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Weekly Economic Update - 29 May 2020#
Gatherings in New Zealand can increase to 100 people from today, and some high-frequency indicators of economic activity are close to normal levels, although the outlook remains highly uncertain. Retail sales showed a modest decline in the March quarter, with a significant drop expected in the June quarter. Imports and exports of goods both fell in April, though the sharper drop in imports resulted in the largest monthly trade surplus on record. April filled jobs fell and the number of Jobseeker Support recipients increased.
G-4 flash PMIs improved in May from April’s all-time low. With restrictions easing this month, the rise in the PMIs aligns with the start of a projected recovery and suggests April marks the trough in activity. High-frequency data in a number of countries confirm some incremental improvement in May against the backdrop of an unprecedented shock to activity. In line with this, global risk sentiment has improved, boosting stock markets.
Six days without a new case of COVID-19…#
There have been just three new cases of COVID-19 in the two weeks since New Zealand moved to Alert Level 2, all of which were linked to known clusters (Figure 1). There are fewer than ten known active cases remaining in New Zealand, with 98% of recorded cases now recovered, and there are no people in hospital with the virus. Total tests reached 272,000 on 27 May, which is around 5.4% of the total population.
Figure 1: New confirmed and probable COVID-19 cases since end of Level 4, by infection source
Source: Ministry of Health
…and NZ restrictions are among the loosest#
The size of all gatherings can increase to 100 from 12pm today (29 May). New Zealand now has some of the loosest restrictions in the world according to the Oxford University Government Response Stringency Index, just a month after having some of the strictest.
Activity indicators are close to normal levels…#
Some high-frequency indicators of economic activity are now close to normal levels, after falling sharply under Alert Levels 4 and 3 (Figure 2). Electronic card spending has been nearly equal to pre-COVID levels during Level 2, after being two-thirds lower at Level 4. Weekday heavy traffic is now around 5% below normal levels, while light traffic remains 20% lower. Electricity demand, which fell by 15% under Level 4, is now above pre-COVID levels.
Figure 2: Average activity at each Alert Level
Sources: Waka Kotahi NZ Transport Agency, Electricity Authority, Paymark and Verifone data via Data Ventures
…though the outlook remains uncertain#
The apparent bounce-back in consumer spending may be only temporary, as unemployment and falling asset values are likely to depress consumer spending for some time. Households may also become more risk averse, leading to an increase in precautionary saving. Considering the economy as a whole, the Treasury expects GDP to remain below pre-COVID levels until 2022.
On 22 May, the number of Jobseeker Support recipients reached 189,000, around 6.3% of the estimated working-age population. Weekly growth in recipients continues to slow.
Source: Waka Kotahi NZ Transport Agency
Source: Electricity Authority
Job Seeker Support
Source: Waka Kotahi NZ Transport Agency
Source: Paymark and Verifone data via Data Ventures
Fiscal Support: Wage Subsidy (paid)
Modest fall in retail sales in the March quarter…#
Retail sales volumes fell 0.7% in the March quarter and are 2.3% higher year-on-year. Supermarket and grocery volumes rose 8.5% and liquor sales rose 6.1% in the quarter, as people stocked up ahead of lockdown. Large falls were recorded in accommodation, motor vehicles and parts, recreational goods, furniture and food and beverage services. Core retail sales volumes (which exclude the volatile components of petrol and vehicles and parts) rose 0.6% in the quarter with annual growth reaching 4.0% year-on-year. Total sales values fell 0.4% on a quarterly basis (up 3.4% yoy) while core retail sales values rose 0.8% (up 5.3% yoy), reflecting higher prices.
Retail sales are a good indicator of private consumption spending (Figure 3). In line with retail sales, we expect a modest fall in private consumption in the March quarter. With most businesses unable to operate during lockdown, we expect a significant fall in retail sales and private consumption in the June quarter followed by a strong rebound in the September quarter. There is however a risk that high unemployment, lower household incomes and continued uncertainty will result in a slower recovery.
While retail sales may be supported by an increase in domestic travel over the remainder of the year, the absence of high-spending international visitors means that retail sales are likely remain below previous levels.
Figure 3: Private consumption and retail sales
Source: Stats NZ, the Treasury
…and the monthly trade surplus was the largest on record in April#
Alert Level 4 resulted in a sharp drop in domestic demand and imports in April. The monthly merchandise trade surplus rose to $1.3bn, the largest on record and the annual trade deficit narrowed to $2.5bn, the smallest since March 2015 (Figure 4).
