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Monthly Economic Indicators – April 2005

Monthly Economic Indicators – April 2005

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Text finalised Monday 6 May 2005.


Executive Summary

Data released during April added to the expectation of a rebound in GDP in the March quarter, following a slowing of growth over the second half of 2004.

- Import data for March were consistent with steady growth in both consumption and investment spending.
- Retail spending increased markedly in February, and despite some weakness in credit card billings in March it appears likely household spending held up well over the March quarter as a whole.
- Building activity showed signs of continuing the rebound observed since the end of 2004.
- Wage payments grew significantly over the March quarter.

The Reserve Bank recently expressed some concern that the pace of growth at a time of limited spare production capacity would limit its “inflation headroom”.

- March quarter price inflation was low. There were some signs of persistent price pressures easing – construction cost inflation declined, for example – but the main reason for the low March figure was greater-than-usual seasonal reduction of international airfares.
- Inflation expectations and pricing intentions both suggest upward price pressures.

Despite the renewed pace of business activity growth in March, a slowing of GDP growth by the end of the year remains the most likely scenario.

- Measures of business confidence declined sharply in April.
- The delayed effects of higher interest and exchange rates, as well as reduced migration, are expected to translate into slower growth over time.

A full economic forecast will be published as part of the Budget Economic and Fiscal Update on 19 May.

The provisional publication date for the next Monthly Economic Indicators is 7 June. Between now and then, Statistics NZ will release labour force and retail spending data which will add further to information about the state of the household sector. Business inflation measures in the form of the Producers and Capital Price Indexes will also be published, and will provide a test of the price expectations data observed over the last month.



March quarter GDP rebound likely, but slowing still probable before 2006.
GDP growth at the end of 2004 was slower than the average forecasts of economists. The slower growth was at odds with confidence indicators showing a high level of optimism. It also did not fit with labour market data indicating businesses had taken on more workers. And there were some unusual data movements affecting GDP. Because of the inconsistencies and unusual influences, GDP was expected to rebound in the March quarter.

The indicators of March quarter economic activity available to date support this expectation of a rebound. The magnitude of the rebound is still unclear because only limited data is available at this stage. However, it appears likely that growth was faster than the 0.6% forecast in the December Economic and Fiscal Update.

What is known is that there was a high value of imports in March, including a significant contribution from investment goods, suggesting domestic demand continues to expand steadily. Building consent values continue to grow strongly, both for commercial buildings and housing. Retail spending growth was strong in February and although credit card billings point to a moderation of growth in the March month, there seems clear evidence that household spending has grown quite rapidly over the quarter as a whole.

Wage income rose considerably over the March quarter. Most of this was due to an increase in the average hourly wage rather than an increase in hours paid (although official employment data will be contained in the Household Labour Force Survey data, to be released on 12 May).

Because of apparently buoyant demand and income at a time when measured spare capacity in the economy is limited, the Reserve Bank has been concerned about the potential for inflation pressures to increase.

The quarterly inflation rate was low over the March quarter. The low result partly reflected a lessening of some persistent pressures – construction cost inflation, for example, has eased somewhat. However, the main reason for the lower March result was a large airfare reduction.

Meanwhile, business surveys continue to indicate that firms are more likely to increase prices, and to expect a higher rate of generalised inflation. In short, a wider set of indicators of March quarter inflation are consistent with some inflation pressure over that period.

There is a possibility that any March quarter “bounce” will persist, but at this point in time a gradual slowing of growth over the remainder of 2005 is still viewed as the most likely scenario.

The National Bank’s April business confidence survey pointed to a significant reduction in the level of optimism in the business community. A single month of data is not conclusive, but there are also other reasons to expect growth to slow – the delayed effects of higher interest and exchange rates for example, as well as slower population growth.

The Treasury will publish a full economic forecast as part of the 2005 Budget on 19 May.

The provisional publication data for the next Monthly Economic Indicators is 7 June. Between now and then, the Government’s 2005 Budget will be published. The results of the March quarter Household Labour Force and Retail Trade surveys will become available, enabling a fuller analysis of the state of the household sector. And Statistics New Zealand will provide new industrial price information in the form of the Capital and Producer Price Indexes.

In April, the Reserve Bank did not raise the Official Cash Rate, but reiterated inflation concerns.

