Weekly Economic Update - 14 May 2021

Weekly Economic Update 14 May 2021#

House price growth continues…#

The housing market continued to show robust activity in April, with house prices rising 2.0% from March to be up 26.8% from a year ago (Figure 1). Overall, activity appears to have remained resilient in the month since the Government announced its Housing Package, with median days to sell reaching an all-time low of 29 days for the month of April, although it will likely require a few more months before the full effects of the policy changes will be seen.

Figure 1: REINZ house prices and sales

Source: REINZ

…with sales numbers remaining elevated..#

Sales activity remained elevated in April, despite a 5.9% seasonally adjusted fall in the month of March and a continued run of low availability of properties for sale across the country. Sales for the month of April were at their highest levels for an April month since 2016. Strong demand at a time of low inventory is likely to have contributed to the high rates of house price growth since the middle of last year. Although the median house price eased slightly to $810,000 in April, parts of the country continue to see a shift in the market towards higher priced properties, with the median sale price in Auckland now up to $1.125 million after reaching $1 million in October 2020, a growth rate of 12.5% in just over half a year.

…although the outlook remains uncertain#

It is expected that the combined effects of the return of higher loan to value requirements for investors coming into force in May, changes to interest deductibility for investors and house prices being already at record high levels will dampen the pace of monthly house price growth over the coming months. However, signs of capacity constraints in the construction sector, and low levels of inventories make the outlook for house price growth somewhat uncertain.

Consumer spending remains steady#

Total electronic card spending rose by 4.0% in April (Figure 2), boosted by the easing of alert level restrictions - which had dampened spending in February and March - as well as school holidays and the trans-Tasman travel bubble. Spending rose across most industries particularly in hospitality.

Figure 2: Electronic card spending

Source: Stats NZ

Spending rebounded strongly following the easing of alert level three and four restrictions in May last year, reflecting pent-up demand and savings accumulated during the higher alert levels. Since then, spending growth has been relatively flat owing to the ongoing lack of international visitors and new migrants.

Food and rental prices higher#

Food prices rose 0.7% in April, driven by a 3.4% rise in the prices of fruit and vegetables to be up 0.7% compared to a year ago. Rental prices (stock measure) rose 0.3% in the month of April and 2.9% over the year

US unemployment rate ticks up…#

The unemployment rate in the United States (US) unexpectedly rose from 6.0% to 6.1% in April, against expectations for a fall to 5.8% (Figure 3). Employment growth of 266,000 was well shy of expectations for a 1 million increase. Solid wage growth and historically high job opening rates suggest that labour supply rather than demand is constrained, possibly owing to generous unemployment benefits. While the labour force participation rate edged up from 61.5% to 61.7%, the number of discouraged workers increased by 42,000 to 565,000. US employment levels are still some 8 million lower than pre-pandemic levels in February 2020. Following the labour market data release, market pricing for the US Federal Reserve Bank's first rate hike was pushed back from the first to the second quarter of 2023.

Figure 3: US labour market

Source: Haver

…as inflation continues to rise#

Consumer price inflation rose in the US and China in April. In the US, the consumer price index (CPI) increased by 0.8% in April compared to the previous month, and by 4.2% compared to the same period last year, much higher than market expectations. Core CPI (all items less food and energy) rose by 0.9% and 3.0% in monthly and annual terms, respectively, versus expectations of 0.3% and 2.3%. The US 5-year implied spot inflation rate based on bond rates increased to 2.7%, the highest level since 2006. Central bank officials have continued stating that the spike in inflation will be temporary.

Meanwhile, in China, producer prices rose by close to 7% in April compared to the same period last year, while consumer prices rose by 0.9%, up from a 0.4% annual increase in March.

EU forecasts upgraded#

The European Commission upgraded its economic growth forecasts for the region in its Spring 2021 release. The European Union (EU) economy is now forecast to grow by 4.2% in 2021 and 4.4% in 2022, up from 3.8% forecast for both years in February, supported by an increase in vaccination rates and easing in mobility restrictions. Further job losses are expected in some member states this year, but unemployment rates should start declining in 2022.

