Monthly Economic Indicators October 2013

Executive Summary#

Analysis#

Inflation rises#

The annual rate of Consumer Price Index (CPI) inflation rose to 1.4% in September from 0.7% in June - the first significant increase in the inflation rate since the October 2010 rise in GST (Figure 1). September’s quarterly increase of 0.9% can largely be attributed to increased fuel prices and seasonally higher vegetable prices. However, not all the increase in inflation can be attributed to volatility in these prices as measures of underlying inflation also ticked-up for the first time in a year, which is consistent with other indicators that spare capacity in the economy is contracting.

Figure 1: Consumers Price inflation rises

Source: Statistics NZ

Recent falls in international oil prices, combined with a stronger New Zealand dollar, have seen petrol prices retreat below their June quarter average. Combined with the expected seasonal fall in vegetable prices, inflation is expected to remain around 1.4% in the December quarter. This is below the Budget Economic and Fiscal Update (BEFU) forecast of a 1.8% increase.

Looking further ahead, the Budget forecast annual inflation to rise to about 2.0% by December 2014. This remains a reasonable prospect. The outlook is for stronger economic growth in coming quarters than was anticipated in the Budget forecasts, which means additional demand for resources and the prospect of a more rapid rise in inflation.

Reserve Bank lending restrictions come into effect#

On the other hand, the Reserve Bank’s restrictions on high Loan-to-Value Ratio (LVR) lending, which came into effect at the start of October as a macroprudential tool to reduce financial stability risks, appear to be having the intended effect of dampening growth in mortgage finance. In doing so, the restrictions are helping to reduce the risk and potential impact of a major correction in house prices. Initial indications are that the banks are approving fewer mortgages and that high-LVR buyer demand has eased.

If these initial impressions are borne out in subsequent data releases, the Reserve Bank may have more flexibility as to when and how quickly it raises interest rates. Prior to the Reserve Bank’s October OCR decision, financial markets moved to attach a greater probability to the first rise in the OCR being in April rather than in March.

The Reserve Bank’s decision to hold the OCR at 2.5% in October reinforced this move in noting that the recent rise in the exchange rate, if sustained, could reduce inflationary pressure and provide the Bank with greater flexibility on the timing and extent of future rate rises.

Net migration inflows strengthen...#

October’s releases of migration and trade data reinforced the positive outlook for the economy.

In the September month, seasonally-adjusted permanent and long-term migration data showed a net gain of 2,740 migrants – the highest monthly increase in just over a decade. The net measure has been positive since January and the September rise takes annual net migration to 15,170, roughly double the Budget assumption (Figure 2).

Figure 2: Net migration inflows strengthen

Source: Statistics New Zealand

The monthly increase in net migration is largely attributable to a fall in migrant departures to Australia, with the net loss of 800 people equal to the slowest rate in a decade. Additionally, arrivals have ticked up, increasing net migration further.

Short-term visitor arrivals also increased in September, up 2.9% from the same time last year. Visitors from China were up 26.5%. The Tourism Satellite Account, which presents information on tourism’s contribution to the economy in terms of expenditure and employment, showed tourist expenditure rose 2.2% to $9.8 billion in the year ending March 2013. Direct tourism employment increased 1.8%, compared to flat job growth across the economy as a whole. Growth in visitor arrivals was concentrated in the Asian market, up 53,000, but this was more than offset by a decline in visitors from Europe and the Americas. Total visitor arrivals fell 0.3% in the year ending March.

...and trade data supports positive outlook...#

The value of goods exports rose 9.4% (seasonally adjusted) in the September quarter to $12.1 billion. The increase can largely be attributed to a 20.4% rise in the value of dairy exports, with international dairy prices remaining at elevated levels and volumes being supported by favourable weather conditions. In addition, forestry had a strong showing on the back of historically high volumes and world prices supported by high demand from China.

Figure 3: Quantity of Dairy Exports

Source: Statistics NZ, GlobalDairyTrade

The value of goods imports rose 8.4% (seasonally-adjusted) to $12.7 billion, mainly driven by capital goods which increased 25.6% in the quarter. The value was impacted by a one-off import of a drilling platform in August.