The RBNZ left the Official Cash Rate unchanged at 6.75%, but continued to stress the risk that inflation would challenge the top of the target band. While growth slowed in the second half of 2004, the RBNZ put this partly down to supply constraints, and judged that aggregate demand had not weakened. Similarly, a low quarterly inflation rate over the March quarter was judged by the RBNZ to be “heavily influenced by temporary factors, such as the large seasonal fall in international airfares”. The RBNZ expected a “rebound in GDP growth” over the first half of 2005 and persistent inflation pressures.

As the bank noted, the low inflation rate for March does not tell the whole story.

Quarterly CPI inflation for the March quarter was 0.4%, considerably slower than in the previous nine months. A 0.5% decline in the index for tradable goods partly counterbalanced a 1.1% increase in the index for other goods and services.

The 0.4% quarterly result was depressed by a significant decline (15.8%) in international airfares. Excluding the airfare decline would have lifted the overall quarterly inflation rate to approximately 0.8%. The weighted median measure of inflation, which is designed to give less weight to volatile components, showed a 0.5% increase.

Significant positive contributions to inflation over the March quarter came from the housing group (largely through house construction and real estate/conveyancing fees), used car prices and health care costs.

The only negative contribution other than airfares came from clothing and footwear. However, there was also a slowing in the rate of new house construction cost inflation. House construction costs continue to rise quite rapidly (1.5% over the quarter), but less rapidly than in previous quarters.

Merchandise trade data for March suggested robust domestic demand…

Merchandise trade data for the month of March showed a trade deficit of $581 million, an increase from the deficit of $462 million in February (seasonally adjusted). The monthly deficit raised the annual goods trade deficit to $4,365 million.

A high value of imports – maintaining the level reached in February – and a lower value of exports both contributed to the deterioration of the trade position. Export values may have been influenced by declining New-Zealand-dollar commodity prices at that time (they began to rise again in April).

A significant increase in spending on capital goods over the March quarter provides some evidence that business investment spending growth has resumed following an unexpected lull in the December quarter.

The sustained high value of imports over the March quarter is also consistent with the retail spending data for January and February.

…and retail sales provide further evidence household consumption spending has been rising.

There was a 1.7% increase in retail turnover between January and February (seasonally adjusted). Excluding volatile vehicle and petrol sales, the increase was 1.6%. This follows a similarly strong figure for January.

The burst of spending corresponded to an increase in credit card billings – total billings for cards used in New Zealand rose by 3.6% and 2.1% in January and February respectively.

A small decline in credit card billings in March may indicate that there was a correction in retail spending in that month (official data will be released on 13 May). However, even with a slowing in March, it is now likely that the household consumption component of March quarter GDP will show substantial growth.

The housing market remains active. The latest sales figure showed a small decline, but signs of strength remain…

There were 8980 houses sold by members of the Real Estate Institute over March, a decline of 6.6% compared to February, and a decline of 8.5% compared to March 2004 (figures are seasonally adjusted).

However, the tendency since October last year has been towards a gradual rebound of the monthly number of sales, following a year-long slide. It is not yet clear why the level of sales has stayed above the late-2004 levels.

One explanation for the increase in sales activity is the “mortgage wars” at the end of 2004, with lower bank lending margins encouraging households to bring forward purchases of houses (see Figure 6). If this explanation is the right one the rebound should be short-lived.

But another possibility is that demand is fundamentally strong (due to rising household incomes, for example), and that the latest rebound is simply a reflection of that demand. If so, the rebound may be longer-lived.

…and house prices are still going up…

House prices have been supported by the rise in sales. The Real Estate Institute’s median house price measure, which is not adjusted for the changing composition of sales, shows the annual rate of inflation has risen from 10.6% in November last year to about 16% in each of January, February and March. Quotable Value’s new monthly house price indicator shows an annual inflation rate of 12.1% for March.

…along with the number of building projects.

Building consent values rose considerably between February and March. The number of consents issued for new houses and apartments rose from 2,508 to 2,673 (seasonally adjusted), owing to a large number of apartments approved during the month. The number of non-apartment consents actually declined by 3.9% on a seasonally adjusted basis.

