Weekly Economic Update - 11 September 2020

Weekly Economic Update - 11 September 2020#

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High-frequency indicators suggest that economic activity bounced back sharply after Auckland moved to Alert Level 2. Income support numbers fell due to a large number of COVID-19 Income Relief Payments ending. Construction activity and sales across a range of industries had record falls in the June quarter, with a run-down in finished goods inventories indicating that the decline in physical production was even greater. Business confidence improved somewhat, however remains firmly entrenched in negative territory with firms indicating an expectation to reduce staffing levels.

The unemployment rate in the United States (US) fell in August to 8.4%, from 10.2% in July. Business conditions in Australia deteriorated, but consumer confidence recovered. China's exports grew at the fastest pace since March 2019, while imports fell. Equity markets have been under pressure due to corrections in the valuations of tech stocks in the US, while Brexit uncertainty has weighed on European markets.

NZ remains at Alert Level 2#

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New Zealand will remain at Alert Level 2, with additional gathering restrictions in Auckland, until at least 16 September. Cabinet will review the current Alert Level settings on 14 September. There are 81 active COVID-19 cases in the community and 39 active cases in managed isolation at the border. Over 330,000 tests have been taken since 12 August, and all community cases since 29 August have been linked to a known source (Figure 1).

Figure 1: Daily COVID-19 tests and cases by source

Source: Ministry of Health

Activity indicators bounce back sharply…#

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High-frequency data suggest that economic activity in Auckland bounced back sharply after it moved to Alert Level 2 (Figure 2). Heavy traffic volumes rebounded to slightly above 2019 levels, as card spending lifted to levels similar to the previous Alert Level 1. Light traffic only partially bounced back.

Figure 2: Auckland activity indicators

Sources: NZTA, Paymark and Verifone data via Data Ventures

Meanwhile, activity also rebounded in the rest of the country, even though Alert Levels did not change (Figure 3). Card spending recovered to levels seen during Alert Level 1, as light and heavy traffic both lifted above 2019 levels.

Figure 3: NZ excluding Auckland activity indicators

Sources: NZTA, Paymark and Verifone data via Data Ventures

…and income support numbers fall#

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The number of people receiving the COVID-19 Income Relief Payment fell by 6,200 in the week to 4 September, due to a large number of people reaching the end of their 12-week entitlement. As relatively few transferred to Jobseeker Support, total income support numbers fell by 4,500.

This week's official data releases point to a very large fall in next week's June quarter GDP release, although not as severe as assumed in the Budget Update. The major New Zealand (NZ) banks expect quarterly GDP to fall by about 13%.  

Record fall in building work…#

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Building activity continued to fall in the June quarter, with the volume of all building work put in place down a record 22.4% on March (Figure 4) and 27.0% on the same time last year. A large fall was expected given almost all residential and non-residential construction was halted during most of April under Alert Level 4. The magnitude of the fall was lower than implied by our Budget forecasts of residential and business investment, reflecting the earlier easing in alert levels than was assumed.

Figure 4: Building activity

Source: Stats NZ

… and manufacturing and wholesaling…#

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The seasonally adjusted volume of manufacturing sales fell a record 12.2% in the June quarter, with 12 of the 13 manufacturing industries recording lower sales. The influential meat and dairy product manufacturing industry was less affected (only down 2.7% over the quarter), reflecting its status as an essential industry over the course of the lockdown period. In addition to the decline in overall sales volumes, there was a greater than usual run-down in finished goods inventories over the quarter, pointing to a decline in production. We estimate that physical production over the quarter declined by around 16%.

Wholesale trade sales volumes fell 10.9% in the quarter, led by lower sales of petroleum products (down 14.9%) with lower demand for fuel arising from travel restrictions. Sales of motor vehicles and parts fell $836 million (down 31%) reflecting the 38% fall in new car registrations over the quarter.

…and services industries follow suit…#

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Data from Stats NZ's new Business Data Collection showed consistent declines across service industries over the June quarter, led by a 45% fall in sales of accommodation and food services. There is not yet a sufficient time series of data to undertake a robust seasonal adjustment, but the 16% decline in sales across services industries in the June 2020 quarter contrasts starkly with increases of 7% and 5% recorded in the previous two June quarters.

