Weekly Economic Update - 23 July 2021

Weekly Economic Update 23 July 2021#

Travel bubbles with Australian states paused#

Quarantine free travel with New South Wales, Victoria and South Australia are paused until at least next week as these states introduce restrictions to curb the spread of the delta variant.

An announcement about the travel bubble is expected on Friday afternoon.

Activity indicators are up across the board…#

The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) rose by 2.1 points to 60.7 in June. A reading above 50 indicates that the sector is expanding. Two of the major sub-index values of production (64.5) and new orders (63.6) remained particularly strong. Despite the pick-up in activity, the proportion of negative comments (53.1%) remained higher than positive ones. Challenges faced by both manufacturers and services businesses include significant labour shortages and logistics disruptions.

The services sector remained in expansionary territory for the fourth consecutive month according to the BNZ-BusinessNZ Performance of Services Index (PSI). The PSI rose 2.3 points to 58.6 in June, driven by expansion in the sub-indices of activity/sales (62.5) and new orders/business (66.1). The GDP-weighted Combined Index (PCI) rose 2.0 points to 59.1.

BNZ noted that combined, the PSI and PMI point to an annual GDP for the year ended June 2021 of around 4% (Figure 1).

Figure 1: Real production GDP and PCI

Source: Stats NZ, BNZ-BusinessNZ

This result is consistent with results from the Quarterly Survey of Business Opinion (QSBO) which shows that domestic trading activity for the past 3 months points to an annual GDP lift of around 4% (Figure 2).

Figure 2: Domestic trading activity and GDP

Source: Stats NZ, NZIER

The New Zealand Activity Index (NZAC) is also up 6.0% on June last year. Activity indicators are up across the board, with particularly strong growth in online job advertisements and falling jobseeker numbers. Traffic flows and card transactions are also firmly up on the same time last year.

This strong outturn is partly driven by activity indicators being lower than usual in June last year while the economy was in recovery following COVID restrictions. Most activity indicators have now recovered to above their pre-COVID-19 values.

…reflected in strength in tax revenues#

These indicators of activity are also consistent with the recent strength seen in tax revenue outturns. Total unconsolidated tax revenue for the eleven months ended May 2021 was $4.5 billion (4.7%) above the 2021 Budget Economic and Fiscal Update forecast and $13.7 billion (15.6%) more than last year. Corporate tax, GST, source deductions, resident withholding tax on dividends and other persons tax were all above forecast.

Dairy prices continue to fall at auction#

Dairy prices fell 2.9% in US dollar terms at this week's GlobalDairyTrade auction, led by a 5.2% fall in skim milk powder prices and a 3.8% fall in whole milk powder prices. While this is the seventh consecutive fall at auction, dairy prices are still up almost 20% year on year.

Strong US consumer spending continues…#

Retail spending in the US continued to rise in June, remaining well above the pre-pandemic trend (Figure 3). Restaurant spending was a key driver of growth in the month, increasing 2.3% to exceed the pre-pandemic peak by more than 5%. Preliminary July consumer sentiment unexpectedly fell, possibly owing to rising COVID-19 cases.

Figure 3: US retail sales and industrial production

Source: Haver

The recovery in industrial production has been more subdued, with the index still around 1% below pre-pandemic levels in June. Production was up 1.4% for the quarter as a whole, indicating robust growth in June quarter GDP.

…as inflation remains contained in Europe…#

Annual consumer price inflation in the euro area eased slightly in June, remaining around the European Central Bank's 2% target (Figure 4). Price pressures will likely pick up in the second half of the year as easing restrictions allow for a further recovery in demand.

Figure 4: Consumer price index

Source: Haver

In Japan, annual inflation reached above zero for the first time since September 2020, driven by higher energy costs as world oil prices rose. When excluding fresh food and energy costs, consumer prices were down 0.2% on an annual basis, reflecting persistently weak consumer demand.

…and UK employment recovery stalls#

The UK unemployment rate was unchanged at 4.8% in the three months to June, as the number of people in employment and in the labour force both remained flat (Figure 5). Easing restrictions in the UK should be positive for employment, although rising COVID-19 cases are a threat to the recovery.

Figure 5: UK labour market (3-mth moving average)

Source: Haver

Spread of Delta strain threatens global recovery#

Global COVID-19 infections are on the rise as the more infectious Delta strain takes hold in countries where the virus had been relatively contained. On 19 July, daily cases in the UK were trending at around 50,000 as all restrictions were removed in England, while a similar number of new cases were recorded in the US. The high vaccination rates in the two countries have proven effective in reducing the severity of symptoms, with deaths remaining low despite the sharp rise in new cases.

The rise of the Delta strain has been particularly notable in Asia, where low vaccination rates have allowed the virus to spread. Daily cases have spiked in Thailand and Vietnam, where COVID-19 was contained throughout 2020. The spread has also been severe in Australia, with lockdown restrictions being introduced in South Australia and extended in Victoria this week while daily cases remain high in New South Wales.

High-Frequency Indicators#

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#

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