Economy Watch

Dairy Dip

Doug Steel -
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- Dairy prices ease at auction
- Skimmilk powder prices slump further
- As EU considers what to do with its stockpile
- We tab down our 2017/18 milk price forecast to $6.30


The GDT Price Index fell 1% at auction overnight, to be down 5.1% since a recent peak back in June. The ongoing drift lower in international prices as milk supply increases and as the EU considers how to unwind its massive stockpile of skimmilk powder sees us lower our forecast for Fonterra’s milk price to $6.30 for the 2017/18 season.

Rate Increase Closer

Stephen Toplis -
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- CPI inflation surprises
- Will put upward pressure on wages and expectations
- But no sign of a target breach in the foreseeable future
- And NZ institutional arrangements currently confused
- So policy uncertainty abounds

New Zealand consumer price inflation has soared well above RBNZ expectations. At 0.5% for the third quarter, 1.9% for the year, the rate of price increase was 0.3% above that projected at the time of the August Monetary Policy Statement. Some of this can be put down to factors that will be quickly played down such as stronger-than-expected petrol and food prices. But other aspects of the data, such as the above-forecast increase in non-tradables inflation (0.7% for the quarter, 2.6% for the year) should be greeted with greater consternation.

Wait and see

Doug Steel -
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PSI Solid

The Performance of Services Index (PSI) has remained stoutly expansive over recent months. Sure, it cooled marginally to 56.0 in September from 57.2 in August, but it remains well above its long term average of 54.4. In contrast to measures of business confidence that have noticeably dipped around the election, the PSI, as a survey of changes in actual activity, has held up well. The small monthly decline was well within usual variation. In combination with its strong manufacturing PMI cousin, which was released last week, it all suggests the economy maintained a decent amount of momentum in the third quarter.

Election Uncertainties

That is not to say that the election was not on the minds of many PSI respondents. Indeed, just like in the PMI, of the respondents citing the major factor on their business as being a negative one, about a quarter of these noted the election. This coincided with a dip in the proportion of positive comments in September to 56.6% from 66.9% in August. But encouragingly in being well above 50%, it shows positive comments still firmly outnumber negative ones. Also offering encouragement was the firm September PSI employment reading. At 54.1 it was up from 52.2 in August and smack on the 2017 year-to-date average, which is running stronger than last year’s average of 53.4. This bodes well for Q3 employment growth when the official figures are released next month.

Sales Expansion Slowing?

The PSI activity/sales indicator was one area that did show a material slowdown, although at 56.6 in September it hardly indicates slow growth. Still, it was down from 62.7 in August. This continues a volatile period for sales over the past six months, so we wouldn’t jump to conclusions on one month’s reading. But it is notable that it comes alongside the PSI for retail trade falling to an unadjusted 46.8, the lowest level for a September since 2011. Slower services sales indicators might just reflect election caution or perhaps the fact that school holidays didn’t start until October this year. But with much lower house sales and softer signals from the likes of electronic card transactions over recent months this bears watching. On the positive side, PSI new orders remain strong posting a, relatively rare, fifth consecutive reading above 60. New orders were also strong in last week’s PMI.

Service Sector GDP

Recent official figures revealed service sector GDP growth averaged an annual pace of 3.2% in the first half of 2017, above its 5-year average of 2.8%. Despite some ups and downs in the details, the ongoing strength in the overall PSI indicates that service sector GDP growth has maintained its strength into the second half of 2017.

Solid September

Craig Ebert -
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The PMI
September’s Performance of Manufacturing Index (PMI) proved to be about as strong as it was in August. Index wise, it was 57.5 versus 57.9, seasonally adjusted. Aside from remaining comfortably above its long-term average (of 53.4), this was a particularly encouraging result considering the proximity of the 23 September general election. Note: while respondents submitted their views in early October, it was in regards to how things were going through the course of September. Of the (minority) of respondents citing the major factor on their business as being a negative one, around a quarter of these referenced the election. So it wasn’t a non-issue, as such.

Activity/Sales
Even so, the manufacturing industry would seem to be forging ahead quite nicely. This was definitely the message in the PMI’s production index for September, with its seasonally adjusted result of 59.6. The tone from its new orders index remained relatively upbeat too, with 60.4. These elements corroborated areas of strength in the 3 October NZIER Quarterly Survey of Business Opinion (QSBO). In this, manufacturers indicated solid expansion in production and orders, especially when looking ahead. And with respect to output, expectations of domestic sales had overtaken those for exports. Note: QSBO responses occurred prior to September’s election.

