Weekly Economic Update - 17 September 2021

Weekly Economic Update 17 September 2021#

GDP data tells us that post-lockdown rebound in activity over the past year has been even stronger than previously thought. This is giving businesses confidence about their prospects once restrictions ease. But there are still challenges in the medium and longer term. Uncertainty about our post-vaccination strategy, together with ongoing global supply chain issues and labour shortages are likely to be constraints to our economic recovery for some time once restrictions ease.

High-frequency indicators have held up well...#

Following the drop to Alert Level 2, card spending in most regions outside Auckland has risen above 2019 levels, with spending on food and beverage services showing a significant increase but remaining far from a full recovery.

...with businesses remaining confident despite lockdown...#

Business confidence has remained resilient through lockdown so far, with business confidence rising 7 points in ANZ’s Preliminary Business Outlook survey for September. Firms’ own activity outlook remained broadly stable, with a net 18.2% of firms expecting to increase activity (Figure 1). Only 4.3% of businesses reported lower activity compared to a year ago, much lower than the 63.2% of surveyed businesses in May 2020. Inflationary pressures eased slightly, with inflation expectations falling slightly from 3.1% to 3.0% in September and pricing intentions easing from 59% to a net 55% of firms expecting to raise their prices in coming months.

Figure 1: Own activity and GDP

Source: ANZBO, Stats NZ

...which had little impact on house prices#

Housing market strength continued despite Alert Level 4 restrictions. The REINZ House Price Index rose 1.9% in the month of August and recording a fresh record high annual growth rate of 31.1%. However, with interest rates expected to rise after this latest outbreak of COVID-19 in the community is contained, house price growth is expected to slow.

The economy grew strongly before lockdown...#

Real GDP grew 2.8% in the June 2021 quarter, with broad-based growth confirming a strong recovery since the first lockdown in 2020. This strengthens the case for rising interest rates in the near term. Inflationary pressures were already evident and the economy was already above capacity, so this GDP number will support the Reserve Bank’s view that monetary policy may need to tighten.

Growth in the June quarter was broad-based, but particularly strong in tourism-exposed industries. However, this outturn also reflects unusual people movements as a result of travel restrictions during the pandemic. Typically, there is a fall in the quarter following the peak tourist season, but the actual volume of services exports increased in the June quarter. Adjusting for this typical seasonal pattern magnified the result with seasonally adjusted services exports increasing 63% in the quarter. This boosted seasonally adjusted GDP.

GDP is expected to contract sharply next quarter owing to restrictions, potentially amplified by the continued unusual travel patterns highlighted above.

...and the annual current account deficit widened#

New Zealand’s annual current account deficit widened to 3.3% of GDP in the June 2021 quarter, driven by the recovery in goods imports and the ongoing reduction in travel services export revenue. The deficit is expected to continue widening, as a downward cycle in global commodity prices weakens the goods balance and the slow recovery in international tourism drags down the services balance.

Global inflation debate continues...#

The global economy has experienced a sharp lift in inflation recently. The big uncertainty is whether this is temporary (in which case central banks can keen interest rates low) or persistent (meaning global interest rates will rise). The latest evidence remains mixed, although there appears to be more of a persistent element than was expected earlier in the year. 

Annual CPI inflation in the UK rose to 3.2% in August, the highest rate since 2012 (Figure 2). Growth in the month was driven by restaurant, hotel and recreation prices, reflecting the impact of easing pandemic-related restrictions. This adds credence to the argument that high inflation is a temporary phenomenon driven by the recovering services sector. However, rising producer price (PPI) inflation suggests underlying price pressures.

US inflation data also presented a mixed picture. While annual price growth eased to 5.3% in August, which would appear to support the temporary inflation narrative, price weakness was concentrated in volatile categories like airfares and hotels, which will have been impacted by the spread of the Delta variant and may rebound as the pandemic fades. Furthermore, producer price inflation and inflation expectations both hit new record highs, suggesting that persistent price pressures could be present.

Figure 2: Consumer and producer prices

Source: Haver

...as Australian confidence shows resilience...#

Australian business and consumer confidence indexes recovered some ground in August and September, but remain well below the levels seen prior to the June Delta outbreak (Figure 3). The dip in confidence has been far smaller than during the initial outbreak in 2020, however, reflecting both the strong economic momentum going into the current outbreak and increased certainty that activity will bounce back once a high degree of vaccine coverage allows for the easing of restrictions.

Figure 3: Australia confidence indexes

Source: Haver

...despite labour market vulnerability...#

Employment fell 1.1% in Australia in August as the spread of the Delta variant disrupted activity. The unemployment rate fell to 4.5%, though this was driven by a drop in the labour force participation rate as fewer people looked for work.

...and a slowing global recovery#

China’s industrial production and retail sales for August reflected the impact of virus control measures and the government’s financial crackdown, with both indexes showing a slowdown from earlier in the year (Figure 4). Industrial production in the US was also weaker than expected, partly due to the impact of Hurricane Ida.

Figure 4: Industrial production and retail sales

Source: Haver

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