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Weekly Economic Update 18 September 2020#
GDP fell by a record 12.2%, less than forecast in the Pre-election Economic and Fiscal Update (PREFU). Electronic card spending data suggest that city centres were more heavily affected by renewed restrictions. Income support numbers continued to fall as COVID-19 Income Relief Payments ended. The quarterly current account went into surplus for the first time since 2009, and the services account recorded its first deficit since 1998. Net migration fell close to zero from April to July, with a net gain of NZ citizens. Dairy prices rose after four consecutive declines.
Updated OECD forecasts show global growth of -4.5% in 2020, up from -6.0% in June. The OECD notes that activity picked up swiftly following the easing of confinement measures but the pace of recovery has slowed and confidence remains fragile. The slower pace of recovery is evident in US data for August, although activity in China continues to expand steadily.
Alert Level settings extended#
Current Alert Level settings will remain in place until at least 21 September, though restrictions are set to ease. If progress on containing the new outbreak continues, gathering limits will ease in Auckland on 23 September and the rest of NZ will move to Alert Level 1 on 21 September. There are 44 active COVID-19 cases in the community and 33 active cases in managed isolation at the border.
Figure 1: Daily COVID-19 tests and cases by source
Source: Ministry of Health
Spending in city centres lags behind#
Electronic card spending data suggest that city centres have been more heavily impacted by Alert Level restrictions than regional areas (Figure 2). Spending in the city centres of Auckland and Wellington remains close to 10% below the Alert Level 1 average, while the regional areas outside of city centres are down around 5% compared to Level 1. Similar trends are seen in other main centres around New Zealand.
Figure 2: Electronic card spending in city centres compared to regional areas
Source: Paymark and Verifone data via Data Ventures
In New Zealand overall, card spending has dipped in recent days after rebounding sharply in the first week of September (see domestic high-frequency indicators), possibly reflecting some pent-up demand. On 15 September, national card spending was around 3% below the Alert Level 1 average.
Income support numbers continue to fall#
The number of people receiving the COVID-19 Income Relief Payment (CIRP) fell again in the week to 11 September, due to more people reaching the end of their 12-week entitlement. The total number of recipients fell by 2,372 in the week, to 16,236. The number of Jobseeker support recipients increased by 1,847 from the previous week; one-third of these were people who had been receiving the CIRP. The total number of income support recipients (Jobseeker and CIRP) fell by 500, down to 217,000.
Real GDP fell 12.2% in the June quarter#
Real production GDP fell 12.2% in the June 2020 quarter (Figure 3). This easily surpassed the previous record fall, a 2.4% decline in the March 1991 quarter, in current quarterly GDP data. Over the year to June 2020, real GDP was 2.0% below the year to June 2019.
Figure 3: Real GDP (production) growth
Source: Stats NZ
The quarterly decline was not as large as our PREFU forecast of a 16% decline in production GDP. The impact of COVID-19 and the related restrictions on activity meant that forecasters were particularly uncertain about GDP predictions for this quarter. Initial fears, such as the near 24% June quarterly decline in BEFU, were ameliorated somewhat as New Zealand moved through the alert levels at a quicker pace than initially anticipated. Less negative partial data also contributed to predictions becoming less negative.
COVID-19 has created numerous measurement challenges. Stats NZ has used additional data and analysis to address these. Nevertheless there is a higher level of uncertainty around current estimates and these could be revised as more complete data becomes available.
Largest declines in mining, transport, construction and retail trade & accommodation#
All but the financial and insurance services industry experienced declines in the quarter, with most experiencing record falls. The largest percentage falls came in mining, transport, postal and warehousing, construction, and retail trade and accommodation. Mining is a relatively small, volatile industry, where changes in exploration activity tend to cause large swings. Not surprisingly reduced air travel had a large impact on the transport industry. Construction sites were largely closed during Alert Level 4, while accommodation and food services were hard hit by reduced tourism.
Table 1: Production GDP by industry
Service industries fared better than expected
Assumptions about the economic impact of the different COVID-19 alert levels are key forecast judgements. We will review these assumptions ahead of the Half Year Economic and Fiscal Update (HYEFU), but in aggregate the impacts appear smaller than assumed in PREFU. At an industry level, initial analysis suggests there was a mix of over and under estimates, but overall a greater number of industries experienced smaller declines in activity than assumed. This was particularly the case for services industries.
