Weekly Economic Update 26 November 2021
As expected, retail trade was significantly impacted by COVID-19 restrictions in the September quarter. However, economic activity has been recovering and overall demand has remained resilient, contributing to the Reserve Bank’s decision to raise the Official Cash Rate (OCR) with further increases expected ahead. As interest rates rise, inflationary pressures are expected to ease as household spending turns towards servicing household debt.
Retail trade fell with restrictions…
Retail sales volumes fell 8.1% in the September quarter, owing to the effect of the Delta outbreak and associated restrictions. Reflecting previous data releases, Auckland has been the most significantly affected region and hospitality the most impacted industry. Despite this fall, the rebound seen in the weekly electronic card spending data since late September is expected to continue as restrictions ease, supporting household consumption and the economic recovery in the December 2021 quarter.
Figure 1: Retail trade and consumption
Source: Stats NZ
…but domestic demand supported goods trade…
Despite global supply chain disruption, strong demand both overseas and domestically is supporting New Zealand’s goods trade which is now roughly in line with the pre-pandemic trend. Goods import values continued to surge in October, breaking the previous record for an October month by $500 million. Goods exports recovered as restrictions eased, and global commodity prices remain supportive.
…contributing to an OCR increase…
The Reserve Bank increased the OCR by 0.25 percentage points to 0.75% in the November Monetary Policy Statement (MPS) with annual headline Consumer Price Index (CPI) inflation at 4.9% and unemployment at 3.4%. In line with survey-measures of inflation expectations, the Reserve Bank expects annual CPI inflation to be above their target band in the near before returning towards the 2% midpoint target over the next two years.
The Reserve Bank expects to gradually remove monetary policy stimulus further over time given the medium-term outlook for inflation and employment. The MPS shows the OCR increasing to 2.6% by September 2024, about 0.5 percentage points higher than expected at the August MPS.
…which will dampen household spending
Household debt increased significantly over the past year and a half, reaching 169% of disposable income at the end of the June 2021 quarter. Most of this is in housing, with housing lending growth reaching a peak in July and remaining elevated at 11.6% in September 2021.
With elevated debt and mortgage lending concentrated in shorter terms, rising interest rates will likely have a significant impact on highly indebted households (Figure 2). With more income turning towards servicing debt, reduced spending will lower aggregate demand.
Figure 2: Residential mortgages by time until next repricing
Source: Reserve Bank of New Zealand
Growth in advanced economies seems to be picking up in November, though rising COVID-19 cases in Europe pose a threat to the recovery. Supply chain disruption continues to drive inflation higher, and the stage appears set for a faster tightening in monetary policy in the US.
Global growth strengthens in November…
Purchasing Managers Indexes (PMI) for November indicate a strengthening recovery in advanced economies, with most composite output indexes lifting further into expansionary territory (Figure 3). Supply chain issues featured strongly in the surveys as delivery times lengthened and shortages were reported. This flowed through into rising price pressures, with growth in input costs near or exceeding record highs, suggesting that high inflation is unlikely to abate in the near term.
Figure 3: Composite output PMI
Australia’s PMI lifted further into expansionary territory, led by the services index as easing restrictions allowed in-person activities to resume. Japan’s PMI experienced a similar recovery, with rising vaccination rates and easing activity restrictions boosting business confidence. Growth slowed in the US, reflecting ongoing supply constraints, though the PMI remained firmly expansionary and above the long-run average.
Growth unexpectedly picked up in the euro area, though rising COVID-19 cases and weakening business confidence suggest that the improved performance may be short-lived. The UK PMI rose to the top of the pack for the first time this year, with strong employment growth combined with record inflationary pressures suggesting that a tightening in monetary policy may come soon.
…as US Fed eyes faster tightening in policy…
Minutes of the US central bank’s November policy meeting show that a growing proportion of members are open to a faster reduction in monetary stimulus if high inflation persists. The data since the meeting in early November suggest that these conditions may have been met. US consumer prices as measured by the Personal Consumption Expenditure deflator rose by 5.0% on an annual basis in October, the highest in nearly 40 years. Price inflation for goods was even stronger at 7.5%, with lower services price inflation pulling down the headline number. Consequently, financial markets now pricing in an interest rate increase by the middle of next year.
…but COVID-19 spread in Europe is a threat
Daily COVID-19 cases in Germany, Austria and the Netherlands have risen well above previous records, and although deaths have remained much lower than previous waves, these are also on the rise (Figure 4). This has resulted in new restrictions, and in some cases these have been met with violent protest. Consumer confidence in the euro area fell to its lowest level in 7 months, indicating future weakness in household demand.