The annual trade deficit widened to $1.5 billion from $0.8 billion in the June quarter. If there is no change in the ownership of the imported platform, for example it is leased, its value will not be included in the Balance of Payments figures. This suggests the Goods Balance surplus will remain steady at around 0.6% of GDP. However, rental payments for the drilling platform will add to the deficit on the Services Balance, which was running at 0.5% of GDP in the year ending June. Higher dairy exports (Figure 3) combined with high dairy prices are likely to underpin a narrower deficit in the last quarter of the year.

Consumer spending dips in September#

The value of core retail spending (excluding fuel and vehicles) fell 1.0% in the September month, driven primarily by a reversal in durables spending that rose significantly in August.

While the September month was soft, the overall quarter was more reasonable. Consumer confidence in the outlook also remained buoyant according to October’s ANZ-Roy Morgan Consumer Confidence survey.

Business confidence remains buoyant…#

Business confidence in the economic outlook rose to 14 year highs in September’s Quarterly Survey of Business Opinion (QSBO) and in October’s ANZ Business Outlook (ANZBO) (Figure 4). The QSBO also reported a greater proportion of firms experienced an improvement in their own activity over the September quarter and more firms were positive that activity would increase in the December quarter. Respondents to the ANZBO survey were also more confident in the outlook for their own business, with a net 47% expecting better times ahead – the highest since 1994.

Figure 4: Business confidence remains buoyant

Source: NZIER, ANZ

The QSBO employment measure continued to report modest employment growth, but hiring intentions rose strongly and are very positive.

Measures of capacity utilisation continued to rise, with the QSBO reporting that more firms experienced capacity as a constraint and that both skilled and unskilled labour were more difficult to find. However, most of the pressures are in Canterbury.

Manufacturing activity continued to increase, but at a slower pace. Supporting this picture, September’s BNZ-Business New Zealand Performance of Manufacturing Index continued to move down from its July peak of 59.4, falling to 54.3, which still points to growth, but not as strongly as earlier.

In the services sector, both the QSBO and the BNZ-Business New Zealand Performance of Manufacturing Index reported that businesses experienced an increase in activity in the September quarter. Indicators of inflation and price pressures in the QSBO and the ANZBO were mixed, but on balance appear to support the view that inflation will rise gradually. The QSBO reported steady building activity but weaker new orders and slower employment growth.

Canterbury building consents reach record high in September#

Growth in residential building consents has slowed in recent months. Nationally, residential building consents including apartments fell 1.9% in the September quarter, following a 15.6% rise in June. Excluding apartments, residential building consents rose 2.3%, following a 9% increase in the June quarter. Consents in Canterbury reached a record high in the September month, but increased only moderately elsewhere. Slower growth in consents is reflected in the housing market more broadly, where house sales have held steady at around 7,000 per month since the start of the year (Figure 5).

Figure 5: Slower growth in building consents

Source: Statistics New Zealand, REINZ

It typically takes a few months until changes in the number of consents feed through to changes in the level of building activity. The strong rise in June consents is likely to lead to a solid bounce back in September quarter real residential investment, which fell 1.6% in June, while the moderate rise in September consents points to slower growth in the December quarter.

Increases in the value of non-residential building consents also point to increased activity in coming quarters. Non-residential building consent values were 10% higher in the September quarter from the same quarter a year ago, following a 29% rise in June. For the year ending September 2013, consents were up 11.4%, which is the largest annual increase since 2005.

US-led uncertainty impacts on global markets#

US fiscal uncertainty affected market sentiment in October, and contributed to expectations that the Federal Reserve (Fed) will delay tapering asset purchases until March 2014. Non-US economic developments were generally positive.

Persistent US fiscal risk in coming months...#

The US government partially shut down from 1 to 16 October as the Congress was initially unable to agree on government funding for the new fiscal year, or on a higher debt limit as the Treasury was expected to run out of funds by mid November. The Republicans conditioned the approval of new spending and a higher debt ceiling on delaying key components of President Obama’s healthcare reforms, while the Democrats were unwilling to compromise on their flagship policy.

Congress agreed on 16 October to extend government funding until 15 January and suspend the debt ceiling until 7 February, but it is still required to agree to a long-term fiscal plan by 13 December. Overall, the deal represents only a temporary solution and fiscal risk is likely to continue to weigh on market sentiment.

The shutdown is likely to have had a muted economic impact of around 0.05-0.15% points on growth in the December quarter. The effects on financial markets were modest, with global equity and hard commodity prices falling, and prices rising for non-USD safe-haven assets. However, the prices of riskier assets rebounded after Congress reached a fiscal resolution.