Figure 4: Overseas merchandise trade
Source: Stats NZ
Imports of goods fell by 22% ($1.1bn) in April compared to the same period last year. The value of goods imports fell by 22.9% in April compared to March, led by fuel imports (down 70.5%) and motor vehicles. Goods exports fell 1.8% compared to last year and 7% from the previous month. This was led by log exports which declined by 54.9% from March. Forestry companies were not able to operate during Alert Level 4, resulting in a 61.8% reduction in the quantity of logs exported. The value of dairy exports rose by 7.2% in April, driven by higher volumes and prices but meat exports declined by 10.3% due to lower demand. The full effects of the lockdown may become more apparent in May’s data, although China’s ongoing recovery should help support demand for New Zealand’s exports in coming months.
Initial signs of employment drop#
The number of filled jobs fell by just over 37,000 in April, (a 1.7% decline) with services industries contributing most of the decline, with over 29,000 jobs lost. These numbers are broadly consistent with the additional 30,000 people recorded as receiving JobSeeker Support payments in April.
The decline in employment is consistent with the Treasury’s view that employment growth will fall in the June quarter. We are anticipating further declines in subsequent months, and overall employment to fall by 6.8% overall in the June quarter. The Treasury expects unemployment to peak at 9.8% in the September quarter before recovering as the economy starts to grow.
China sets 2020 policy targets#
China’s Premier Li delivered the annual government work report at the National People’s Congress (NPC) on May 22. The policy focus this year is on the "six-ensuring" policy to provide resilience in employment, social welfare, market entities (corporates), food and energy security, supply chain stability, and social functions. The report emphasises the importance of economic growth in supporting this resilience, but there is no numerical growth target this year owing to the uncertainty arising from the COVID-19 pandemic and its impact on global growth, although the target for urban job creation remains positive (Table 1).
Table 1: NPC targets
The 2020 fiscal deficit target rose to 3.6% of GDP, local government special bond issuance rose and a special COVID-19 government bond issuance was announced. A large share of the bonds is likely to finance increased infrastructure spending, which will stimulate demand for resource imports. However, media reports suggest China is seeking to promote the use of domestic coal by tightening import rules, which is likely to have implications for Australia.
The NPC also announced intentions to amend national security legislation relating to Hong Kong, raising investor concerns about the geopolitical risk amidst the recent escalation in US-China tensions.
Meanwhile, G-4 countries flash IHS Markit Purchasing Managers Index Surveys (PMI’s) improved to 33.1 in May from April’s all-time low of 22.3, according to JP Morgan’s composite measure. The hardest hit regions (the euro area and UK) and sectors (services) saw the biggest gains over the month (Figure 5). With restrictions easing this month, the rise in the PMI’s aligns with the start of a projected recovery and suggests April marks the trough in activity.
Figure 5: Change in G-4 composite PMIs
Australia downgrades cost of JobKeeper…#
The Australian government announced the discovery of material errors in the reporting and estimation of demand for the JobKeeper program, the largest individual component of the government’s fiscal support package. The Treasury now expects 3.5 million people to receive JobKeeper subsidies, below the prior estimate of 6.5 million. As a result, the scheme is now expected to cost AU$70 billion, down from the initial guidance of AU$130 billion.
…and PM announces recovery plan#
Meanwhile, PM Morrison outlined his “JobMaker” economic recovery plan that includes changes in industrial relations, skills, federation reform and a stimulus package for residential housing, which the papers say will be “multibillion-dollar”.
High frequency data in Australia continues to strengthen, with ANZ and CBA reporting card data that shows higher spending than for the same week a year ago, led by retail spending. Travel and entertainment spending lagged, down 53% on last year.
Singapore GDP contracts#
Singapore’s economy contracted by 0.7% in the March quarter from the same period last year, and by 4.7% on an annualised quarterly basis. The decline was led by the services sector, which contracted by 2.4% from a year ago, while manufacturing rose by 6.6%.
Due to the deterioration in the external demand outlook since March, as well as the expected impact of the lockdown that has been in place since 4 April, the Ministry of Trade and Industry lowered their real GDP growth forecast for Singapore to
-7% to -4%, from -4% to -1% previously. The lockdown will be in place until 1 June. In response to the deterioration in the economic outlook, the government revealed a fourth budget package amounting to SGD$33bn in extra measures, taking total fiscal support to 19.2% of GDP.
European Commission proposes €750bn package#
The European Commission proposed a fiscal package worth €750bn to support its members. The proposed package consists of €250bn in loans and €500bn in grants, but the exact ratio is to be discussed at the Commission’s summit on 19 June.