Table 2: Real Expenditure on GDP
Real expenditure GDP fell 9.8% in the quarter, a smaller decline than in the headline production measure. Prices across the economy also declined slightly resulting in a 10.1% decline in nominal GDP.
Most components were a little stronger than forecast ie the declines were smaller than anticipated. Government consumption was the only component to increase in the quarter, although the increase was less than we anticipated.
Investment not as weak as feared#
Investment fell sharply in the quarter with residential investment down nearly 23% and business investment down around 20%. While the declines were large, they were not as bad as we feared.
The decline in exports was particularly concentrated in services exports. Services exports fell nearly 40%, but this decline was smaller than we anticipated as more foreign tourists remained in the country.
We will next release updated forecasts as part of the HYEFU in December. Today’s GDP data provides a base for these forecasts.
In the absence of further unanticipated large shocks, the June quarter should represent the low point in terms of levels of GDP. Partial data suggests that the economy has rebounded from this low. Most economic forecasters included a record fall in June quarter GDP followed by a record, but still partial, rebound in the September quarter. This is likely to remain the case as forecasters update their predictions, but in many cases today’s data will mean that the initial fall is smaller.
It may be that many forecasters will follow the smaller June quarter GDP decline with a smaller forecast September quarter rebound, possibly leaving forecasts of GDP relatively unchanged by the end of the year. Key to such an approach will be judgements about the extent to which today’s result is indicative of greater activity at the different alert levels (particularly the lower alert levels that will hopefully apply by the end of the year).
A competing risk is that what we have observed in terms of a stronger June quarter labour market and less pronounced fall in GDP may reflect timing – that is the adverse impacts are taking longer than anticipated to show up in official data. For example, as those tourists that remained in New Zealand depart there is the risk that services exports will fall further.
On balance, the risks are probably to the upside, provided future data revisions are not too large. However, exactly how COVID-19 developments play out remains a key source of uncertainty.
Pre-election Update released#
On Wednesday, Treasury released the PREFU, which over the near-term has a less negative outlook than that contained in the Budget Update, as the New Zealand economy benefitted from earlier than expected downward movements through the alert levels. The medium-term outlook is weaker, reflecting a weaker global outlook and more persistent impacts of the pandemic that are expected to reduce New Zealand’s potential output, slowing the pace of recovery (Figure 4).
Figure 4: PREFU forecast for GDP
Sources: Stats NZ, the Treasury
The forecast outlook is conditioned on several key assumptions around which there is considerable uncertainty (such as the progression of the pandemic and when border restrictions are eased). The PREFU contains three alternative scenarios to help illustrate the sensitivity of the outlook to these assumptions. Full details of the PREFU, including these scenarios, are available on the Treasury website.
Record current account surplus…#
A collapse in imports drove the quarterly current account into surplus in the June 2020 quarter – the first seasonally adjusted quarterly surplus since 2009 and the largest surplus since records began in 1972. This resulted in the annual current account deficit narrowing from 2.9% to 1.9% of GDP for the year to June 2020 (Figure 5).
Figure 5: Current account deficit (annual)
Source: Stats NZ
The fall in international and domestic travel as a result of COVID-19 restrictions led to a sharp fall in imports of crude oil, that more than offset a slight fall in total goods exports, to see the goods balance return to surplus for the first time since June 2014.
… as tourism spending hits services balance#
The quarterly seasonally adjusted services balance was in deficit in the June 2020 quarter for the first time since 1998. Services exports fell by $2.5 billion (bn) to $3.9bn, while services imports fell by $1.8bn to $4.0bn, leaving a deficit of $68 million (Figure 6).
Figure 6: Goods and services trade
Source: Stats NZ
Travel services exports (spending by overseas visitors in New Zealand, including tourists, students, and business people) fell by $1.9 billion, reflecting border restrictions that were in place over quarter. This sharp fall in spending was partly offset by a $1.2 billion fall in spending overseas by New Zealanders.
Net migration all but ceases#
Over the months where full border restrictions have been in force from April 2020 to July 2020, seasonally adjusted net migration is provisionally estimated at 800 people, made up of a net gain of 3,300 New Zealand citizens, and a net loss of 2,500 non-New Zealand citizens. Across the same four months in 2019, there was a provisionally estimated net gain of 14,200 migrants (Figure 7).