...suggests tapering being delayed until March#

The US labour and housing markets were softer recently. Non-farm payrolls rose by a weaker-than-expected 148,000 in September, continuing their recent softness. Housing demand is showing reduced momentum, owing to higher mortgage rates relative to early 2013.

Analysts now expect the Fed’s tapering of asset purchases to be delayed until March 2014. This is owing to fiscal risks, softer economic developments and shutdown-induced data uncertainty, and on expectations of Janet Yellen, who is seen by the market as being relatively dovish, becoming the new Fed chair on 31 January 2014. Global longer-term yields have eased since mid-September on delayed tapering expectations (Figure 6). The Fed left its policy rate and asset purchases unchanged in October, and retained flexibility on tapering in its statement.

Figure 6: 10-year government bond yields

Source: Haver, Federal Reserve

Despite a softer labour market, the RBA takes on a more neutral monetary policy stance...#

Softness persists in the Australian labour market. Annual employment growth in September was 0.8%, a 19-month low. While the unemployment rate fell 0.2% points to 5.6%, this was driven partly by discouraged workers leaving the labour force. Despite a soft labour market, the RBA signalled a more neutral outlook for monetary policy, reinforced by high inflation in the September quarter, and market expectations for another rate cut by mid 2014 drifted lower.

...likely owing in part to stable growth in China#

China’s annual GDP growth in the September quarter was 7.8%, confirming a stable expansion in activity, although slower compared to the past decade. Solid industrial production (IP) and retail sales were consistent with stable growth.

Credit and liquidity risks resurfaced. The 7-day interbank rate rose sharply in late October, on concerns that the People’s Bank of China (PBoC) may tighten policy to address strong house price growth, large write-offs of bad loans by banks, and risks around local government debt. However, a repeat of June’s liquidity squeeze is unlikely; interbank rates remain much lower and the PBoC has the capacity to stabilise markets if necessary.

Euro area, UK and Japan continue to recover#

The euro area pick-up continued. IP and retail sales expanded solidly in August, and showed slower annual contraction in recent months, while PMIs indicated moderate growth in October.

The UK’s GDP expanded by a solid 0.8% in the September quarter, confirming a faster recovery than in the euro area. Retail sales continued to recover from their weakness in late 2012, supported by accelerating growth in house prices.

Japan’s government confirmed that its sales tax will be raised from 5% to 8% in April 2014, as the economy continued to show stimulus-led improvement. However, it is likely that growth will falter without effective structural reforms.

Special Topic: Fiscal Consolidation in Advanced Economies#

Many advanced economies emerged from the global financial crisis with high government debt and large fiscal deficits. In response, most of these countries are undertaking fiscal adjustments to reduce deficits, and stabilise and ultimately reduce government debt. Drawing on recent data from the International Monetary Fund (IMF) (particularly the October 2013 Fiscal Monitor [1]), this note addresses the international fiscal consolidation experience so far and how New Zealand compares.

Fiscal consolidation in advanced economies is proceeding#

Many advanced economies have made significant efforts over recent years towards fiscal consolidation. Deficits in most countries have narrowed since 2010 and are forecast to continue to narrow (Figures 1 and 2 - note differences in scale).

Figure 1: Fiscal Balances 2010-16, selected higher deficit countries

Figure 2: Fiscal Balances 2010-16, selected lower deficit/surplus countries

Source: IMF, October 2013 Fiscal Monitor. The IMF presents its data on a Government Finance Statistics and calendar year basis. Figures from 2013 onwards are forecasts.

2013 is expected to be a year of particular progress compared with previous years (although individual country plans differ). Consolidation in 2014 and beyond is expected to be more moderate, reflecting the progress made thus far.

Similarly, government debt is expected to stabilise and then start to decline in most countries, although in the near term debt continues to rise for some. Figures 3 and 4 show the government debt paths from 2010 to 2016 in selected countries (again, note differences in scale).

However, although fiscal consolidation is proceeding broadly as planned in most countries and deficits are narrowing, the extent of actual reduction in deficits so far is not as significant as originally anticipated. The main reason for this is that most countries have experienced weaker economic growth than expected, leading to weaker revenue.