Meanwhile, industrial production in the euro area rose by just 0.1% in March, well below market expectations. In the United Kingdom, real GDP contracted by 1.5% in the March 2021 quarter compared to the previous quarter, better than market expectations. The monthly GDP data has shown improved momentum, and the economy should rebound strongly in the June quarter.

Australia budget more expansionary than expected…#

The Australian Treasury upgraded its forecasts for economic growth and unemployment in its 2021/22 Budget. Following the 0.2% contraction in 2019/20, the economy is now forecast to grow by 1¼% in 2020/21, 4¼% in 2021/22, and 2½% in 2022/23. The unemployment rate is forecast to continue declining, and to return to its pre-pandemic level of around 5.2% in the December quarter of 2021.

The better-than-expected economic recovery meant that the underlying cash deficit for 2020/21 was revised more than AU$50 billion lower to $161 billion (7.8% of GDP) from AU$214 billion (11% of GDP) at the previous budget in October 2020. The underlying cash deficit for 2021/20 was revised lower by around AU$5 billion to AU$107 billion (5% of GDP), higher than market expectations. Rating agency Standard & Poor's said in a statement after the budget that fiscal deficits would have to narrow towards their long-term trend over the next two to three years for Australia to maintain their 'AAA' rating, which is currently on a negative outlook. There are arguably some upside risks to the Treasury's nominal GDP (and therefore tax) forecasts, as the iron ore price is assumed to decline to US$55/tonne by the end of the March 2022 quarter, from current levels of more than US$200/tonne.

The Budget contains extensions to temporary full expensing (AUD$17.9 billion or 0.9% of GDP) and temporary loss carry-back schemes (AUD$2.8 billion or 0.1% of GDP), as well personal income tax cuts for low and middle-income earners worth up to AUD$1,080 for individuals or up to AUD$2,160 for couples (AUD$7.8 billion or 0.4% of GDP). Other recovery measures include a wage subsidy for apprenticeships, increased support for the unemployed (AUD$9.5 billion or 0.5% of GDP), and a AUD$1.2 billion package (0.1% of GDP) for aviation and tourism.

…as business conditions remain strong#

Business confidence and conditions rose to new record highs in April, as reflected in the National Australia Bank (NAB) Monthly Business Survey. All components of the business conditions index rose to their highest levels on record. The strength was broad-based across sectors and states. Capacity utilisation rose to a fresh record high of 85.3%. Labour and input cost measures have also risen in recent months, but this has not yet flowed through to official measures of wage and consumer price inflation.

Meanwhile, the volume of retail trade fell by 0.5% in the March 2021 quarter following two consecutive quarters of strong gains. While spending on food, household goods and clothing fell, there was a strong lift in spending on eating out (up 5.8% compared to the previous quarter). Despite the fall, overall retail trade volumes are still 5.9% above pre-pandemic levels.

Mixed performance in Asia#

GDP data released in Malaysia and the Philippines this week continued to show divergent performances in the region (Figure 4). March 2021 quarter GDP data surprised on the downside in the Philippines and on the upside in Malaysia. Quarterly growth in the Philippines was only 0.3%, while in Malaysia, growth returned to positive territory (2.7%) following the 1.5% contraction in the previous quarter. Real GDP remains around 0.9% and 8.3% below pre-pandemic levels in Malaysia and the Philippines, respectively.

Figure 4: Real GDP in selected Asian countries

Source: Haver

Weekly Update taking a break next week#

With the release of Budget 2021 on Thursday 20 May, we will not be producing a Weekly Economic Update next week.

High-Frequency Indicators (Domestic)#

Traffic Movement#

Source: Waka Kotahi NZ Transport Agency

Freight Movement#

Source: Waka Kotahi NZ Transport Agency

Spending by Region#

Source: Marketview data via MBIE

Spending by Industry#

Source: Marketview data via MBIE

Jobseeker (JS) and Income Support Recipients#

Source: MSD

People Movements at Selected Locations#

Source: Google

High-Frequency Indicators (Global)#

Trade Weighted Index#

Source: RBNZ

Volatility Index#

Source: Haver

US Activity and Equities#

Sources: Federal Reserve Bank of New York, Haver

Labour Markets#

Source: Haver

COVID-19 Cases#

Sources: 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