Statistics NZ has suggested that the large total number of consents in March might have been influenced by a rush to beat higher fees for consents which the department says came into effect on 31 March. If this is the case, then a pull-back might be expected to have occurred in April.

Non-dwelling consents were issued for projects worth $400 million in March, compared to a monthly average for the last year of $326 million (seasonally adjusted by Treasury). Over the past three months, and after removing seasonal effects, there have been particularly big increases in the contribution to the total from retail trade buildings, hospitals and education buildings. In contrast, the contributions from office buildings, industrial buildings and hostels appear to be declining following cyclical peaks (see Figure 9).

Increased wage income provides one explanation for the strength of some data over the March quarter.

There was a 2.0% increase in the total wage payments over the March quarter, according to the results of the Quarterly Employment Survey (seasonally adjusted).

The increase was largely the result of a 1.5% average hourly wage increase (unadjusted).

At this stage, the data is suggestive of steady income growth but slowing job growth in the March quarter, following a record employment increase at the end of 2004. Note, however, that this assessment is made without the benefit of Household Labour Force data, which is not due for publication until 12 May.

The Quarterly Employment Survey provides the best indication of labour income growth. The Labour Cost Index is the preferred measure of wage inflation, because it controls for changes in the composition of the work force.

The Labour Cost Index increased by 0.6% over the March quarter and 2.5% over the year to March.

Growth has been robust, but looking forward, business confidence data suggests a slowing …

The National Bank’s April Business Outlook portrayed a significant weakening of business confidence.

A net 48% of businesses surveyed in April expected general economic prospects to worsen, compared to a net 20% in March.

Firms’ expectations of their own activity, the preferred indicator for actual activity growth, also weakened considerably. The net percentage of businesses expecting their activity to increase declined from 30% in March to 15% in April.

Investment, employment, export and profit expectations also declined.

The only expectations to rise were those for the unemployment rate, interest rates, pricing intentions and inflation. The expected inflation rate has now reached 3.11%, which is above the top of the Reserve Bank’s target band for the first time since 2001.

One interpretation of the data is that firms are beginning to experience increased cost pressures. They hope to offset some of those cost pressures by raising sale prices, but they also expect to absorb some of the increased costs through increased efficiency or reduced profits.

…and reduced population growth is likely to reinforce that.

The net population gain from long-term and permanent migration was 300 people in March, considerably lower than the monthly average of 840 over the last year.

The annual net migration gain for the year to March is just above 10,000 people.

The decrease in the net gain over recent months has been due to both fewer arrivals and more departures. Both series are showing signs of stabilising, but more data will be required to confirm a levelling out.

In commodity markets, oil prices have declined.

Brent crude oil prices briefly topped US$55 per barrel early in April but declined to be approximately US$50 by 2 May.

One possible explanation for the lower price is that United States oil reserves have risen (evidence is only anecdotal at this stage); another is that the initial estimate of March quarter United States GDP growth, which was lower than expected, has caused some of the decline. Slower GDP growth, were it to persist, would decrease demand for oil.

In financial markets, interest rates declined marginally over April, but exchange rates increased.

90-day bill rates, the benchmark for floating mortgage interest rates, have eased slightly in spite of the Reserve Bank’s recent statement that it remained concerned about inflation pressures.

A Reuters poll of 14 analysts taken on 28 April, following the Reserve Bank’s announcement, showed that a clear majority expect the next official interest rate change to be a cut, in the first quarter of 2006. This would be consistent with a view that, although inflation expectations have edged up, slowing growth over the remainder of 2005 will give the Reserve Bank more room to move.

The exchange rate has demonstrated renewed strength over April, with the New Zealand dollar’s value increasing compared to all the currencies in the Trade Weighted Index, and increasing particularly strongly against the Euro.
Abroad, forecasters continue to expect a measured global economic recovery.
Provisional March quarter GDP results have recently been released for the United States (growth of 0.8% over the quarter) and China (growth of 9.5% in the year to March). The United States result was lower than many analysts were expecting.

Economic forecasters continue to expect quarterly economic growth rates for New Zealand’s trading partners to begin to recover by the end of 2005, eventually leading to an increase in annual growth rates.

However, the Consensus Forecasts predictions of 3.2% growth in 2005 and 3.4% in 2006 are marginally lower than predictions made last year and at the beginning of this year.


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