Weekly Economic Update - 5 June 2020

Weekly Economic Update - 5 June 2020#

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Only one known active case of COVID-19 remains in New Zealand, and Cabinet will consider a move to Alert Level 1 on 8 June. High-frequency indicators of economic activity have been steady over the past week, with most remaining slightly below 2019 levels. The merchandise terms of trade fell by 0.7% in the March quarter, led by declines in meat and forestry prices.Dairy products overtook travel services exports in revenue for the first time in almost five years. Consumer confidence lifted in May, but remains subdued.

Australia became the latest developed country to report a GDP decline in the March quarter. Meanwhile, manufacturing PMIs improved in May, but remained in contractionary territory for all countries except China. Risk sentiment has continued to improve despite weak economic data, violent US protests, and ongoing US-China political tensions. In response, equity and commodity prices have increased and the US dollar is weaker.

With one active case of COVID-19 remaining…#

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New Zealand has recorded thirteen days without a new case of COVID-19, and just one known active case remains in the country(Figure 1).Of the 1504 confirmed and probable cases in New Zealand, 1481 have recovered and 22 have died.Total tests reached 286,000 on 3 June, which is around 5.7% 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

…Alert Level 1 may come sooner than expected#

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On 8 June, Cabinet will consider whether to move to Alert Level 1. While border restrictions will remain, restrictions on domestic activity would be “essentially lifted” according to the Prime Minister, though businesses may still be required to contact trace. The Treasury has estimated that economic activity will be around 5-10% lower than normal under Alert Level 1, mainly due to the absence of international visitors.

Activity indicators steady at Level 2#

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High-frequency indicators of economic activity have been steady over the past week, with most remaining below normal levels (Figure 2). Over the past two weeks, total retail card spending has been slightly above spending at the same time in 2019, although remains slightly down on spending immediately prior to March. When excluding supermarkets, liquor stores and pharmacies, spending was slightly below 2019 levels. Heavy traffic remains around 5% below last year, and has shown little growth for the past two weeks. Light traffic is now around 15% below last year, up from 40% below at the beginning of Alert Level 2.

Figure 2: Indicators of economic activity

Sources: Waka Kotahi NZ Transport Agency/Paymark

On 29 May, the number of Jobseeker Support recipients reached 189,500, an increase of 700 on the previous week. Weekly growth remains well below the growth seen throughout April. Around 6.3% of the estimated working-age population are receiving a Jobseeker benefit.

High-Frequency Indicators#

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Traffic Movement

Source: Waka Kotahi NZ Transport Agency

Electricity Demand

Source: Electricity Authority

Job Seeker Support

Source: MSD

Freight Movement

Source: Waka Kotahi NZ Transport Agency

Retail Spending

Source: Paymark and Verifone data via Data Ventures

Fiscal Support: Wage Subsidy (paid)

Source: MSD

Modest fall in terms of trade…#

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The merchandise terms of trade fell 0.7% in the March quarter (Figure 3) but is still 5.3% higher than a year ago. Export prices fell by 0.2% while import prices rose by 0.5%.

Export prices for lamb and beef declined by 10% and 5.8% respectively, led by lower demand and supply chain difficulties because of the COVID-19 pandemic. Forestry prices fell by 3.4%. Dairy prices held up well despite supply chain disruptions, rising 0.8%.

Meat export volumes fell by 1.6% while dairy and forestry exports fell 1.0% and 1.2% respectively.

We expect to see sharper falls in both export and import volumes in the June quarter, and the terms of trade is expected to come under pressure.

Figure 3: Terms of trade

Source: Stats NZ

The services terms of trade index rose by 3.6% in the March quarter compared to the December quarter, but was 0.4% lower on an annual basis. Services export prices rose by 1.3% on a quarterly basis, while services import prices fell by 2.2%.

..with dairy exports overtaking travel services...#

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Dairy product exports have overtaken travel services exports in revenue for the first time in almost five years. Spending by international visitors and students fell $239 million in the year to March, compared to the December 2019 year. Travel restrictions will see services exports drop sharply in coming quarters (Figure 4). At the end of 2019, exports of travel services (largely tourism) represented a little over half of total real services exports. Dairy exports rose by $396 million in the year to March, boosting New Zealand's trade surplus to $3.5 billion in the March 2020 year.

