. The 2015 FSG showed an operating balance excluding gains and losses (OBEGAL) surplus of $414 million, vs. the 2015 Budget forecast deficit of $684 million. Tax revenue contributed about half of the OBEGAL's $1 billion positive variance from forecast.

This special topic expands on the tax variance commentary that appeared in the FSG, analyses the tax revenue results for the September 2015 quarter and outlines the likely implications for tax revenue for the remainder of the 2015/16 fiscal year.

Tax revenue for the year to June 2015#

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For the 12 months ended June 2015, core Crown tax revenue was just 0.8% ($559 million) above the 2015 Budget forecast of $66,077 million, as shown in Table 1. While all of the variances from forecast across the various tax types were relatively small, they were almost all positive, producing the positive result vs. forecast for total tax revenue.

Total wages and salaries in the June quarter were above forecast, mainly as a result of higher-than-forecast average weekly paid hours. This contributed about half of the $200 million PAYE (source deductions) variance from forecast.

Table 1 - Core Crown tax revenue: 2014/15 actual result vs. 2015 Budget forecast

The other half was the result of a $100 million forecasting judgement included in the Budget forecast that has since proven to be unnecessary. [1]

Customs and excise duty[2] is not normally a tax type that features in forecast variance explanations. However, in the June 2015 quarter, two unusual things happened:

• NZ Customs booked some additional petrol excise revenue, plus associated penalties, relating to prior years; and
• there was an unusually large amount of tobacco product importation/production through the June quarter, causing a small increase in tobacco excise relative to forecast.

Business income taxes, for individuals (other individuals' tax in Table 1) and companies (corporate tax), were both above forecast, although for different reasons. For individuals, the forecast included an assumption that provisional tax would tail off towards the end of the year in the face of declining profitability and lower incomes for dairy farmers. In fact, provisional tax revenue in the June quarter was up on the previous year, contributing +$75 million to the total tax variance. Net terminal tax revenue, i.e. square-ups of income tax for previous tax years, was also a little above expectations.

For corporate tax, provisional and terminal tax were close to, albeit a little below, forecast. The majority of the positive variance against forecast came through Portfolio Investment Entity (PIE) tax. PIE tax is inherently difficult to forecast for two reasons:

• Since PIE tax is linked to investment returns, it can be very volatile from one year to the next; and
• More than 90% of annual PIE tax is returned and paid in the month of April, which means that there is limited current-year information available from PIE taxpayers at the time the Budget forecasts are prepared.

PIE tax in 2015 was boosted by strong growth in KiwiSaver funds under management. While this should raise the trend level of PIE tax in the future, we expect to see continuing variation around the trend owing to the volatility of investment returns.

Finally, resident withholding tax[3] (RWT) also came in above forecast. At the time the Budget forecasts were being compiled, interest RWT was running below forecast and the RWT forecast was lowered accordingly. However, the lower-than-forecast year-to-March outturn turned out to be a timing anomaly and interest RWT finished the year above forecast.

Forecast accuracy#

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The core Crown total tax revenue variance vs. the 2015 Budget forecasts of 0.8% was slightly below the long-run average forecast variance of 1.1%. It was also similar to the variances of the previous four years, which were all around ±0.6% to 0.7%.

In 2008, when the long-run average forecast error was around 4%, the Treasury adopted a target of achieving variances from forecast of less than ±3% for its one-year-ahead forecasts of core Crown tax revenue. Treasury has achieved this target on six out of the seven annual tax revenue outcomes since then and the long-run (now 20-year) average has dropped to 3.1%. Compared to the 2014 Budget forecast, total core Crown tax revenue for 2014/15 was $194 million (0.3%) higher, well within the ±3% target range.

Further information on the performance of Treasury's economic and tax forecasts can be found at: http://www.treasury.govt.nz/publications/informationreleases/forecastingperformance

2015/16 tax outturns so far#

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FSG for the three months to September 2015 have been published on the Treasury website. To some extent, tax revenue has continued on from where it left off in June.

Some tax types have continued to run above forecast, particularly:

• The momentum (relative to forecast) seen in source deductions in the June quarter has continued through to September; and
• Corporate tax was boosted by a small number of large, unforeseen payments of non-resident withholding tax (NRWT). The NRWT portion of the corporate tax variance is expected to persist through to the end of 2015/16 but is not expected to be repeated in later years.

However, some negative forecast variances have begun to appear in the tax outturn table:

• Interest rate cuts are starting to affect interest RWT (included in other direct taxes in Table 2);
• Weakness in nominal domestic consumption through the first half of the 2015 calendar year has contributed to below-forecast GST; and
• Much of the additional tobacco excise collected in the June quarter has reversed out as refunds in the September quarter.

Looking ahead...#

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As noted above, when formulating tax forecasts, some judgement is required to assess whether outturn variances are the result of short-lived seasonal fluctuations or have been caused by permanent macroeconomic factors. While tax revenue is currently running close to forecast, it is possible that this might not continue through to the end of 2015/16.

Since the Budget forecast was finalised, GDP has posted two quarters of weak growth, i.e. the March 2015 and June 2015 quarters. This is yet to become fully evident in tax outturns.

The world price for NZ's dairy products has dropped considerably since the Budget. While this is affecting dairy farmers' profits and tax payments most immediately, it has wider implications for both corporate and individuals' income tax, as do other key developments noted in recent Monthly Economic Indicators reports.

The lower level of domestic consumption, caused by the abovementioned weak growth through the first half of 2015, is expected to continue to weigh on GST outturns over the remainder of 2015/16.

Employment growth halted in the September quarter and the unemployment rate rose to 6.0%. This may imply some downside to the Budget's source deductions forecasts over the coming months at least.

Since the Budget, the Reserve Bank has cut the OCR three times, causing deposit interest rates to fall. This is already causing interest RWT to fall short of the forecast. A lower interest rate track through the remainder of 2015/16 would continue to drag on RWT.

All of these things were taken into consideration when preparing the 2015 Half-Year Update forecasts, which are due for release on 15 December.

The October FSG will be published on 8 December.

New Zealand Key Economic Data#

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7 December 2015

Quarterly Indicators#

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Monthly Indicators#

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