…pointing to a large fall in June quarter GDP#

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Stats NZ note that industry sales usually track value-added, which is what GDP measures, but this quarter firms' fixed costs such as insurances and rents will not have declined as much as sales. This means that the fall in value-added would be greater than the fall in sales. Overall, the major NZ banks expect quarterly GDP to fall by about 13%.  

Business confidence up#

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While the preliminary release of the ANZ Business Outlook for September saw across the board increases in forward-looking indicators, the indicators remain firmly entrenched in negative territory. Business confidence lifted 16 percentage points to a net 26% of firms expecting conditions to deteriorate, while expectations of own activity rose 8 percentage points to a net 10% of firms expecting a reduction in their own activity (Figure 5).

Figure 5: Business confidence and own activity

Source: ANZ Business Outlook

US unemployment rate falls further#

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The US economy added 1.37 million net new jobs in August, close to market expectations. The US has now recovered around half of the jobs that were lost during March and April, but the pace of employment growth has slowed. The unemployment rate (which is sourced from a different survey) fell from 10.2% to 8.4% (Figure 6). However, permanent layoffs increased by a further 534,000, and the duration of temporary layoffs has risen.

Figure 6: US labour market indicators

Source: Haver

Australian business confidence weakens…#

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Business conditions fell by 6 points (pts) in August to -6 in National Australia Bank's (NAB) monthly business survey, thereby erasing most of the previous month's gains. The deterioration was driven by a weakening in the employment index (-11pts), while there were also declines in the trading (-3pts) and profitability (-4pts) sub-indexes. The deterioration in business conditions was broad-based across states.

…but consumer confidence recovers#

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The Westpac consumer confidence index recovered by 18% in September to 93.8pts, likely driven by a reduction in new cases of the virus in Victoria, and no evidence of a resurgence in other states. This leaves the index just 1.6% below its average in the six months prior to the emergence of COVID-19.

The survey was completed before Victoria's premier announced that the state's lockdown would be extended for another two weeks until 28 September, after which restrictions will gradually be eased if new COVID-19 cases continued to decline.

China's exports rise, but imports fall#

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The value of China's exports were 9.5% higher in August (in US$-denominated terms) than during the same period last year, the quickest growth since March 2019. However, much of the growth in exports was in COVID-19 related industries such as personal protective equipment and work-from-home items, which offset weakness in other areas. Moreover, imports fell by 2.1%, which could suggest some underlying weakness in China's domestic demand. China's trade surplus with the US rose by 27% from last year to $34.2 billion, while imports from Australia fell by more than a quarter following a deterioration in relations between the two countries. US President Trump said on Monday that if he were re-elected, the US would further scale back their ties with China by using tariffs and other measures.

Tech stocks lead equities lower#

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Weakness in the technology sector has driven equities lower since last week, while there has been a slight increase in market volatility. The recent weakness has mostly been seen as a correction in over-valued stocks, with equity prices still much higher than the beginning of the year. The weakness in equities has resulted in increased demand for safe-haven assets. Meanwhile, Brexit uncertainty has weighed on European markets, and the British pound has come under pressure.

High-Frequency Indicators (Domestic)#

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Traffic Movement#

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Source: Waka Kotahi NZ Transport Agency

Freight Movement#

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Source: Waka Kotahi NZ Transport Agency

Electricity Demand#

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Source: Electricity Authority

Retail Spending#

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Source: Paymark and Verifone data via Data Ventures

Jobseeker and Income Support Recipients#

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Source: MSD

Fiscal Support: Wage Subsidy (paid)#

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Source: MSD

High-Frequency Indicators (Global)#

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Trade Weighted Index#

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Source: RBNZ

Volatility Index#

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Source: Haver

US Activity and Equities#

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Sources: Federal Reserve Bank of New York, Haver

Labour Markets#

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Source: Haver

COVID-19 Cases#

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Sources: World Health Organisation/Haver

World Commodity Prices#

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Source: ASB

Tables#

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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