Employment
Not every aspect of September’s PMI was expansive, however. In fact, its employment index fizzled out to 50.7, having been running nicely about the 56.0 mark in July and August. It’s tempting to see this as manufacturers pushing pause on their hiring, as they await news on the form of the next NZ government. However, we note that the PMI jobs index has been bouncing around viciously for the last 6 months or more, but with a reasonably positive average. And as a timely cross-check we note the QSBO view on manufacturing employment remained relatively upbeat. This was as true for reports on hiring for the last 3 months as it was regards the coming 3 months.

Capacity
The other reason we can imagine manufacturers are still out there hunting for staff is the fact that they are reporting increased difficulty in finding them. This is particularly the case for skilled staff (as it is for the economy at large). Yet in relation to physical capital, the latest QSBO suggested manufacturers were running less close to the wind. Its capacity utilisation measure, CUBO, for manufacturers eased to 90.1%, from 91.7% in Q2 and 92.9% in Q1. Rather than signifying any pull-back in demand this could well reflect the consequence of the decent pick-up we’ve witnessed in business investment in plant, machinery and equipment over recent quarters.

QSBO Demonstrates Political Correctness

Craig Ebert -
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- QSBO hardly rattled by the (prospective) election
- With steadfast commitment to employ and invest
- Fissures in building and services look transitory
- Inflation indicators firm but not lifting
- Responses to next government of most interest

The news in this morning’s NZIER Quarterly Survey of Business Opinion (QSBO) was that it held its shape rather well, when it might have gone a bit wobbly, if only because of its proximity to the general election. Sure, its net confidence subsided, but not all that much. More to the point, the QSBO’s indicators on activity, employment, investment, profitability, capacity constraint, and pricing/costs, remained firm.

Frank Spencer

Craig Ebert -
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- RBNZ OCR and language unchanged, as expected
- Albeit as Spencer softens dig at “high” NZD
- RBNZ view of falling inflation up for debate now
- Post-election bidding for even greater fiscal stimulus
- But how might the business sector be impacted?

Acting RBNZ Governor, Grant Spencer, was reasonably frank at his first OCR review this morning. Nothing material had changed since the August Monetary Policy Statement (MPS). And so it was best to carry on with much the same messages, along with an unchanged cash rate of 1.75%. This was widely anticipated, certainly by local commentators.

Outlook for Borrowers: Post September OCR Review

Jason Wong -
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- With expectations of unchanged monetary policy for an extended period, wholesale floating rates and short-dated wholesale fixed rates should remain flat through the rest of the year and into early next year. This suggests little need for businesses to rush in to protect against higher short term rates.
- Borrowers have had plenty of opportunity to hedge longer-term interest rate risk at attractive levels over the last month or so. Anyone who “missed the boat” should look to reset their expectations. We think the low in rates this year has now passed. With the balance of risk to the upside for rates through to the end of next year, we still consider a hedge on dips strategy entirely appropriate.

Is It Nothing But Election Nerves?

Craig Ebert -
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- Business survey finally showing election nerves?
- As its GDP growth signal slows to 3% from 4%
- Inflation pointers congealing near 2%
- August trade miss no big deal for us
- Q3 GDP and current account still looking up

It looks like someone finally told the ANZ business survey that a tight election was afoot. Its net confidence tanked to zero in September, from +18 in August. But while this is a big fall, bear in mind the level is still majorly suppressed by seasonality this time of year. When we correct for this we get a net confidence reading of +14, which, while lower than August’s +29, is higher than it was back in April +7. The long-term average is +11. So September’s result is no disaster, or even a stalling, more a bit of temperance from a seemingly bullet-proof attitude over prior months.

A Centrist GDP Outcome

Craig Ebert -
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- Q2 NZ GDP expands 0.8% (2.5% y/y)
- No real surprise (for RBNZ included)
- But nominal GDP growth "just" 5.4% y/y
- No great fodder for election debate
- As growth indicators remain robust in Q3
- But immigration falls again in August

There might yet be some important implications for New Zealand’s economic outlook from Saturday’s election. But with that race still looking very tight we cannot presume to amend our views on anything at this point. Today’s Q2 GDP report certainly can’t be considered fodder for one side of the election debate or the other, when it comes to arguing the underlying health of the economy.

