Weekly Economic Update - 5 February 2021

Weekly Economic Update 5 February 2021#

Labour market data stronger than anticipated…#

The unemployment rate fell to 4.9% in the December quarter from 5.3% in the September quarter (Figure 1). The participation rate was relatively stable, rising slightly to 70.2% from 70.1% the previous quarter.

Figure 1: Unemployment and underutilisation rates

Source: Stats NZ

…driven by a rise in employment…#

The Household Labour Force Survey (HLFS) recorded an additional 17,000 people employed compared to the previous quarter – up 0.6% (Figure 2). This was consistent with the Quarterly Employment Survey (QES) filled jobs measure up 16,500 or 0.8%. On an annual basis, HLFS employment was up 0.7% while QES filled jobs were up 0.9% on last year.

Figure 2: Employment

Source: Stats NZ

…led by construction and the public sector…#

The construction industry provided most of the boost to employment in the December quarter, with an additional 10,300 people employed in the quarter, to be up 21,000 over the year. This suggests labour supply may be less of a constraint on capacity in the construction sector than previously thought, alongside record levels of building consents currently in the pipeline. Significant gains in employment were also seen across the public sector industries. Partially offsetting employment declines were recorded (as expected) in some tourism-related industries.

…resulting in a pickup in activity…#

The solid employment story has translated into a similarly positive activity story, with hours worked up 4.5% in the December quarter following the 9.4% bounce-back in the September quarter after the 10.2% fall seen in the June quarter.  Hours worked in the December quarter were up 3.9% on the same quarter last year, however the corresponding QES hours paid series was up only 0.3% over the year.

The New Zealand Activity Index (NZAC) for December that was released two weeks ago pointed to activity in the December month being around 1.5% above the same period last year (Figure 3), sustaining the pace observed in the previous two months. These positive outturns highlight the greater than expected resilience that has been observed in the New Zealand economy since the easing of lockdown restrictions.

Figure 3: New Zealand Activity Index (NZAC)

Source: The Treasury

…supporting wage growth#

The strong employment result, combined with compositional shifts in the industry employment mix, has translated into support for earnings growth - with QES average hourly earnings up 4.2% over the year. Looking through the compositional effects, the unadjusted Labour Cost Index (LCI) rose 2.5% while the adjusted LCI rose 1.6% over the year (Figure 4).

Figure 4: Wage growth

Source: Stats NZ

While the December quarter labour market data points to a material upgrade in expectations for the economic outlook, uncertainty remains as to whether the strength in employment will be maintained in coming months, particularly as we move into what has traditionally been the peak of our international tourism season.

Building consents continue to rise…#

Building consents rose 4.9% in December, led by a 6.3% increase in multi-unit dwellings. Total annual consents were up 4.8% in December 2020 compared to a year ago and at 39,420, was the highest level since 1974. Consents issuance was up in all the main centres compared with a year ago, with Auckland and Canterbury both up over 25% in December 2020 compared with 2019.

High levels of consents issuance, together with a resilient labour market and strong house price growth over the past year points to continued strength in construction activity in the year ahead. However, there are still headwinds to consider, such as the potential for supply chain disruptions to dampen the pace at which growth occurs.

Consumer and business confidence higher#

The preliminary February release of the ANZ Business Outlook showed another lift in activity. Business confidence lifted 3 points to a net 12% of firms expecting conditions to improve while the activity outlook rose to 22%. Cost pressures are becoming apparent, with a net 71% of firms expecting higher costs ahead. Firms are intending to pass the costs on where they can, with a net 49% of firms intending to raise their prices. Investment and employment intentions and capacity utilisation are also higher, consistent with an improving growth outlook.

Consumer confidence rose by 2 points to 114 in the January release of the ANZ-Roy Morgan Consumer Confidence Survey. Consumer confidence is now just below its historical average of 120.

Fonterra raises milk price forecast#

Dairy prices rose for the sixth consecutive time at the GlobalDairyTrade auction this week. Overall, prices rose by 1.8% to be about 13% higher than a year ago (Figure 5). Whole milk powder prices rose by 2.3% while skim milk powder prices were down 1.5%.  Milk fat prices were particularly strong, with butter up 6.2%.

