Weekly Economic Update - 1 October 2021

Weekly Economic Update 1 October 2021#

The data continues to suggest that the August lockdown has not impacted activity to the same degree as the 2020 lockdown. The shallower fall in activity combined with resilient demand and business sentiment will be supporting a recovery from late September. However, capacity pressures remain, with supply chain disruptions and labour shortages continuing to pose barriers to growth and will keep inflationary pressures elevated.

Smaller fall in activity preceded the recovery…#

Economic activity was down 0.6% in August 2021 compared to a year ago in the New Zealand Activity Index (NZAC), much lower than the falls of over 2.5% in March, April and May last year (Figure 1). However, with the country at higher alert levels in September, activity is likely to remain below the levels seen a year ago. GDP is expected to contract sharply in the September quarter before bouncing back strongly as alert level (AL) restrictions ease.

Figure 1: NZAC and GDP

Source: Stats NZ

Over the past week however, some constituent indicators of the NZAC have suggested that the recovery has quickened. National heavy traffic levels have fully recovered and heavy traffic levels in the Auckland region on 27 September was more than double its level compared to the week prior.

... and business sentiment remains resilient…#

Business confidence fell slightly in the final September 2021 ANZ Business Outlook but remains higher than before the latest COVID-19 outbreak. However, elevated cost pressures and expectations that demand will remain resilient are leading to sustained inflationary pressures.

…with imports at record high levels in August#

Import values rose to a record high level for an August month, suggesting that retailers are confident about their activity outlook. This took the monthly trade balance to a record deficit of $950 million (Figure 2). Export values weakened further, reflecting the impact of the August 2021 lockdown. The fall in export volumes is expected to be smaller than the 2020 lockdown given the shorter period under AL 4.

Figure 2: Overseas merchandise trade

Source: Stats NZ

Consents issuance hit a fresh record high#

Despite the return of higher alert levels, consents issuance reached a record high of 46,453 for the year ended August (Figure 3). The August lockdown will lead to a fall in construction activity in the September quarter, but high activity levels are expected to return as alert level restrictions ease. However, ongoing capacity constraints will constrain growth ahead.

Figure 3: Annual Dwelling Consents by Region

Source: Stats NZ

Energy shortages are intensifying concerns about global inflation, while the spread of the delta variant continues to stifle the economic recovery.

Energy shortages raise inflation fears…#

Prices for oil, natural gas and coal are rising as the global rebound in economic activity runs up against supply chain bottlenecks. China is rationing electricity to businesses as coal supply runs low, power bills in Europe are surging as peak winter demand looms, and petrol stations in the UK are running dry as supply from refineries to retailers is disrupted. There are concerns that the supply crunch could spread to other countries, further adding to existing global inflation pressures and impeding the economic recovery.

…but US rate increases still "a ways off"…#

US Federal Reserve Chair Powell said this week that inflation now appears likely to remain high into the new year as supply chain disruptions continue to drive prices higher. Powell acknowledged the challenging trade-off between managing inflation and addressing continually high unemployment, but reiterated that interest rate rises in the US are still some way in the future.

…as consumer confidence slips further#

Ongoing weakness in the US economy is evident with consumer confidence falling for the third month in a row in September, as the spread of the delta variant worsened in the country. Weekly COVID-19 cases were over one million during the first three weeks of September, and weekly deaths have also picked up to more than 10,000 as more than a third of the population remains unvaccinated. The consumer expectations measure fell to its lowest level since the end of 2020, indicating that people expect the situation to worsen before it gets better.

Figure 4: US consumer confidence

Source: Haver

Consumer confidence lifts in Australia#

Australia's retail sales fell for a third consecutive month in August as the COVID outbreak dampened activity, but a lift in consumer confidence in September suggests that a recovery may soon be under way as the country looks toward lifting restrictions. Victoria and NSW are both set to re-open in October as vaccination targets are met.

Growth continues to slow in China…#

China's manufacturing sector, as measured by the Purchasing Managers Index (PMI), fell into contraction in September for the first time since February last year (Figure 5). The fall reflects a number of factors, including regional lockdowns as China continues its zero-tolerance approach to COVID cases, as well as coal shortages curbing industrial production. With both of these limits on growth likely to persists in the near term, China's economic activity may continue to slow, with implications for New Zealand's export demand.

Figure 5: China manufacturing PMI

Source: Haver

…as the Evergrande saga continues#

Another risk to China's economy is the highly indebted property developer Evergrande, which appeared to miss a second bond interest payment this week. After raising money by selling its stake in a commercial bank, the company is prioritising domestic creditors over offshore bondholders. China's central bank has injected further liquidity into the banking system and vowed to protect consumers exposed to the housing market, which has helped to calm asset markets. Meanwhile, the government is reportedly encouraging state-owned firms to purchase some of Evergrande's assets, which should help the company meet its debt obligations and prevent a messy collapse.

High-Frequency Indicators[1]#

Traffic and Freight Movement#

Source: Waka Kotahi NZ Transport Agency

Card Spending#

Source: Marketview data via MBIE

People Movements at Selected Locations#

Source: Google

Jobseeker (JS) and Income Support Recipients#

Source: MSD

COVID-19 Cases Per Million People#

Source: World Health Organisation/Haver

World Commodity Prices#

Source: ASB

Tables#

Data in Italic font are provisional.
... Not available.

(1) Seasonally adjusted
(2) Ordinary time, all sectors
(3) Westpac McDermott Miller
(4) Quarterly Survey of Business Opinion
(5) Reserve Bank (11am)
(6) Daily close

(1) Seasonally adjusted
(2) Case-Shiller Home Price Index 20 city
(3) The Conference Board Consumer Confidence Index
(4) Cabinet Office Japan
(5) European Commission
(6) Nationwide House Price Index
(7) Australian Bureau of Statistics
(8) Melbourne/Westpac Consumer Sentiment Index