The European Central Bank’s (ECB) biannual financial stability report forecast euro zone budget deficits to rise to 8% of GDP on average this year and aggregate government debt to rise from 86% of GDP to over 100%. Public debt is expected to approach 200% of GDP in Greece, 160% in Italy, 130% in Portugal and just below 120% in France and Spain. The ECB warned that the increase in debt levels could trigger a reassessment of sovereign risk by investors and reignite pressures on more vulnerable sovereigns.
Global risk sentiment improves#
Global stock markets have performed well over the past week, boosted by the gradual return to normal in a number of countries, optimism about potential COVID-19 vaccines, and the European fiscal stimulus proposal. The S&P500 broke through 3,000 points for the first time since early March, and market volatility levels have trended downwards (Figure 6). The Brent crude oil price was also supported initially, but declined on Wednesday due to an unexpected jump in US stockpiles, and following reports that Russia plans to increase oil production from July.
Figure 6: S&P500 and market volatility
Source: Haver Analytics
|Date||Key NZ Data||Previous|
|2 June||Building Consents||37,000 (annual)|
|2 June||Overseas Trade Indexes||+2.6% (Terms of Trade)|
|Real Production GDP1||qpc||1.0||0.4||0||0.8||0.5||...|
|Current account balance (annual)||%GDP||-3.8||-3.6||-3.4||-3.3||-3||...|
|Merchandise terms of trade||apc||-4.8||-1.9||-1.0||0.9||6.9||...|
|LCI salary & wage rates - total2||apc||1.9||2.0||2.1||2.5||2.6||2.5|
|QES average hourly earnings - total2||apc||3.1||3.4||4.4||4.2||3.6||3.6|
|Core retail sales volume||apc||5.0||3.9||3.6||5.4||3.3||4.0|
|Total retail sales volume||apc||3.5||3.3||2.9||4.5||3.3||2.3|
|WMM - consumer confidence3||Index||109.1||103.8||103.5||103.1||109.9||104.2|
|QSBO - general business situation1,4||net%||-22.6||-26.5||-32.0||-38.1||-27.7||-67.3|
|QSBO - own activity outlook1,4||net%||14.3||6.3||-3.7||-0.6||5.3||-12.7|
|Monthly Indicators||Nov19||Dec 19||Jan 20||Feb 20||Mar 20||Apr 20|
|Merchandise trade balance (12 month total)||NZ$m||-4837||-4467||-3927||-3300||-3403||-2496|
|Dwelling consents - residential||apc||3.8||24.1||2.7||6.0||-8.7||...|
|House sales - dwellings||apc||1.0||16.9||7.7||13.4||1.6||-78.5|
|REINZ - house price index||apc||5.5||6.5||6.9||8.5||9.1||8.5|
|Estimated net migration (12 month total)||people||55940||58556||62177||66515||71456||...|
|ANZ NZ commodity price index||apc||18.8||12.2||7.7||6.6||5.8||0.9|
|ANZ world commodity price index||apc||12.4||8.7||5.1||0.1||-5.8||-9.2|
|ANZBO - business confidence||net%||-26||-13||...||-19||-64||-67|
|ANZBO - activity outlook||net%||13||17||...||12||-27||-55|
|ANZ-Roy Morgan - consumer confidence||net%||121||123||123||122||106||85|
|NZ exchange and interest rates5|
|Trade weighted index (TWI)||index||69.1||69.3||69.2||69.2||69.4||69.9|
|Official cash rate (OCR)||%||0.25||0.25||0.25||0.25||0.25||0.25|
|90 day bank bill rate||%||0.25||0.25||0.25||0.26||0.26||0.26|
|10 year govt bond rate||%||0.65||0.7||0.62||0.61||0.65||0.71|
|VIX volatility index||index||28||29.5||28.2||...||28||27.6|
|AU all ords||index||5680||5661||5609||5730||5890||5885|
|US interest rates|
|3 month OIS||%||0.05||0.05||0.05||0.05||0.05||...|
|3 month Libor||%||0.36||0.36||0.37||...||0.37||...|
|10 year govt bond rate||%||0.68||0.68||0.66||...||0.69||0.68|
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||Oct 19||Nov 19||Dec 19||2019
|Jan 20||Feb 20||Mar 20||2020
[9.6% share of total goods exports]
|Retail sales value||apc||3.3||3.3||5.6||4.9||4.5||-5.7||-21.6||...|
|Retail sales value||apc||-7||-2.1||-2.6||-0.4||1.6||-4.7||...||...|
|Retail sales volume||apc||1.8||2.4||1.8||2.3||2.5||-9.2||...||...|
|Retail sales volume||apc||3.1||0.7||0.6||0.9||0.2||-5.9||-22.6||...|
|Retail sales value||apc||2.7||3.2||2.4||2.2||5.7||9.4||...||...|
(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