Weekly Economic Update - 27 August 2021

Weekly Economic Update 27 August 2021#

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High frequency data beginning to show impacts#

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With New Zealand just over a week into the Alert Level 4 lockdown that began on August 17, the economic impacts are now beginning to be seen in a range of high frequency indicators.

Overall, mobility and spending data reflect that people movements have been impacted in a similar way as that seen during Alert Level 4 in 2020.

Traffic flows are well down…#

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During the first full week of this Alert Level 4, light traffic was down by 74% compared to the previous week, and heavy traffic was down by 55% (Figure 1). These declines are consistent with our last time spent at Alert Level 4, suggesting that compliance with restrictions is similar to 2020.

Figure 1: Traffic movements

Source: Waka Kotahi NZ Transport Agency

Apple mobility data similarly showed that from 20-24 August, New Zealander's movements in cars had dropped to 25% of normal, whereas in Sydney and Melbourne car movements were above half of normal. New Zealanders' mobility on public transport had also dropped significantly further than in the Australian cities, and mobility on foot was lower. This suggests that COVID-19 restrictions are significantly more binding in New Zealand than in Sydney or Melbourne, which may have implications for control of the virus.

…while people stocked up on groceries#

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As with previous alert level increases, spending on food and liquor (i.e. supermarkets) spiked 28% in the first week of lockdown, while other spending fell very sharply (Figure 2).

Figure 2: Electronic card spending

Source: MarketView data via MBIE

Businesses are concerned about supply#

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Our business outreach suggests that many businesses remain confident of a rebound in demand after the Alert Level is lowered. Many businesses are more prepared for the Alert Level change than last year, and often have good cash buffers, although some hospitality businesses are less well placed.

However, businesses report that Alert Level 4 restrictions have exacerbated existing difficulties on the supply side. Restrictions at Managed Isolation and Quarantine facilities along with self-isolation as a result of exposure to locations of interest have exacerbated the difficulty of finding labour. At the same time, restrictions are causing additional logistical issues. For exporters, the closure of some non-essential industries has reduced outgoing container volumes, leading to a risk that shipping companies may visit fewer ports in New Zealand. Exporters are also keen to ensure that relationships with overseas customers are maintained during the period of New Zealand's lockdown.

Supply side constraints are also affecting producers for the domestic market. However, domestic supply chains appear to be coping well, with supermarkets reporting that they have enough stock and are able to move it.

The time spent at Alert Levels matters…#

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Experience has shown that shorter periods spent at elevated alert levels result in smaller economic impacts, as some activity is able to be deferred rather than lost completely.

…but experience suggests a swift recovery#

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Experience from our previous time spent at Alert Level 4 showed that the impact on the level of economic activity was significant, but transitory. Real GDP fell 11% in the June 2020 quarter, but recovered sharply to now sit 0.8% above pre-COVID-19 levels. This is broadly consistent with the recovery profile for non-durable retail spending (Figure 3).

Figure 3: GDP and Retail Trade

Sources: Stats NZ and Treasury calculations

Core retail spending bounced back much more strongly and has remained at elevated levels to currently sit around 7% above long-run trend. This is due to continued strength in spending on durables and housing-related items, which came on the back of record levels of residential building activity and people being unable to go overseas on holiday.

Retail spending data also illustrates the extent to which spending (particularly on durables) was simply deferred from the June 2020 quarter lockdown, with some of the September quarter recovery subsequently winding back in the following quarter.

COVID-19 cluster grows#

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The August COVID-19 outbreak in continues to grow. As at 1pm on Thursday, 26 August, there were 277 total active cases in the community, of which 263 were in Auckland and 14 in Wellington.

Retail sales remain strong…#

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Retail sales volumes rose 3.3% in the June quarter, supported by New Zealanders holidaying at home, low interest rates, low levels of unemployment and rising house values, placing upside risk to our BEFU 2021 forecasts of private consumption (Figure 4).