Figure 7: Net migration (monthly)
Source: Stats NZ
July 2020 recorded the 12th consecutive monthly net gain of New Zealand citizens, reversing the typical historical pattern where more New Zealand citizens depart than arrive. Changing travel patterns because of COVID-19 are impacting the estimation of net migration. As people stay longer, they are more likely to be counted as a migrant arrival, and the ongoing stay of people who arrived before border and travel restrictions is keeping net migration estimates over the past 8 months at high levels. Net migration estimates could be revised up or down depending on whether these people stay in New Zealand or head back overseas.
Dairy prices bounce back#
Following four consecutive declines, Wednesday’s GlobalDairyTrade (GDT) auction saw dairy prices rise 3.6%, led by a 3.2% increase in whole milk powder prices and an 8.2% increase in skim milk powder prices. Fonterra's current forecast for the 2020/21 season is in the range of $5.90-$6.90 per kg of milksolids, down from the $7.10-$7.20 payout range for the 2019/20 season that is due to be finalised on Friday.
OECD lifts global GDP growth forecast for 2020#
In its Interim Economic Assessment released on Wednesday, the OECD forecast global real GDP to contract 4.5% in 2020 and to increase 5.0% in 2021 (Table 3). The drop in 2020 is less than expected in its June Economic Outlook, but still unprecedented in recent history, while the outlook for 2021 growth is not much different. The OECD notes that global activity has picked up swiftly following the easing of confinement measures and the initial reopening of business, supported by prompt and effective policy support. However, the recovery has lost some momentum in recent months and confidence remains weak. To boost confidence, the OECD urges governments to maintain policy support.
Table 3: OECD real GDP forecasts
The OECD update focuses on the world’s 20 largest economies and does not include updated New Zealand forecasts. The OECD’s forecasts for our main trading partners are stronger in 2020 than assumed in the PREFU, particularly for the United States (US), China and the euro area, but the outlook for 2021 is broadly in line with the PREFU.
…as China’s steady recovery continues…#
China’s activity data for August continue to be consistent with a steady recovery in output. Retail sales continued to increase, up 0.5% from a year ago – the first positive print this year. Industrial production (IP) rose by 5.7% in August compared to the same period last year, higher than market expectations. Meanwhile, the decline in fixed-asset investment over the year to date moderated to 0.3% compared to a 1.6% decline in the first seven months of the year. The urban unemployment rate fell by a further 10 basis points to 5.6% in August, and compared to a peak of 6.2% in February.
…but pace of recovery slows in the US#
In the US, IP increased by 0.4% in August compared to the previous month, below market expectations (Figure 8). The IP index is still 7.3% below pre-pandemic levels. Monthly growth in the production of final products slowed from 5.1% in July to 0.7% in August, with consumer goods edging 0.3% higher. US retail sales also continued to recover, but at a slower pace, with sales excluding vehicles and gas up 0.7% in August compared to July, and below market expectations.
Figure 8: Industrial production and retail sales
The US Federal Reserve (the Fed) left its policy settings unchanged at its meeting on Wednesday, but reworked its forward guidance stating the Fed Funds rate would remain at 0% - 0.25% until labour market conditions are consistent with maximum employment and “inflation has risen to 2% and is on track to moderately exceed 2% for some time”. This comes after the Fed announced it would be following a flexible average inflation-targeting regime. Market reaction was limited. In line with the OECD’s revisions, the Fed’s updated projections show a lesser contraction in GDP and a lower unemployment rate than in its June projections.
Australian unemployment rate falls#
The number of employed people increased by 111,000 (0.9%) from July to August, while unemployment fell by 87,000 (8.6%). Hours worked increased by only 0.1% due to an increase in part-time employment. The participation rate increased by 0.1 percentage points, while the unemployment rate fell 0.7 percentage points to 6.8%.
