Many of the economic data releases in recent times have come in stronger than expected. This morning for instance we learned that in July the value of export receipts was up from a year earlier by a surprisingly strong 24%. The unemployment rate has fallen from 3.9% to 3.6% with jobs growth in the June quarter of 21,000 people. Net migration inflows have improved from just under 6000 in the year two October last year to a slightly above average 12,000 in the year to July. Investment and employment intentions in business surveys have improved, and some housing market indicators have become less bad.
The economy is definitely having a soft landing rather than a hard one and is well away from anything resembling a recession. This is good news in terms of people continuing to keep their jobs and get reasonable wage increases but we still think company profitability is going to remain constrained by strong cost increases and slightly reduced ability to increase selling prices as a result of below average growth in the economy.
As a result of the stronger than expected data we have seen the markets become less optimistic that the Reserve Bank will be easing monetary policy any time soon and this helps explain why the Kiwi dollar has recently risen. It has remained relatively strong over the past week with only a slight bit of easing today after the July merchandise trade deficit turned out to be better than expected. Looking ahead the next major thing the markets will be focusing on is the Reserve Bank's review of the official cash rate and release of its Monetary Policy Statement on September 14. We expect them to continue to express concern about inflationary pressures and warn that there will be no easing of the cash rate for a considerable period of time. We don't expect that there will be an increase in the cash rate again this cycle even allowing for the data we have mentioned above. This is because petrol prices have fallen recently and the exchange rate is running 5% above the level the Reserve Bank assumed for the second half of this year.
24 August 2006
BNZ WEEKLY OVERVIEW
In addition, while we have been quite critical of the Reserve Bank over the past 2 1/2 years mainly because of their tightening actions over 2004 not being aggressive enough, it has to be recognised that we are not alone in having inflation at 4%. The inflation rate in Australia is 4% and it is 4.1% in the United States. We do not see signs of panic from either the Federal Reserve in the United States or the Reserve Bank of Australia and panic here is not warranted either. It is more a matter of one not getting too optimistic about the extent to which monetary policy will be eased in New Zealand when an easing cycle does eventually start sometime at or after the middle of last year.
THE WEEK’S ECONOMIC DEVELOPMENTS
Farm Sales Declining
The REINZ reported that in July there were 158 farms sold around New Zealand. This was a decline from a year earlier of 12.7% and in the three months to July sale numbers were down from a year ago by 14.5%.
There is a downward trend in place but the rate of decline is slightly less than a few months ago when sales in the three months to April for instance were down 24.8% from a year earlier. While a couple of years ago one might have attributed some weakness in farm turnover to a shortage of listings, at the moment anecdotal feedback suggests farmers are exercising caution in the face of diminished cash flows and after many years of expansion are going through a period of consolidation. This will impact on growth in the regions to a slight extent and the likes of engineering firms who in recent years have enjoyed a boom with substantial growth in on-farm expenditure. The farm sale price data should not be relied upon but for what it is worth the average farm sale price in the three months to July was ahead from a year earlier by 9.2%.
Net Migration Inflows Continue to Improve
There was a net addition to New Zealand’s population from long-term and permanent migration flows in July of 1,340 people. This was up from a net loss in July 2005 of 120 people and means that over the year to July the net migration gain was 12,150 compared with 2,690 in June and the low point of 5,987 in October. Net migration flows have improved in recent months with the number of people leaving New Zealand in the three months to July down by 6.9% from a year earlier while the number of people arriving on our shores was up by 4.4%. So as is common with these numbers both sides of the ledger are moving and affecting the net result in the same way.
BNZ WEEKLY OVERVIEW
These numbers are much stronger than we thought they would be and we are still concerned that over the next couple of years with the New Zealand economy growing at a slower rate than Australia's in particular we will see net gains edge lower. But it must be said that as we have often noted over the past years forecasting net migration flows is extremely difficult so one usually is best advised to take things as they come. The fact that these numbers are improving and the net gain in the past year is above the average for the past 10 years of just under 11,000 suggests there is continuing support for the housing market but also for the rate of growth in the economy as net migration flows have proved to be a strong influence on the country's growth rate. While the improved migration flows will add a few extra people into the labour force clearly the numbers are going to be minuscule when one considers that job numbers grew by 21,000 in the three months to June alone and only a portion of the net gain of just over 12,000 people in the past year will enter the workforce. Overall the numbers will be bad news for the Reserve Bank as they imply extra economic growth and extra inflationary pressure and this will tend to keep interest rates up for longer and provide additional support for the exchange rate.
The number of people visiting New Zealand in July was down from a year earlier by 0.9% although the annual rates of comparison at the moment are distorted by the boost to tourism a year ago from the Lions Tour. Perhaps some better insight into what is happening at the moment is gained by taking a look at seasonally adjusted changes in tourist flows. Doing this we see that in the three months to July the number of people visiting New Zealand was down by 0.6% from the three months to April. Perhaps the most accurate comment one can make about tourism flows at the moment is that they are flat to slightly down.
Although it usually takes about 18 months for a fall in the exchange rate to produce a decent lift in the number of people coming to New Zealand we see a good chance that following a good winter for tourism with lots of Australians coming across to enjoy the low exchange rate and snow, we will see a reasonable upturn in visitor numbers over summer because overseas economic growth rates are running above average.
Foreign Growth Forecasts Ease Marginally
On average New Zealand’s top 14 trading partners are forecast to grow by 3.7% this year and 3.3% over 2007. Each of these forecasts contained in the monthly Consensus Economics survey of economists around the world is down 0.1% from the July survey. There were no major reductions in growth forecasts for particular economies but instead small paring back of expectations for the US and Australia. The US economy is forecast to grow 3.4% this year and 2.7% over 2007, Australia 3.2% then a better 3.3%, Japan 2.9% then 2.2%, the European Union 2.5% then 2.1%, UK 2.5% then 2.4%, and China 10.3% then 9%.