Weekly Economic Update - 22 October 2021

Weekly Economic Update - 22 October 2021#

Like other countries around the world, consumer prices in New Zealand have risen sharply, with the Consumers Price Index (CPI) growing at its fastest rate in over ten years in the September quarter. Elevated cost pressures and resilient demand will likely boost inflation further in the quarters ahead and financial markets now expect monetary policy to tighten more sharply. Some cost pressures are expected to ease over 2022 but demand is expected to remain resilient. Businesses have indicated that activity had already begun rebounding last month, consistent with the high-frequency data. However, the recovery is likely to be felt unevenly across the country with regions at different alert levels.

Highest inflation in over 10 years…#

CPI inflation reached 2.2% in the quarter, with prices up 4.9% from a year ago (Figure 1), reflecting the high cost pressures reported in business surveys, continued momentum in demand from the June quarter and the resilience seen in the high-frequency data. Inflation is now the highest it has been for over 10 years and will likely rise further in the quarters ahead. However, some inflationary pressures are expected to ease over 2022 as the effects of higher energy prices and supply chain disruptions subside.

Figure 1: Consumers Price Index  

Source: Stats NZ

…leading to an upward spike in swap rates…#

Measures of core inflation and inflation expectations have risen to around 10-year highs, contributing to financial markets’ expectations of a better-than-even probability of a 50-basis point increase in the Official Cash Rate at the November Monetary Policy Statement, with both the 1-year and 2-year swap rates jumping strongly after the CPI release. Some retail interest rates moved higher in the days after the CPI release, with mortgage rates rising 14-50 basis points so far, taking the average 2-year fixed rate to around 3.4%. Rising interest rates are expected to help bring inflation down towards the Reserve Bank’s 2.0% target midpoint over the medium term.

…and businesses report improving activity#

The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) is back to expansionary territory after rising to 51.4 in September (Figure 2). However, the outlook for the North Island remains contractionary while activity in the South Island has returned to pre‑lockdown levels.

The BNZ-BusinessNZ Performance of Services Index (PSI) also rose but remains in contraction at 46.9. While lower alert levels have allowed manufacturing in most parts of the country to resume, restrictions, particularly in Auckland, and limits on gathering sizes will continue to constrain the recovery in services.  

Figure 2: PMI, PSI and PCI

Source: BNZ-BusinessNZ

The effects of the pandemic are not felt evenly across businesses, with smaller businesses and those in Auckland, disproportionately affected. Business outreach suggests small and medium-sized businesses are more pessimistic than suggested in the business surveys. Concerns raised include managing the vaccination status of people in the workplace, ongoing supply-chain issues, skills shortages and difficulty maintaining international contacts owing to closed borders.

Global growth appears to be slowing amid supply constraints and weakening construction activity, while inflation continues to be driven up by supply disruption and energy shortages, contributing to fears of ‘stagflation’ (stagnant economic growth and high price inflation) in the global economy.

Growth slows in the September quarter…#

Industrial production in September was weaker than anticipated in both China and the US, indicating a slowdown in global economic growth (Figure 3). In China, production eased slightly from the previous month to continue the trend of a steady decline since the beginning of the year. Difficulty sourcing materials contributed to a surprise drop in production in the US, with vehicle output being particularly affected by the global shortage of semiconductor chips.

Figure 3: US and China economic activity

Source: Haver

Retail sales data were more encouraging, with both the US and China posting solid gains. China’s overall GDP growth for the September quarter was a disappointing 0.2% rise compared to the previous quarter. Given the various headwinds facing China’s economy, including energy shortages, outbreaks of COVID-19 and the precarious property market, economic growth appears unlikely to pick up significantly in the near term.

…with weakness in construction…#

Construction activity around the world is displaying weakness, suggesting that a key driver of the post-pandemic economic recovery is starting to slow. Construction was a weak point in China’s GDP data, down 1.8% compared to the same quarter in 2020, as high debt levels weighed on the country’s property sector. A similar fall in construction activity was recorded in the euro area in August, and homebuilding in the US unexpectedly fell in September amid shortages of materials and labour. New building permits also fell sharply in the US, indicating that the slowdown in residential construction is likely to continue.

…as inflation remains high…#

Annual consumer price index (CPI) inflation remained high in both the UK and the euro area, with both above 3.0% in September (Figure 4). Bank of England Governor Bailey signalled that a tightening in monetary policy could be imminent, stating that the bank ‘will have to act’ if the risks of persistently elevated inflation continue to mount.

Figure 4: Consumer price indexes

Source: Haver

…amid supply disruption and energy shortages#

Rising oil prices have been a key contributor to global inflation, and these have continued to rise in October to the highest level in three years (Figure 5). Freight prices also show little sign of easing, as congestion at ports around the world remains severe. Coal prices have nearly tripled since the start of 2021, prompting China to increase mining activity despite pledges to reduce emissions.

Figure 5: Global freight and energy prices

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