|Date||Key upcoming NZ data||Previous|
|23 Sept||Monetary Policy Review||OCR held at 0.25%, LSAP expanded to $100bn|
High-Frequency Indicators (Domestic)#
Source: Waka Kotahi NZ Transport Agency
Source: Waka Kotahi NZ Transport Agency
Source: Electricity Authority
Source: Paymark and Verifone data via Data Ventures
Jobseeker and Income Support Recipients#
Fiscal Support: Wage Subsidy (paid)#
High-Frequency Indicators (Global)#
Trade Weighted Index#
US Activity and Equities#
Sources: Federal Reserve Bank of New York, Haver
Sources: World Health Organisation/Haver
World Commodity Prices#
|Real Production GDP1||qpc||0.4||0.1||0.7||0.5||-1.4||-12.2|
|Current account balance (annual)||%GDP||-4.0||-3.8||-3.8||-3.4||-2.9||-1.9|
|Merchandise terms of trade||apc||-1.9||-1.0||0.9||7.1||5.4||6.5|
|LCI salary & wage rates - total2||apc||2.0||2.1||2.5||2.6||2.5||2.1|
|QES average hourly earnings - total2||apc||3.4||4.4||4.2||3.6||3.6||3.0|
|Core retail sales volume||apc||3.9||3.6||5.4||3.3||4.0||-11.7|
|Total retail sales volume||apc||3.3||2.9||4.5||3.3||2.3||-14.2|
|WMM - consumer confidence3||Index||103.8||103.5||103.1||109.9||104.2||97.2|
|QSBO - general business situation1,4||net%||-27.0||-30.7||-38.0||-28.6||-68.0||-58.8|
|QSBO - own activity outlook1,4||net%||5.3||-2.0||-0.2||4.1||-13.9||-24.8|
|Merchandise trade balance (12 month total)||NZ$m||-3,382||-2,393||-1,274||-1,129||-115||...|
|Dwelling consents - residential||apc||-8.3||-16.5||-4.4||20.4||-0.8||...|
|House sales - dwellings||apc||2.7||-77.2||-44.3||11.7||28.6||24.8|
|REINZ - house price index||apc||9.0||8.6||7.0||7.6||9.3||10.1|
|Estimated net migration (12 month total)||people||89,608||87,837||85,359||82,649||76,191||...|
|ANZ NZ commodity price index||apc||5.8||0.9||-1.3||-2.9||0.2||-3.8|
|ANZ world commodity price index||apc||-5.8||-9.2||-8.1||-5.7||-1.5||-2.7|
|ANZBO - business confidence||net%||-63.5||-66.6||-41.8||-34.4||-31.8||-41.8|
|ANZBO - activity outlook||net%||-26.7||-55.1||-38.7||-25.9||-8.9||-17.5|
|ANZ-Roy Morgan - consumer confidence||net%||106.3||84.8||97.3||104.5||104.3||100.2|
|Weekly Benefit Numbers||7 Aug||14 Aug||21 Aug||28 Aug||4 Sep||11 Sep|
|Health Condition and Disability||number||68,415||68,921||69,270||69,612||69,916||70,458|
|COVID-19 Income Relief Payment||number||21,988||22,834||24,053||24,811||18,608||16,236|
|NZ exchange and interest rates5|
|Trade weighted index (TWI)||index||71.7||72.1||71.9||72.2||72.1||72.3|
|Official cash rate (OCR)||%||0.25||0.25||0.25||0.25||0.25||0.25|
|90 day bank bill rate||%||0.30||0.30||0.30||0.30||0.30||0.30|
|10 year govt bond rate||%||0.57||0.60||0.60||0.60||0.61||0.60|
|VIX volatility index||index||28.8||29.7||26.9||25.9||25.6||26.0|
|AU all ords||index||6,059||6,090||6,039||6,079||6,079||6,147|
|US interest rates|
|3 month OIS||%||0.09||0.09||0.09||0.09||0.09||...|
|3 month Libor||%||0.25||0.25||0.25||0.24||0.25||...|
|10 year govt bond rate||%||0.71||0.68||0.67||0.68||0.68||0.69|
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
|Retail sales value||apc||4.5||-5.6||-19.9||-5.6||2.2||2.4||2.6||...|
|Retail sales value||apc||1.6||-4.7||-13.9||-12.5||-1.3||-2.9||...||...|
|Retail sales volume||apc||2.6||-8.1||-19.3||-2.6||1.3||0.4||...||...|
|Retail sales volume||apc||-0.1||-6.1||-22.7||-12.9||-1.6||1.4||...||...|
|Retail sales value||apc||5.7||9.4||-8.9||5.5||8.6||12.8||...||...|
(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