Figure 4: Dairy and services share of exports

Source: Stats NZ, the Treasury

..although dairy prices are flattening…#

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The GlobalDairyTrade (GDT) price index fell by 4.2% in the March quarter, and by a further 8.7% in April and May, which suggests that dairy export prices will decline in the June quarter. More recent GDT data showed dairy prices continuing to flatten, rising only 0.1% at this week's auction to be down 3.9% in local currency terms due to a stronger NZD. WMP prices rose 2.1% but most other dairy product prices fell.

…and building consents continued to ease#

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Housing consents continued to ease in April with consents for standalone houses and multi-unit dwellings down 6.5% and 7.8% respectively. Annual consents dipped in Auckland and Wellington but remained stable in Canterbury from the previous month. Construction activity is expected to rebound in the next few months as the restrictions on activity in response to the COVID-19 outbreak ease, taking advantage of the high number of consents issued in the past year. However, heightened uncertainty and reduced demand from lower incomes and net migration should keep consents issuance at lower levels over the year.

Consumer confidence remains subdued#

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Consumer confidence remained subdued in May, rising 12 points to 97.3 in the ANZ-Roy Morgan Consumer Confidence Survey. Consumers' perceptions of their current financial situation lifted 4 points to 0 while perceptions regarding next year's economic outlook lifted 10 points but remains very low at -46%. There remains the risk that consumer confidence may deteriorate further when the wage subsidy scheme ends and house prices start declining significantly.

US-China tensions escalate#

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Chinese authorities have instructed major state-run agricultural companies to pause imports of some US farming products, in response to escalating tensions with the US over Hong Kong. This has raised questions about the feasibility of the US-China Phase One trade deal. Under this agreement, China had vowed to increase its US agricultural imports by $36.5bn in 2020.

RBA keep policy targets unchanged…#

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The Reserve Bank of Australia (RBA) decided at its monetary policy meeting to keep their targets for the cash rate and the yield on 3-year Australian Government bonds at 25 bps, in line with expectations. Governor Lowe stated that the depth of the downturn might be less severe than previously thought, while stressing that the nature and speed of the recovery remains highly uncertain, and that the pandemic will have long-lasting effects on the economy. The Board vowed that the cash rate target would not be increased until progress is made towards full employment and inflation is within the 2%-3% target band.

…as GDP falls in March quarter#

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Australia's real GDP declined by 0.3% in the March quarter, while annual growth slowed to 1.4% (Figure 5). Household consumption declined by 1.1% on a quarterly basis, the biggest contraction since the mid-1980s. Exports of goods and services fell by 3.5%, while imports declined by 6.2%. Gross fixed capital investment declined by 0.8% on top of a 1.2% decline in the December 2019 quarter. General government consumption was up 1.8%. Although a technical recession is now a given, Australia's Q1 GDP performance is the second best (after Sweden) among the 19 advanced economies that have Q1 GDP figures.

Figure 5: Australia real GDP growth

Source: Australian Bureau of Statistics / Haver Analytics

Global PMIs improve, but remain low#

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The JPMorgan Global Manufacturing PMI increased by 6.7 pts to 39.2 in May. The improvement was broad-based, although new orders and new export orders lagged. This would suggest that production continued to contract in May (although at a slower pace), despite restrictions being lifted in a number of countries. Of the 31 countries covered, China was the only one reporting output growth in May, while the rate of contraction slowed in all except Japan and Australia (Figure 6). China's Caixin Manufacturing PMI surprised on the upside in May, moving into expansionary territory at 50.7. New export orders remained weak, reflecting lacklustre external demand. India's manufacturing PMI remained weak in May at 30.8, as a result of the lockdown there having been extended until the end of the month.

Figure 6: Global manufacturing PMIs in selected countries in May (below 50 means contraction)

Source: IHS Markit, Haver Analytics

Risk-on sentiment boosts markets#

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Risk sentiment has continued to improve despite weak economic data, violent US protests, and ongoing US-China political tensions. Confidence levels are improving as economies continue to open up. The S&P500 reached a 3-month high, commodities prices have firmed, and the US dollar has weakened. Oil prices were supported by reports that OPEC+ may extend its production cuts for a further 1-3 months. Oil and copper prices reached their highest levels since early March.

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