Different countries have approached consolidation differently

The trends of narrowing deficits and stabilising then declining government debt broadly reflect the experience of most advanced economies. But underneath these trends are a number of different approaches. One difference between countries is the extent to which consolidation is achieved by spending measures, revenue measures, or both. New Zealand is somewhat unusual (although not totally alone) in that its fiscal consolidation has been largely on the spending side. Figure 5 shows the extent to which fiscal consolidation so far has been by spending or revenue measures, or both, across a sample of countries (a positive value represents fiscal consolidation and a negative value represents fiscal expansion).

Figure 5: Composition of Adjustment, 2009-13

Source: IMF, October 2013 Fiscal Monitor. Data is cyclically adjusted.

As Figure 5 shows, many countries have relied on both revenue and spending initiatives to help reduce their deficits. In many cases, the share of consolidation on the revenue side was more than was initially planned.

There are differences in approach beyond the mix of spending and revenue initiatives. The United States, the United Kingdom, France and Greece are proceeding with fiscal consolidation at a faster pace than most other countries, with adjustment likely to be more than 1% of GDP in 2013. To a large extent this comparatively faster adjustment reflects different starting points, as most of the countries on fast consolidation paths had comparatively high deficits to begin with. Still, individual country circumstances are relevant too. For example, much of the consolidation in the United States in 2013 is due to the extension of automatic spending cuts, or the “sequester”.

At the other end of the spectrum, some countries that do not feel such immediate pressure to consolidate are actually loosening fiscal policy slightly in 2013. Sweden, Germany and Canada fall into this category. In some cases this reflects the fact that these countries have not faced the need for significant adjustment - Sweden is an example. In Germany, on the other hand, fiscal easing reflects the fact that deficit goals were achieved ahead of schedule.

In the middle, countries such as Ireland and Spain are continuing with fiscal consolidation into 2013 and beyond, but at a more moderate pace than the fast consolidation group.

Japan is unusual in that fiscal consolidation is yet to get underway despite having a large deficit and high government debt (it is one of the few countries surveyed that actually increased its deficit since 2010). Consolidation is planned for 2014 and beyond, although some details of what that will involve have yet to be fleshed out.

Getting debt back to acceptable levels is still a challenge for most countries...

Even assuming that planned fiscal consolidation takes place, many countries will still have levels of government debt at or near historical peaks, leaving them vulnerable to economic shocks. Accordingly, the IMF advises most advanced economies to continue efforts to reduce government debt throughout the 2020s.

Figure 6: Aggregate advanced economies’ gross government debt, 2006-18

Source: IMF, October 2013 Fiscal Monitor.

... but New Zealand is relatively well-placed#

Compared with many advanced economies, New Zealand is well-placed in terms of moving into surplus and being able to start reducing its debt. Under current forecasts, New Zealand will move into surplus in the 2014/15 fiscal year (or the 2015 calendar year under the IMF forecasts, which are prepared on a calendar year basis). Of the advanced economies that the IMF surveys, only Estonia, Hong Kong, Korea, Norway, Singapore and Switzerland will also achieve surpluses in 2015.

Moving into surplus means that New Zealand can start paying down its government debt sooner than many other countries. Also, New Zealand’s starting position is more favourable in that government debt was at historically low levels in 2008. Despite two shocks - the global financial crisis and the Canterbury earthquakes - New Zealand’s government debt did not rise to the levels seen in other advanced economies.

The Annual Financial Statements of the New Zealand Government, released on 7 October 2013, show New Zealand is in an even stronger position than that reflected in the IMF’s analysis. The IMF data for New Zealand is based on Budget 2013 forecasts, so values for 2013 are forecasts rather than actual data. But in fact, actual results for the 2012/13 fiscal year were stronger than forecast at Budget 2013. In particular, the 2013 Financial Statements show New Zealand’s operating balance to be -2.1% of GDP in 2012/13, as opposed to the forecast at Budget 2013 of -2.9% of GDP. Similarly, net core Crown debt was forecast to be 27.1% of GDP in 2012/13, but was in fact 26.3% of GDP.

New Zealand Key Economic Data#

31 October 2013

Quarterly Indicators#

Monthly Indicators#

Figure 4: Gross Government Debt, selected lower debt countries

Source: IMF, October 2013 Fiscal Monitor.

The IMF presents its data on a Government Finance Statistics and calendar year basis. Figures from 2013 onwards are forecasts.

Figure 3: Gross Government Debt, selected higher debt countries