Weekly Economic Update - 3 December 2021

Weekly Economic Update - 3 December 2021#

While activity continues showing signs of recovery, uncertainty and elevated inflationary pressures are still present. The construction sector should be supported by high building consents issuance, although inflationary and capacity pressures may slow the pace of expansion. Meanwhile, continued strength in commodity prices support the terms of trade and capital imports suggest increased business investment in the September quarter. We expect the move to the COVID-19 Protection Framework will lift economic activity in Auckland and will monitor this in coming weeks.

Inflation and uncertainty hit businesses…#

While still elevated relative to pre-COVID-19 levels, business activity and confidence eased slightly in October, with increased uncertainty and historically high inflation expectations. The final November ANZ Business Outlook showed headline business confidence falling 3 points while businesses own activity outlook dipped 7 points. Cost pressures, pricing intentions and inflation expectations all remain high, suggesting ongoing pressure on Consumers Price index (CPI) inflation (Figure 1).

Figure 1: Cost and inflation pressures

Source: ANZ

…and consumer confidence eases…#

With increased uncertainty and elevated inflation, consumer confidence eased further in November. The ANZ-Roy Morgan consumer confidence survey showed consumer confidence easing 1 point to 97 in November, continuing the theme of below average confidence levels seen since COVID-19 arrived. Rising interest rates, combined with lower real wages, has likely caused the slight fall in house price inflation expectations, potentially pointing to a slowdown in housing market activity.

…while building consents support construction#

Construction activity should be well supported over the year ahead as annual building consents issuance reaching a fresh record high of 47,715 in the year to October. However, construction firms continue to highlight strong intentions to raise prices and their 1-year ahead inflation expectations rose to 4.1%, indicating that robust price growth in the construction sector will likely persist into the next year. Combined with material shortages and capacity constraints, this could lead to delays for some projects.

Goods terms of trade reach a record high#

The goods terms of trade in the September quarter increased 0.7% to a record high, reflecting continued strength in global commodity prices. Global freight costs remain elevated, and a fall in travel services exports reflects the disruption of trans-Tasman travel. Imports increased faster than exports, widening the quarterly trade deficit, and will weigh on GDP.

Exports volumes fell as a result of a lockdown-induced drop in forestry exports and an easing in dairy exports after an unusually strong June quarter. However, import volumes continued growing strongly as retailers stock up for the holiday season.

Elevated investment intentions are reflected in strong imports of capital goods in the September quarter, boding well for business investment as the economy moves to the COVID-19 Protection Framework.

Figure 2: Capital goods imports and business investment

Source: Stats NZ

The OECD describes the global economic recovery as increasingly uneven as developing economies lag behind. Australia's GDP fell by less than expected and a rebound appeared to take hold in October, and Japan also showed signs of recovery. Inflation reached a record high in Europe, and the US is set to reduce monetary stimulus faster, though a new COVID-19 variant raises concern.

OECD Economic Outlook: A Balancing Act#

The OECD released its December Economic Outlook this week, characterising the global recovery as uneven and increasingly imbalanced as the disparity between advanced and developing economies continues to widen. Strong policy support and vaccination in developed countries has pulled output up to its pre-pandemic path, though supply constraints and rising inflation pressures are also bringing risks and policy challenges. Compared to the OECD forecasts released in May, global growth is expected to be slightly weaker in 2021 owing to supply chain disruption and the spread of the Delta variant (Table 1).

Source: OECD

Australian GDP falls by less than expected…#

Australia's real GDP fell by 1.9% in the September quarter compared to the June quarter, a smaller decline than expected and far less severe than the contraction experienced in the June 2020 quarter (Figure 3). After previously recording four consecutive quarters of strong growth, GDP is now slightly below pre-pandemic levels.

Figure 3: Real GDP

Source: Haver

Household spending was the main driver of the decline, though a sharp increase in the household saving ratio suggests that a drawdown in savings should support the economic recovery now that COVID-19 restrictions have begun to ease. Retail sales in October support this view, rising 4.9% to be in line with pre-Delta levels.

…as Japan's output shows signs of recovery#

Industrial production in Japan rose 1.1% in October after falling for the previous three months as supply shortages constrained activity. Automotive production drove the increase as parts shortages eased, and manufacturers' plans to reach normal production in December will support the recovery further. Retail sales also recovered in October as pandemic restrictions eased, up 1.4% to be in line with levels prior to the Delta outbreak.

Inflation hits record high in the euro area…#

The preliminary estimate for November Consumer Price Index (CPI) inflation in the euro area was 4.9%, the fastest rate of annual inflation since the euro was introduced in 1999. Unemployment remained high in October, falling to 7.3%, reducing the chances of a swift monetary policy response.

…with faster US monetary policy taper likely…#

US Federal Reserve Chair Jerome Powell stated this week that inflation can no longer be considered transitory, and that a sooner end to the Fed's asset purchase programme appears warranted. This suggests that asset purchases will conclude in the first quarter of next year, with interest rate increases likely to follow shortly after. Strong November employment and manufacturing data released this week support Powell's view that the economy now requires less monetary stimulus.

…though Omicron variant brings uncertainty#

The World Health Organisation identified a new COVID-19 ‘variant of concern' named Omicron, which has been found in countries around the world including Australia. The variant appears to be more infectious than previous strains, though it is not yet clear whether it is more deadly. The CEO of BioNTech believes that the vaccine the company co-created with Pfizer will protect against severe symptoms from the variant, and stated that a new vaccine could be relaunched within 100 days.

High-Frequency Indicators[1]#

Traffic and Freight Movement#

Source: Waka Kotahi NZ Transport Agency

People Movements at Selected Locations#

Source: Google

COVID-19 Cases Per Million People#

Source: World Health Organisation/Haver

Card Spending#

Source: Marketview data via MBIE

Jobseeker (JS) and Income Support Recipients#

Source: MSD

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