Figure 4: Daily new COVID-19 cases and deaths
Source: Our World in Data
|Date||Key upcoming NZ data||Previous|
|30 November||ANZ Business Confidence||-13.4 (index)|
|1 December||New dwelling consents||-1.9 (mpc)|
|2 December||Terms of trade||+3.3 (qpc)|
Traffic and Freight Movement
Source: Waka Kotahi NZ Transport Agency
Source: Marketview data via MBIE
People Movements at Selected Locations
Jobseeker (JS) and Income Support Recipients
COVID-19 Cases Per Million People
Source: World Health Organisation/Haver
World Commodity Prices
-  Additional high frequency indicators are available on the Stats NZ COVID-19 data portal: https://www.stats.govt.nz/experimental/covid-19-data-portal
|Real Production GDP1||qpc||-9.9||13.9||-1.0||1.4||2.8||...|
|Current account balance (annual)||%GDP||-1.5||-0.7||-0.8||-2.5||-3.3||...|
|Merchandise terms of trade||apc||6.3||-0.3||-1.6||-0.9||0.0||...|
|LCI salary & wage rates - total2||apc||2.1||1.8||1.6||1.6||2.1||2.4|
|QES average hourly earnings - total2||apc||3.0||4.2||4.3||4.0||4.0||3.5|
|Core retail sales volume||apc||-11.7||7.6||4.4||5.4||30.2||-3.2|
|Total retail sales volume||apc||-14.2||8.1||4.7||6.6||33.3||-5.2|
|WMM - consumer confidence3||Index||97.2||95.1||106.0||105.2||107.1||102.7|
|QSBO - general business situation1,4||net%||-61.2||-36.7||-15.0||-8.2||8.6||-8.4|
|QSBO - own activity outlook1,4||net%||-25.0||1.1||9.5||7.5||27.1||9.3|
|Monthly Indicators||Jun 21||Jul 21||Aug 21||Sep 21||Oct 21||Nov 21|
|Merchandise trade balance (12 month total)||NZ$m||-276.6||-1088.4||-2922.3||-4105.2||-4920.3||...|
|Dwelling consents - residential||apc||24.0||24.2||42.3||24.4||...||...|
|House sales - dwellings||apc||10.4||-9.1||-23.6||-36.4||-21.7||...|
|REINZ - house price index||apc||29.9||30.4||30.7||30.0||29.9||...|
|Estimated net migration (12 month total)||people||991.0||1,810.0||731.0||796.0||...||...|
|ANZ NZ commodity price index||apc||17.5||16.9||15.4||17.4||16.4||...|
|ANZ world commodity price index||apc||28.0||22.2||21.5||23.6||23.7||...|
|ANZBO - business confidence||net%||-0.6||-3.8||-14.2||-7.2||-13.4||-18.1|
|ANZBO - activity outlook||net%||31.6||26.3||19.2||18.2||21.7||15.6|
|ANZ-Roy Morgan - consumer confidence||net%||114.1||113.1||109.6||104.5||98.0||...|
|Weekly Benefit Numbers||15 Oct||22 Oct||29 Oct||5 Nov||12 Nov||19 Nov|
|Health Condition and Disability||number||81,627||81,495||81,384||81,465||80,241||80,325|
|COVID-19 Income Relief Payment||number||3,304||3,507||3,720||3,956||4,172||4,321|
|NZ exchange and interest rates5|
|Trade weighted index (TWI)||index||74.9||75.2||74.9||74.6||74.5||74.0|
|Official cash rate (OCR)||%||0.50||0.50||0.50||0.50||0.75||0.75|
|90 day bank bill rate||%||0.87||0.87||0.87||0.87||0.87||0.80|
|10 year govt bond rate||%||2.65||2.62||2.60||2.62||2.61||2.57|
|VIX volatility index||index||17.6||17.9||19.2||19.4||18.6||...|
|AU all ords||index||7,713||7,730||7,688||7,742||7,726||7,737|
|US interest rates|
|3 month OIS||%||0.08||0.08||0.08||0.08||...||...|
|3 month Libor||%||0.16||0.16||0.17||0.18||0.18||...|
|10 year govt bond rate||%||1.59||1.54||1.63||1.67||1.64||...|
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
|Country||Indicator||Apr 21||May 21||Jun 21||2021Q2||Jul 21||Aug 21||Sep 21||2021Q3||Oct 21||Nov 21|
|Retail sales value||apc||53.4||28.0||18.9||15.3||15.7||14.3||16.3||...|
|Retail sales value||apc||11.9||8.3||0.1||2.4||-3.2||-0.5||...||...|
|Retail sales volume||apc||23.7||8.7||5.6||3.3||1.5||2.5||...||...|
|Retail sales volume||apc||42.1||24.4||8.8||1.9||0.4||-0.7||-1.3||...|
|Retail sales value||apc||23.8||7.1||2.9||-2.9||-0.7||1.9||...||...|
(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