The Kiwi really got the stuffing beaten out of it during the previous forex trading week, due to the RBNZ’s surprise rate cut (and promises of more rate cuts and a little jawboning of the Kiwi on the side). And if that made you wonder how New Zealand’s economy is faring, then you may wanna read up on this Forex Snapshot.
Note: As with all of my other Forex Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.
- New Zealand’s Q3 2015 GDP grew by 0.9% quarter-on-quarter, which is much faster than Q2’s 0.3% (revised lower from 0.4%).
- This is the fastest quarter-on-quarter growth since Q3 2014 and marks the second consecutive quarter of faster quarter-on-quarter growth.
- Year-on-year, Q3 2015 GDP grew by 2.3%, which is slightly slower than than Q2’s 2.4%.
- This marks the third consecutive quarter that annual GDP has been growing at a slower pace after peaking at 3.5% back in Q4 2014.
- In terms of output, the main drivers for quarter-on-quarter GDP growth were manufacturing, transportation, and business services while construction was the main drag.
- Manufacturing expanded by 2.8% after a 0.4% contraction during the previous quarter.
- This is the biggest quarterly increase since Q4 2012 and was driven mainly by food, beverage, and tobacco manufacturing.
- Transportation was up by 2.6% after a 1.8% plunge during the previous quarter, due to “increased road transport activity and transport support services.”
- The business services industry was very robust, advancing by 2.0% after a 2.3% increase back in Q2, due mainly to higher demand for legal and accounting services.
- Construction contracted by 2.9% after a modest 0.8% expansion previously, due to “a fall in heavy and civil engineering construction.”
- In terms of expenditure, the main drivers were the 2.7% increase in fixed asset investment (1.2% previous).
- The increase in fixed investment was driven mainly by a 24% increase in investments on transport equipment (mainly aircraft), which is tied to New Zealand’s booming tourism industry.
- Net exports also had a very positive contribution due to a 1.9% increase in exports (-1.1% previous) and a 2.8% decrease in imports (+2.3% previous).
- Consumer spending also grew by 0.6% (0.9% previous), but its contribution to GDP growth was easily overshadowed by the other components.
- New Zealand’s jobs data looks good on the surface but the details are actually pretty bad.
- Q4 2015 jobless rate plunged to 5.3% from 6.0% previous, which is the lowest reading since Q1 2009.
- The labor force participation rate sank deeper to 68.4% from 68.6%, which is the lowest rate since Q3 2013.
- The labor force participation rate has been sliding for three consecutive quarters now, peaking at 69.5% back in Q1 2015.
- The lower participation rate and the fact that the number of unemployed shrank by 10.9% while employment only increased by 0.9% implies that many people just gave up on looking for jobs.
- Wages grew by 0.4%, which is the same pace as in the previous quarter and happens to be the weakest increase since Q1 2010.
- New Zealand’s inflation problem isn’t going away anytime soon.
- Quarter-on-quarter headline Q4 2015 CPI was pushed deeper into the red at -0.5% (+0.3% previous), which is the weakest reading in seven years.
- Annual headline CPI was just barely above zero at +0.1% (+0.4% previous), but it’s really horrible in the bigger picture since this is the lowest reading since Q3 1999.
- The core reading is even more distressing since it came in at zero percent (+0.3% previous), which is the worst reading ever on record.
- The lower cost of petrol was the main culprit. If the petrol component is stripped, quarter-on-quarter Q4 2015 CPI would only be down by 0.2% while the annual reading will be up by 0.5%.
- Aside from petrol, tradables in general had a significant deflationary effect. And the inflation report blamed the strong Kiwi dollar (at the time) since it made imports relatively cheaper.
Business Conditions & Sentiment
- Business New Zealand’s (BNZ) performance of manufacturing index (PMI) fell by two points to 56.0 in February, but it’s still the third highest reading over a 12-month period.
- PMI has been expanding (above the 50.0 stagnation mark) since October 2012.
- The production index slowed down a bit after three consecutive months of advances, printing a 56.6 in February.
- The new orders index increased higher to 61.0, however, so demand is robust and there’s a chance that the production index will climb higher in March.
- The only bad thing is that the employment index posted a 48.5 figure, which means that there were layoffs.
- This is the first time that the employment index was in contraction mode since December 2014.
- In terms of the services sector, New Zealand is off to a good start since BNZ’s performance of services index (PSI) printed a 55.4 in January.
- This is lower than December’s 58.5, however, and the PSI reading has been trending lower for the second consecutive month now.
- Pretty much all sub-components were also trending lower. The business activity index, for instance, slid lower from 61.7 to 58.0 while the employment index was down to 50.9 from 53.4 previous.
- The new orders index also dropped significantly from 63.8 to 57.0, so business activity in March may suffer.
Consumer Sentiment & Spending
- The Westpac McDermott Miller New Zealand Consumer Confidence Index (CCI) climbed higher to 110.70 from 106.0 during Q4 2015
- CCI finally broke three consecutive quarters of sliding consumer confidence.
- However, that didn’t translate to superior consumer spending since retail sales during Q4 2015 was only up by 1.2%, which is slightly lower than Q3’s 1.5%.
- Year-on-year, retail sales was only up by 5.3%, which is lower than the 5.7% growth reported during the previous quarter.
- Incidentally, lower retail sales would likely mean that consumer spending didn’t contribute as much to New Zealand’s Q4 2015 GDP, which will be released this coming Wednesday (March 16, 10:45 pm GMT – DST on), so mark your forex calendars,
- New Zealand finally had a trade surplus of $8 million in January after seven straight months of deficits. That’s in Kiwi dollars, by the way.
- This pales in comparison to January 2015’s trade surplus of $52 million, however.
- On a more upbeat note, New Zealand’s trade balance has been improving for the fifth consecutive month now, so those positive PMI numbers seem to be on track.
- Exports rose by 5.9%, with the 3.7% rise in dairy products leading the way.
- Exports to China, in particular, climbed by 25% (8.6% previous) while exports to Australia rose by 11% (2.4% previous).
- Imports, meanwhile, increased by 7.2%.
- The increase was due to an 8.9% increase in import for intermediate goods, mainly fertilizer and accessories for capital goods, as well as diesel.
- Consumption goods were also a major contributor to the rise in imports, with its 12% increase (9.3% previous).
Putting it all together
New Zealand’s economy seems to be doing well enough, and businesses remain rather optimistic. New Zealand’s annual GDP reading has been slowing down, however, and New Zealand has a rather severe inflation problem, so the RBNZ seems to have been justified in cutting rates.
Speaking of inflation, the recent slump in oil prices is bad enough, but the Kiwi’s previous bouts of strength, which made imports relatively cheap, is also being blamed for inflicting broad deflationary pressure on New Zealand’s economy. And the trade data for January shows that consumer goods contributed heavily to imports, so perhaps deflationary pressure from cheaper imports ain’t going away soon. Also, the labor force participation rate is decling and wage growth is very weak, which will also adversely affect inflation down the road, so RBNZ Graeme Wheeler’s jawboning of the Kiwi by saying that “a decline would be appropriate” and threats of further rate cuts seem to be well-founded.