Weekly Economic Update - 9 July 2021

Weekly Economic Update 9 July 2021#

Bubble with some Australian states resumes#

Quarantine-free travel with the Northern Territory and Western Australia as well as some green light flights from New South Wales and Queensland will resume at midnight on Friday.

Business confidence continues to improve...#

The June quarter release of the NZIER’s Quarterly Survey of Business Opinion (QSBO) shows a continued bounce-back in firms’ own activity, with a net 28% of firms expecting their own activity to increase in the next three months. This saw headline business confidence return to positive territory for the first time since mid-2017, with a net 10% of firms now expecting to see an improvement in general economic activity.

The rebound in activity has been broad-based across most industries. The building industry led the way on the back of an ongoing record pipeline of consented work ahead, although cost pressures have intensified, with a net 85% of firms reporting increased costs in the June quarter, the highest since March 1985. While indicators of activity in retailing and manufacturing industries are up, confidence has been slower to recover as supply chain disruptions, cost pressures and reduced export demand slow recovery in these industries.

...and firms report difficulty finding staff...#

This backdrop of solid demand has seen firms look to increase employment and investment in plant machinery and equipment over the months ahead. However ongoing constraints on labour supply growth have meant that firms are reporting record levels of difficulty in finding both skilled and unskilled staff. This is particularly evident in the construction industry where labour shortages were reported as being the main limiting factor.

...and inflationary pressures continue to build#

Firms are reporting that they are more able to pass on the increased costs that they have been facing over recent months, with 39% of firms reporting having raised prices over the past quarter, and over half of the surveyed firms expecting to raise prices over the coming quarter (Figure 1).

Ongoing strength in activity indicators point to the New Zealand economy continuing to perform well over the rest of the year, consistent with our Budget Update forecast of 4.0% annual average growth in GDP over the year to December 2021. Higher inflationary pressures means that there is an increased likelihood that the RBNZ will raise rates earlier than forecast in the Budget Update.

Figure 1: Pricing intentions

Source: NZIER

Consumer confidence remains stable#

Consumer confidence remained unchanged at 114 in June in the ANZ-Roy Morgan Consumer Confidence Survey, below its long-run average of 119. Inflation expectations continue to build, with a record 88% of people expecting prices to increase by 5.1% on average over the next two years.

Global shipping costs show no sign of easing...#

Global shipping costs are not showing any signs of easing. The Baltic Dry Index rose 30% in June to a new post-GFC high and it is expected that congestion in the shipping industry will last well into next year.

...while commodity prices remain elevated#

The ANZ World Commodity Price Index continued to rise, lifting 0.8% in June. In local currency terms, the index rose 2.3%. Gains were recorded in the forestry sector, up 3.6%, while dairy was the only sector to record a fall, down 1.5% from previously elevated levels. Dairy prices also fell 3.6% at this week’s GlobalDairyTrade auction but remain over 20% up on the same time last year. Whole milk powder prices were down 3.0% and skim milk powder prices fell 7.0% on the back of subdued demand.

US labour market data appears mixed...#

In the United States (US), labour market data for June showed a mixed picture but overall suggest continuing progress toward full employment. The Household Survey showed employment falling slightly, while the unemployment rate ticked up to 5.9% (Figure 2). The participation rate was unchanged at well below pre-pandemic levels.

Broader measures of unemployment were more encouraging, with the U-6 measure (which includes those on the margins of the labour force as well as those who would like to work more hours) falling to 9.8%. Payroll data were also more positive, with non-farm employment experiencing the largest rise in ten months, driven by the leisure and hospitality industry as restrictions continue to ease.

Figure 2: US Household Survey

Source: Haver

...as growth momentum slows...#

The ISM services index for the US recorded a sharp drop in June, driven by weaker business activity and employment. The overall index remained firmly in expansionary territory, indicating that the recovery in services activity continued but at a slower pace. The services employment index fell to just below the break-even level of 50, further adding to the downside in June’s employment data.

...and US approaches COVID ‘independence’#

In a 4 July address, President Biden stated that the US is ‘closer than ever to declaring independence’ from COVID-19, urging residents to get vaccinated in order to protect against emerging variants of the virus. Around half of the US population has been fully vaccinated, though the daily vaccination rate has been steadily falling since April. At the current pace, it will take until the end of the year to vaccinate 75% of the population, a proportion that would provide an effective level of herd immunity.

Easing restrictions boost euro area spending...#

Retail sales values in the euro area rebounded sharply in May, more than reversing the fall in April (Figure 3). The vaccination programme in the European Union has continued to pick up pace, and at the current rate it will take only another two months to vaccinate 75% of the population. In Australia, retail sales values for May were revised up, with steady monthly growth of 0.4%.

Figure 3: Retail sales values

Source: Haver

...as England must ‘learn to live’ with COVID-19#

UK Prime Minister Johnson announced that virtually all official restrictions in England are likely to be removed on 19 July, even as daily infections continue to rise and are expected to reach 50,000 by the end of the month. Half of the UK population has been fully vaccinated against COVID-19, and it will take another two months to vaccinate 75% of the population at the current rate.

RBA opens door for earlier rate rises#

The Reserve Bank of Australia (RBA) kept their 0.1% cash rate unchanged at the July meeting, though bond purchases were reduced and a slight change in tone suggests that a cash rate increase could occur earlier than previously indicated. The Bank’s central scenario is that economic conditions for rate rises ‘will not be met before 2024’ – in previous statements, these conditions were ‘unlikely to be met until 2024 at the earliest’. This suggests that if the economic recovery in Australia continues to surprise on the upside, as the Bank acknowledged that it has to date, then rate rises could come earlier.

High-Frequency Indicators#

Traffic and Freight Movement#

Source: Waka Kotahi NZ Transport Agency

Card Spending#

Source: Marketview data via MBIE

People Movements at Selected Locations#

Source: Google

Jobseeker (JS) and Income Support Recipients#

Source: MSD

COVID-19 Cases#

Source: 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