NZ Less Vulnerable

Doug Steel -
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- Current account deficit smaller than expected
- Part of a trend reduction in external vulnerabilities
- Indicating NZD not overvalued
- We expect current account deficit to shrink further
- Nothing here to change our +0.8% view for tomorrow’s Q2 GDP.

New Zealand’s external accounts are looking more and more benign by the day. Sure, the annual current account balance remains in deficit, as it has since 1973, but at the equivalent of 2.8% of GDP in the year to June 2017 it is smaller than its historical average. This result was a smaller deficit than the market consensus of 3.1% of GDP and even a touch smaller than our 2.9% forecast (helped by some revisions).

Upwards and onwards

BNZ - BusinessNZ -
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New Zealand’s services sector experienced a lift in expansion during August,
according to the BNZ - BusinessNZ Performance of Services Index (PSI).

Producing the goods

BNZ - BusinessNZ -
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New Zealand’s manufacturing sector experienced increased expansion levels
during August, according to the BNZ - BusinessNZ Performance of Manufacturing
Index (PMI).

Good-Looking Goods Trade

Craig Ebert -
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- Q2 merchandise terms of trade lift 1.5% (10% y/y)
- Likely fattening nominal GDP growth to 8% y/y
- Export and import volumes strongly expansive
- Putting upside pressure on our +0.9% pick for Q2 GDP

Compared to a year ago New Zealand’s merchandise terms of trade have lifted 10%. This is fundamental to the 8% annual growth we expect for nominal expenditure GDP growth in Q2, compared to “just” 2.6% on real (production-based) GDP. Consideration of TOT-fuelled nominal GDP growth is also important for thinking, more generally, about (per capita) income, the ability to save (and strengthen balance sheets), equity valuations and tax revenue to boot.

Growth Stronger, Inflation Weaker

Stephen Toplis -
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- NZ activity indicators portend strong growth
- Pushing profits higher
- Encouraging employment and investment
- Chewing into capacity, but not creating inflation
- And aiding the NZD lower

We’ve said it time and time before, and we’re forced to say it yet again. We are in a rather unusual environment where growth continues to escalate, capacity is being fully utilised, businesses are investing and hiring, and yet inflation remains an abstract concept. This, again, was the message from today’s ANZ Survey of Business Opinion.

New Zealand At A Glance

Stephen Toplis -
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New Zealand’s growth cycle looks set to be extended for a further three years (or more). Low interest rates, fiscal stimulus and population growth are the key to this. Growth is, however, being adversely impacted by capacity constraints, particularly in the labour market. Normally, such an environment would portend significant inflationary problems but inflation (at least that measured by the Consumers Price Index) is absent. Accordingly, the Reserve Bank is on hold for some time. Meanwhile, the recently robust NZD looks set for a modest correction against the USD while strengthening against the AUD.

BNZ Economy Watch - No More Money

Stephen Toplis -
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Those looking for Treasury to announce that there was money to burn when it presented today’s Pre Election Fiscal Update will be very disappointed. There were many who had assumed that the recent windfall gains that were flowing into tax revenues would provide the base for a much stronger future revenue track.

Outlook for Borrowers: Post August MPS

Jason Wong -
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In the 10 August Monetary Policy Statement the RBNZ reiterated the policy guidance it has maintained all year, that “monetary policy will remain accommodative for a considerable period”.

RBNZ Aggressively On Hold

Stephen Toplis -
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The RBNZ is stuck in neutral. Any increase in interest rates is seen as simply not plausible given that inflation continues to sit below the RBNZ’s target band mid-point. On the other hand, low (and, indeed, falling) inflation is not seen as sufficient to cut rates as (a) it’s seen as transitory and (b) the economy simply does not need any more stimulus at this juncture.

Working Through The Noise

Doug Steel -
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There seems to remain a lot of noise in the official employment data making quarterly movements difficult to trust as an indicator of trend. We say this as today’s Household Labour Force Survey (HLFS) shows employment eased 0.2% in the second quarter of the year and the participation rate lurched lower from its record high. This saw employment come in well below market (and our) expectations, but the unemployment rate edge lower and match what was anticipated at 4.8%.

NZ Keeps On Keeping On

Stephen Toplis -
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It has now been over six years since New Zealand last experienced a technical recession, and that was largely due to the fall-out from the Darfield earthquake. Before that, you have to go back to the GFC period of 2008/09. This represents a remarkably long period of expansion by historical standards and, importantly, one which looks set to be sustained for some time to come.