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Now that the election in New Zealand is over, and since another RBNZ statement coming up, I though that now would be the perfect time for a quick economic roundup for New Zealand.

Growth

  • New Zealand’s economy grew by 0.8% quarter-on-quarter in Q2 2017.
  • This is within expectations and is faster than Q1 2017’s +0.6%.
  • In addition, this marks the second quarter of ever faster growth.
  • However, the +0.8% reading still missed the RBNZ’s forecast of +0.9% for Q2.
  • Year-on-year, New Zealand’s GDP grew by 2.5%, which is the same annual rate of expansion as in Q1.
  • This is the shared weakest growth since Q4 2015, though.
  • But on the more upbeat note, Q2’s steady annual reading puts an end to three consecutive quarters of ever weaker annual growth.
  • The RBNZ mainly focuses on the output approach for estimating GDP growth.
  • And using the output approach, 10 of the 16 major industry groups printed another quarter of growth.
  • Of the remainder, 5 reported decreases in output while one, the agriculture, forestry, and fishing industry, reported no growth.
  • And of the 5 industries that reported a contraction, 2 reported weaker rates of decline, namely the construction industry (-1.1% vs. -2.1% previous) and arts, recreation, and other services industry (-0.5% vs. -1.2% previous).
  • Going back to the 10 industries that reported further growth, manufacturing (+1.8% vs. +1.2% previous), retail trade (+2.8% vs. +2.0% previous), and the transport and warehouse services industry (+3.5% vs. -1.6% previous) led the way.
  • However, commentary from the GDP report noted that the strong reading for retail trade was not due to stronger domestic demand but from the “boost in international visitor numbers” because of “the World Masters Games and the British and Irish Lions rugby tour.”
  • Using the expenditure approach, household spending weakened (+0.9% vs. +1.2% previous) while business investment was a drag (-0.4% vs. +1.8% previous).
  • However, the 5.2% surge in exports (+0.4% previous) and the weaker increase in imports (+0.6% vs. +1.0% previous) more than made up for the decline in business investments and weaker consumer spending.

Employment

  • New Zealand’s jobless rate eased further to 4.8% in Q2 2017.
  • This is the best reading for the jobless rate since Q4 2008.
  • However, the jobless rate improved partially because the labor force participation rate plunged from an all time high of 70.6% to 70.0%.
  • This is the poorest reading for the participation rate in four quarters.
  • Jobs growth, meanwhile, was actually negative in Q2 2017, falling by 3K.
  • As for wage growth, the labor cost index for all industires printed another 0.4% quarter-on-quarter increase.
  • The labor cost index has been rising at a steady 0.4% pace for three consecutive quarters already.
  • Also, the rise in the labor cost index has been somewhat stable, rising by 0.3% to 0.5% since Q1 2012.
  • Somewhat subdued compared to the pre-crisis years when the labor cost index rose by 1.0% or more quarter-on-quarter, though.
  • Year-on-year, the labor cost index rose by 1.7%, accelerating from the previous quarter’s 1.6% rise.
  • In terms of trend, the labor cost index has been growing between 1.5% and 1.7% since Q1 2013, so stable overall.
  • Like the quarterly reading, however, wage growth is somewhat subdued compared to the 3.0% (or more) annual increases that was usually reported during the pre-crisis years.

Inflation

  • Headline inflation was flat quarter-on-quarter in Q2 after the 1.0% surge in Q1, which was the best reading since Q2 2011.
  • The slowdown was broad-based since 8 of the major 11 CPI components printed weaker readings in Q2.
  • In particular, the alcoholic beverages and tobacco component only printed a +0.1% increase after surging by 4.0% in the previous quarter because of a tax on tobacco products that was introduced in the previous quarter.
  • The weaker increase in food prices was also a major drag (+0.7% vs. +2.2% previous).
  • Also, 5 of the 11 major CPI components were in negative territory.
  • The biggest drag was the 1.3% drop in transport component (+0.8% previous.)
  • Moving on, the year-on-year reading came in at 1.7%, which is much slower compared to the previous month’s solid +2.2% reading, which was the fastest annual increase since Q3 2011.
  • The slowdown for the annual reading was also broad-based since 7 of the 11 major CPI components printed weaker readings.
  • And among these, the biggest drags were the 4.6% drop for the communications components (-3.1% previous) and the weaker 1.2% increase for the transport component (+3.5% previous).
  • On a more upbeat note, the price of tradables, which has been the main source of New Zealand’s inflation problems, rose by 0.9% year-on-year.
  • This marks the second quarter of increases after 10 consecutive quarters of drops.
  • But on a more downbeat note, the increase in the price of tradables is much weaker compared to the 1.6% rise in Q1.

