Weekly Economic Update - 4 June 2021

Weekly Economic Update 4 June 2021#

Headline business confidence ticks up…#

The ANZ Business Outlook for May 2021 showed business confidence returned to positive territory, rising 4 points to a net 1.8% of firms now expecting conditions to improve. Firms' own activity expectations rose 5 points to 27.1% in April.

…although cost pressures continue to bite…#

Cost expectations rose 5 points to a net 81.3% of respondents reporting higher costs while a net 57.4% intend to raise their prices (Figure 1). Inflation expectations rose to 2.2%.

Figure 1: Pricing and inflation expectations

Source: ANZ

…particularly in the construction industry…#

Cost pressures are particularly evident in the construction industry with a net 93.3% of construction sector respondents expecting higher costs ahead and a net 80% of them expecting to raise prices. This will likely show up in the form of higher housing cost contributions to Consumers Price Index inflation in the quarters ahead as well as providing a boost to nominal GDP.

… as building consents remain strong#

Annual building consents issuance reached a fresh record high, with a total of 42,848 building consents issued in the year to April 2021. Strong consents issuance over the last year provides a strong pipeline of construction activity over the year ahead. The construction industry continues to face headwinds from supply chain disruptions and skills shortages, which are likely to constrain further growth in residential investment, particularly as the construction sector was already believed to be capacity constrained before the COVID-19 pandemic. Strong demand for construction activity at a time of constrained capacity is likely to put further upward pressure on construction prices.

Dairy prices remain elevated…#

Dairy prices eased 0.9% at this week's GlobalDairyTrade auction, with whole milk and skim milk powder prices both 0.5% lower compared to the previous auction. Nevertheless, prices remain elevated at levels not seen since the 2013/14 season (Figure 2). This will support dairy farm incomes and is reflected in the mid-point of Fonterra's opening estimate of the farmgate milk price for the 2021/22 season coming in at $8 per kg of milk solids.

Figure 2: GlobalDairyTrade price indexes

Source: GlobalDairyTrade

…and the terms of trade lifted slightly#

The goods terms of trade index lifted by 0.1% in the March 2021 quarter, as export prices fell by slightly less than import prices. The index is expected to rise strongly over the coming quarters as recent commodity price increases feed through.

Export volumes fell by 1.9% as exporters experienced difficulty shipping products despite strong overseas demand. Lifts in dairy and forestry export volumes were offset by lower meat and seafood exports. In the year ended March 2021, total export values were down by $14.3 billion (16.5%). Total imports fell by a similar amount, suggesting a broadly neutral impact on annual GDP.

OECD upgrades economic outlook…#

In its latest Economic Outlook, the OECD upgraded its forecasts for global economic growth while noting that the recovery remains uneven across countries. Global growth of 5.8% and 4.4% is forecast for 2021 and 2022, respectively (Table 1). The growth upgrade reflects additional fiscal stimulus, vaccine rollouts and more effective containment measures.

Table 1: Real expenditure GDP growth forecasts

Source: OECD

…as Australia's strong recovery continues…#

Australia's real GDP expanded by 1.8% in the March 2021 quarter compared to the previous quarter, taking it above pre-pandemic levels (Table 2). This reflects a further easing of COVID-19 containment measures and a strong labour market recovery. A rise in export prices, in particular for iron ore and liquefied natural gas, contributed to the terms of trade reaching the highest level since the December 2011 quarter. There were also strong increases in both business and residential investment, supported by rising confidence levels and the Federal Government's HomeBuilder scheme.

Household spending continued to recover, though is still 1.5% below pre-pandemic levels. A rise in spending on services and a fall in spending on goods suggest that the shift back to more normal patterns of spending is ongoing (though still incomplete). While the household saving ratio declined further, it still remains around six percentage points above pre-pandemic levels, which suggests there is still scope for above-average consumer spending growth in the coming quarters.

Table 2: Australia GDP, key aggregates (% changes)

Source: Australian Bureau of Statistics
Note: Percentage change, except for household saving ratio

…and the RBA holds the course…#

The Reserve Bank of Australia (RBA) left its policy settings unchanged, with the targets for the cash rate, the Term Funding Facility and the yield on the 3-year Australian Government bond remaining at 0.1%. The following sentence was omitted from the June statement compared to previous ones: "The Board is prepared to undertake further bond purchases to assist with progress towards the goals of full employment and inflation". Some analysts took this omission to be a sign of a more hawkish policy stance. As previously indicated by the Bank, decisions on future bond purchases will be considered at the July meeting.

…while Asia shows divergent prospects#

India's real GDP grew by 1.5% in the March 2021 quarter compared to the previous quarter, taking it around 2% above pre-pandemic levels. Government expenditure expanded by 28.1%, while gross fixed capital formation increased by 9.4%. The prospects for the June quarter are less rosy, however, owing to a surge in COVID-19 infections in May.

Meanwhile, China's manufacturing sector continued to expand in May. The Caixin manufacturing Purchasing Managers' Index (PMI) increased marginally from 51.9 in April to 52.0 in May (Figure 3). While the gauge for new export orders was at its highest since November 2020, production growth softened owing to raw material shortages and high input prices. The indicator for input prices rose to its highest level since December 2016, while the output price measure reached its highest point since November 2010.

In South Korea, the manufacturing PMI dipped slightly but remained in expansionary territory. As in China, supply chain issues and rising prices featured prominently in the survey.

In Thailand, there was a fall in the manufacturing PMI to contractionary territory – the fourth monthly contraction in 2021. This reflects a third wave of COVID-19 infections in the country.

Figure 3: Manufacturing PMIs in selected countries

Source: Haver

High-Frequency Indicators (Domestic)#

Traffic Movement#

Source: Waka Kotahi NZ Transport Agency

Freight Movement#

Source: Waka Kotahi NZ Transport Agency

Spending by Region#

Source: Marketview data via MBIE

Spending by Industry#

Source: Marketview data via MBIE

Jobseeker (JS) and Income Support Recipients#

Source: MSD

People Movements at Selected Locations#

Source: Google

High-Frequency Indicators (Global)#

Trade Weighted Index#

Source: RBNZ

Volatility Index#

Source: Haver

US Activity and Equities#

Sources: Federal Reserve Bank of New York, Haver

Labour Markets#

Source: Haver

COVID-19 Cases#

Sources: 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