While a short lockdown is likely to defer spending, a longer lockdown is likely to result in some loss of sales. In addition, the pause of the Trans-Tasman bubble is also expected to have a negative impact on spending from the September quarter. Nevertheless, a bounce back in spending can be expected once restrictions ease (assuming the spread of COVID-19 in the community is contained).

Figure 4: Retail trade volumes, private consumption and GDP

Source: Stats NZ

…as the annual trade deficit widens#

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Trade data has shown that both exports and imports remain well clear of pre-pandemic levels. Import values continue to grow as consumer demand has been strong, but export values have weakened recently due to global dairy prices retreating from their highs.

Figure 5: Goods trade values (3-month sum s.a.)

Source: Stats NZ

The reintroduction of Alert Level 4 will impact both imports and exports in August, with restrictions adding to congestion pressures at ports. The extent of the impact will depend on the length of time that Auckland and the rest of the country remain at higher alert levels.

Delta slows global recovery…#

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The worldwide spread of the COVID-19 Delta variant had a noticeable impact on Purchasing Managers Indexes (PMI) in August, with a number of major economies recording decreases (Figure 6). In the US, the composite output PMI was dragged down by a large drop in the services index, reflecting a decrease in service business activity as virus cases spiked. The composite index indicates that the economic recovery is continuing, but at a significantly reduced pace. In the UK, where the spread of Delta has also been severe, the PMI index experienced a similar drop but also indicated continuing economic growth.

In Australia, where the spread of Delta has resulted in mobility restrictions in most states, the composite PMI index fell further into contractionary territory in August. The services index has been the most affected, while the manufacturing index remains in expansionary territory but is at its lowest level since June 2020. Prime Minister Morrison is standing by the country's reopening plan, calling for states to relax restrictions once the first hurdle of 70% adult vaccination is reached. This goal is on track to be reached by October.

Figure 6: Composite Output PMI

Source: Haver

The economic recovery appears more stable in the euro area, where the composite PMI index was surprisingly steady at just under 60, indicating strong growth. The services index fell only slightly from the previous month's record high. While daily cases of COVID-19 in Europe have risen since July, they have remained stable and the vaccination rate in the region is relatively high with nearly 60% of the population fully vaccinated.

…as UK spending weakens…#

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UK retail sales volumes fell 2.5% in July, suggesting that pent-up consumer demand following the easing of restrictions has largely run its course. The level of retail sales in July was in line with the pre-pandemic trend, however, indicating that the economic recovery is still on track.

…and German business confidence weakens…#

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Germany's IFO business climate index slipped in August, driven by a worsening in expectations as supply chain issues and the spread of the Delta variant weighed. GDP data for the June quarter showed strong growth, though a slowdown is now expected in the September quarter.

…while US home sales pick up…#

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New home sales in the US lifted in July, following three months of decreases. Annual house price growth reached 18.4%, down from the 20+ recorded in April and May but still elevated. The supply of houses for sale has been increasing, which will likely put downward pressure on house prices in the coming months.

…China's second busiest port reopens…#

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After closing a key terminal last week due to a worker testing positive for COVID-19, China's second busiest (and the world's third busiest) container port is now back online. This is good news for an already stressed global supply chain network, though it will take time for congestion to ease as workers return from quarantine.

…and Bank of Korea makes the first move#

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South Korea became the first developed economy to hike interest rates since the onset of the COVID-19 pandemic, as the Bank of Korea raised its policy rate by 25 basis points to 0.75%. Despite rising COVID-19 case numbers, the move was widely expected due to rising financial stability risks as house prices and household debt increase sharply.

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High-Frequency Indicators[1]#

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Traffic and Freight Movement#

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Source: Waka Kotahi NZ Transport Agency

Card Spending#

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Source: Marketview data via MBIE

People Movements at Selected Locations#

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Source: Google

Jobseeker (JS) and Income Support Recipients#

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Source: MSD

COVID-19 Cases Per Million People#

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Source: World Health Organisation/Haver

World Commodity Prices#

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Source: ASB

Tables#

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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