Figure 5: GlobalDairyTrade results

Sources: Haver/GobalDairyTrade

Fonterra has increased their 2020/21 forecast milk price range by 20 cents per kilogram of milk solids to $6.90-$7.50 for the season that finishes at the end of May. The midpoint of the range is now $7.20 per kgMS.

The ANZ World Commodity Price Index rose 3.6% in the month of January, with the dairy sector providing most of the lift. Stronger prices were also recorded in the meat and forestry sectors. In local currency terms, the index was up 2.4%.

US recovery continues…#

The advance estimate of the US’s December quarter GDP came in at a quarterly growth rate of 1%, close to market expectations and leaving the size of the economy US$475bn below its pre-pandemic level. Investment, exports and imports were strong, but private and government consumption was relatively soft.

Meanwhile, the January ISM manufacturing index ISM declined by 1.8 points (pts) to 58.7. Although weaker than expected, it remains above its long-term average and represents the eighth consecutive month of expansion. The new orders and production components declined, while the employment index improved marginally. The prices index increased by 4.5 pts to its highest level since April 2011, supported by higher commodity prices and strong supplier pricing power.

…and fiscal negotiations have started#

Republicans revealed a US$618bn fiscal stimulus plan on Monday, less than a third of the amount that was proposed by the Democrats. This large gap suggests that negotiations might be protracted, which could dampen the pace of the recovery in the March quarter. However, Democrats may decide to use budget reconciliation to pass the stimulus package without Republican support.

Euro area GDP contracts#

Euro area GDP contracted by 0.7% in the December quarter, slightly better than recent consensus forecasts. There was substantial variation between countries. Germany’s economy was 3.9% smaller at the end of 2020 compared to the end of 2019, while Spain’s was down 9.1%. With mobility restrictions still in place during the March quarter of 2021, another contraction in GDP is expected, followed by a steady recovery as vaccines aid in a gradual return to normal.

RBA extends bond purchasing programme#

The Reserve Bank of Australia (RBA) kept its targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond unchanged, but surprised markets with a more dovish tone than expected. Despite an improved domestic and global economic outlook, the RBA announced that it would purchase an additional AU$100bn of government bonds when the current AU$100bn programme comes to an end in mid-April, at the same pace as currently of AU$5bn a week. The Bank also indicated that it will not raise interest rates until 2024 at the earliest, noting that the recovery remained dependent on “significant fiscal and monetary support”. The RBA expects average growth of 3.5% this year and next, roughly unchanged from previous forecasts, while its forecast for the unemployment rate at the end of 2022 was lowered from 6.0% to 5.5%.

Growth slows in Asia#

China’s Caixin manufacturing Purchasing Managers’ Index (PMI) weakened in January and was below market expectations. There was a slowdown in the growth in the production and new orders components, a decline in the new export business index, and sharp rises in the input costs and output prices components. Manufacturers still expect output to rise over the next year, but the degree of positive sentiment declined to an eight-month low in January. Many firms are concerned about a resurgence of the virus in China and abroad, which could cause further disruptions to business operations and supply chains and lead to a slowdown in the global demand recovery.

Elsewhere in Asia, Philippines’s GDP grew by 5% in the December quarter of 2020, still leaving it around 8% lower than the same period of 2019 (Figure 6). Singapore’s GDP bounced back by 2.1%, leaving it around 4% lower than the pre-pandemic level. In Taiwan, though the pace of growth slowed in the fourth quarter, its economy managed to grow by 3% in 2020.

Figure 6: Real GDP in selected Asian countries

Source: Haver, the Treasury

High-Frequency Indicators (Domestic)#

Traffic Movement#

Source: Waka Kotahi NZ Transport Agency

Freight Movement#

Source: Waka Kotahi NZ Transport Agency

Electricity Demand#

Source: Electricity Authority

Retail Spending#

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