Business Conditions & Sentiment

  • BusinessNZ’s performance of manufacturing index (PMI) bounced to a three-month high of 57.9 in August after falling to 55.5 previously.
  • Improving conditions in the manufacturing sector was broad-based with the production sub-index jumping from 56.0 to 60.3, which is the highest reading since September 2016.
  • The employment sub-index for the manufacturing sectors only increased marginally to 56.7, but it’s still the best reading since September 2014.
  • Additional commentary from BusinessNZ noted that overseas demand picked up, with “a number” of survey respondents pointing out “increased order from Australia.”
  • Also, PMI has been expanding (above the 50.0 stagnation mark) since October 2012.
  • As for BusinessNZ’s performance of services index (PSI), it improved from 56.0 to 57.3 in August.
  • The higher headline reading was driven mainly by the stronger readings for the activity/sales (62.9 vs. 55.8 previous) and new orders (63.1 vs. 60.2 previous) sub-indices.
  • Despite faster new orders growth and increased activity, however, employment growth in the labor-intensive service sector weakened.
  • Also, commentary from BusinessNZ noted that growth in the retail trade industry “was flattered by international visitors for the Lions’ rugby tour (mainly June) and World Masters Games (April).”
  • As such, BusinessNZ expects “retail trade to contract a little in the September quarter.”
  • Moving on, ANZ’s business confidence index eased from 19.4 to a three-month low of 18.3 in August.
  • This means that a net of 18.3% of businesses in New Zealand are still optimistic for the year ahead.
  • Looking at the breakdown, 22.9% of agricultural business were upbeat (25.8% previous), 20.9% for services (23.3% previous), 20.8% for construction (18.2% previous), and 13.2% for retail (16.4% previous).
  • Manufacturing, meanwhile, reported that upbeat businesses increase from 8% to 16%.
  • Looking at the sub-components, inflation expectations dipped further from 1.98% to 1.88%, which is a bad sign for CPI.
  • Moreover, pricing intentions fell furthr from +27.6 to +20.5, which means that even less firms were inclined to raise prices.
  • Not only that, export intentions eased from +32.7 to +26.8%.
  • In addition construction intensions for residential (36.4% vs. 10.5% previous) and commercial (28.6% vs. 5.6% previous) buildings improved.
  • As for rate hike expectations, less firms are expecting a rate hike from the RBNZ (50.6% vs. 39.9% previous).

 

Housing

  • The number of residential building permits issued in New Zealand fell by 0.7% to 2,762 in July.
  • This is a bad sign for residential building investments in Q3 and, by extension, Q3 GDP growth.
  • However, it’s actually kinda good in a way since it reduces the odds of a housing bubble in New Zealand.
  • Also, the number of building permits issued during the Q2 months is still higher compared to the Q1 months, so private investment will likely give GDP growth a boost.
  • Median house prices, meanwhile, fell by 0.2% in June.
  • Home prices have been weakening for three consecutive months already and the recent dip is the first negative reading in seven months.

Trade

  • New Zealand’s seasonally unadjusted trade surplus narrowed from $246 million to $85 million in July.
  • That’s in Kiwi dollars by the way.
  • Despite the smaller surplus, this still marks the fifth month of surplus after eight straight months of deficits.
  • This is also a good start for Q3 GDP growth.
  • However, total surplus in Q2 was $859 million, so the remaining Q3 months need to up their game in order to even match strong trade in Q2.
  • In addition, a closer look shows that exports actually fell by 1.3% month-on-month in July.
  • This is the second month of falling exports, although the fall in July is weaker compared to June’s 4.4% drop.
  • Exports probably took another hit when the Kiwi’s trade-weighted index (TWI) jumped further from 77.92 to 78.41.
  • Fortunately, the TWI eased to an average of 77.08 in August. And it get even better because the TWI stood at 76.43 by September 22.
  • It remains to be seen if the Kiwi weakness in August and September will have a positive effect on New Zealand’s exports, though.
  • It’s also worth pointing out that the RBNZ forecasts that the TWI will settle at 78.5 by the end of Q3.
  • As such, the TWI is currently weaker than the RBNZ’s forecasts, and the RBNZ may be happy about that.

Putting it all together

Source: RBNZ's August Statement on Monetary Policy
RBNZ’s August Statement on Monetary Policy

New Zealand’s economy grew at a faster pace in Q2. However, the 0.8% quarter-on-quarter growth is below the RBNZ’s forecast of +0.9%.

Moreover, the GDP report itself hinted while BusinessNZ explicitly pointed out that one of the major drivers for the faster Q2 growth was the retail trade industry. The only problem is that the strong growth in retail sales was not due to stronger consumer spending. Rather, retail trade “was flattered by international visitors for the Lions’ rugby tour (mainly June) and World Masters Games (April)” as BusinessNZ puts it.

As such, the retail trade industry is expected to weaken in Q3, as demand from foreign visitors subside and consumer spending returns to more natural and sustainable levels.

And while Q3 trade started with a surplus in July, the remaining Q3 months have a lot of catching up to do in order for Q3 trade to even match Q2. And unless the remaining Q3 months do that, then net trade will likely be a drag, at least on quarter-on-quarter GDP growth.

The future looks optimistic for trade, though, since the Kiwi’s average trade-weighted index (TWI) eased from 78.41 to 77.08 in August. And it get even better because the TWI continued to fall in September and stood at 76.43 as of September 22. Of course, that does not automatically mean that exports picked up, but it does raise the possibility since BusinessNZ and ANZ reported that business optimism remained upbeat and exports intentions continue to rise.

It’s also worth pointing out that the RBNZ expects the TWI to average at 78.5 by the end of Q3. As such, the Kiwi is falling at a faster-than-forecasted rate.

Moving on to inflation, New Zealand releases its CPI report on a quarterly basis and there have been no updates since the last RBNZ statement in August. However, anecdotal evidence gathered by ANZ pointed to falling inflation expectations, which also caused pricing intentions to fall. In addition, labor costs remained subdued. As such, things currently don’t look too good for inflation.