Retail’s down, DOWN…and UP
It was interesting to note the “mere” 0.7% decline in March quarter retail sales. More significant will be the plunge in the June quarter. More informative, however, will be the upcoming monthly, and particularly weekly, spending indicators. These will give a crucial steer on the degree of recovery as New Zealand continues to lower its COVID-19 lockdown levels.
Milk Price Possibilities
Global dairy prices have declined so far during 2020. This has followed from a material hit to demand as a result of COVID-19 and associated people movement restrictions, along with rising milk production in the EU and US. The way ahead is highly uncertain so we look at some scenarios and what these might mean for the 2020/21 milk price.
Out of service
Activity in New Zealand’s services sector ground to a halt during April, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for April was 25.9, which was 11.4 points down from March* (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). The April result was also the lowest level of activity since the survey began in 2007.
BusinessNZ chief executive Kirk Hope said that like its sister survey the PMI, the almost total lockdown of the country at level 4 meant most businesses were either significantly affected, or simply couldn’t trade at all during April.
“The proportion of negative comments for April stood at 91%, with COVID-19 the key word used throughout. Given the move to level 2 last week for most businesses, a return to higher levels of activity is expected looking forward. However, the social distancing restrictions that remain in place will still provide a brake for many”.
BNZ Senior Economist Craig Ebert said that “a sizable rate of contraction is what you get when businesses are forbidden from operating, especially those with a customer-facing focus. Covid-19 has seen to that, with policy responses reinforcing the sudden stop”.
*Due to not running the March 2020 PSI because of COVID-19, the March figures have been obtained by taking an average of both the actual combined February 2020 and April 2020 values. The results have then been seasonally adjusted.
New Zealand’s manufacturing sector fell to its lowest level of activity since the survey began, according to the latest BNZ - BusinessNZ Performance of
Manufacturing Index (PMI).
The seasonally adjusted PMI for April was 26.1 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down 11.9 points from March*. The previous low point had been 36.1 in November 2008, which was due to the Global Financial Crisis.
BusinessNZ’s executive director for manufacturing Catherine Beard said that given part of March and almost all of April was in complete lockdown for the country, a significant fall in manufacturing activity was fully expected. The key sub-indices of Production (19.8) and New Orders (17.8) were particularly hit hard.
“Looking at comments from respondents, only two words stand out, namely COVID-19 and lockdown, with
89.7% of respondents outlining negative comments”.
“With level 3 in place since 28 April, along with the country entering level 2 on 14 May, a greater sense of normality will hopefully be present for most manufacturers during the second half of May. This should see a return to relatively stronger levels of activity. However, to what extent the sector climbs out of rock
bottom will largely depend on the ability to get new orders up and running, along with revised factory floor processes for production”.
BNZ Senior Economist, Doug Steel said that “recent negative PMI readings from around the world illustrate the widespread economic pain being felt. New Zealand’s April reading is lower than other countries we often compare ourselves to, which tallies with suggestions that NZ restrictions have been tighter than
*Due to not running the March 2020 PMI because of COVID-19, the March figures have been obtained by taking an average of both the actual combined February 2020 and April 2020 values. The results have then been seasonally adjusted.
Like the bulk of New Zealand’s economic indicators for April, job advertising fell dramatically. This was, of course, the month most impacted by the nation’s maximum-level economic and social lockdown. This level 4 lasted from 26 March to 27 April, after which level 3 came back into play. The 65.3% drop in job advertising in April, followed a 27.0% fall in March, making for an annual rate of decline of 75.4%.
NZ Budget: Still Rescuing Rather Than Recovering
Today, the Government announced the $50 billion of new spending we were expecting. This is in addition to the $12.1 billion delivered on March 17. Cumulatively, this amounts to a staggering 20% of GDP. Not surprisingly, it is reflected in skyrocketing fiscal deficits and soaring government debt levels, but that simply had to be the case under the circumstances. As staggering as these numbers are, New Zealand’s fiscal outlook still looks very favourable by international comparison. And rating agency Standard & Poor’s immediately gave the Budget the tick of approval. But financial markets didn’t seem to like the look of the massive funding programme that lies ahead, with yields across the curve pushing higher.
QE Remains RBNZ’s Go-To Tool
As expected, the centrepiece of today’s Monetary Policy Statement was the announcement of a huge expansion in the RBNZ’s quantitative easing programme (QE).
Indicative of the relative importance of QE in the Bank’s thinking is the fact that five of the six paragraphs in the key policy statement of the MPS referred to it. Only in the last paragraph, almost as an afterthought, did the RBNZ deign to mention the official cash rate.
New Zealand Construction Outlook
As we look to the future, one of the industry groups many people believe will provide an answer to all our problems is construction. Hopes are that both residential and non-residential activity can grow strongly. To us, though, the building sector provides a case study of just how expectations and reality might be quite different, in particular how the rising unemployment rate will circle back to prevent the very recovery in activity that is needed to create jobs.
BNZ Data Reveal Economic Pain
As a bank the BNZ has a mine of information at its fingertips as to how the New Zealand economy is faring. We get this data in real time so are very quickly aware of how things are changing. These data are particularly useful in getting to grips with the current environment with conditions changing dramatically and often. We have decided to share some of our findings with you and hope that it in some way assists in seeing your way through the chaos that abounds.
A Solid Pre-Covid Labour Market
Sure, today’s Q1 labour market data substantively pre-date impacts from COVID-19. Nonetheless, they also confirm a starting point that was no worse than we estimated, and even more robust than we imagined in some respects. We have also taken good bearings from today’s RBNZ note on lockdown-level impacts on the economy. This also gels with our economic presumptions.
The Fiscal Impacts of COVID-19
Even assuming a best-case prognosis on COVID-19 from here, it will, along with the responses to it, leave long and deep scars. This note dwells on the fiscal aspects of this. To cut to the “bottom line”, we can easily see gross government debt rising to double the amount forecast in December’s Half-Year Economic and Fiscal Update (HYEFU). So more in the region of $200b by 2023/24 (60% of GDP), rather than $100b.
From Rescue To Recovery – A New Zealand Chart Pack
As they say, “a picture is worth a thousand words”. With that in mind, please find attached our latest chart pack within which we have tried to illustrate, in a simple fashion, the major issues that confront the New Zealand economy, as we continue the fight against Covid-19. We hope you find this of some use.
Today’s ANZ business survey largely confirmed what we already knew from the preliminary data – that the business environment was atrocious in April. Not surprising given that for many there wasn’t even a market place, or if there was, it was severely impeded by lockdown restrictions at alert level four. The data also confirmed, however, a glimmer of hope appearing toward the end of the month as a move to alert level three became possible.
In light of the major disruption being caused by COVID-19, it wasn’t surprising to see March job advertising fall as much as it did – 29.4% to be precise. This dwarfed February’s slippage of 7.7%, and reflected in an annual fall also in the region of 30%.
On Target Inflation Soon to be History
There are major macro forces along with some micro ones to consider regards the inflation outlook. To cut to the chase, the overarching outlook this year is downward. We expect next week’s Q1 annual CPI inflation to print a touch above 2%. Thereafter, we anticipate annual CPI inflation falling to and through the bottom of the RBNZ’s target band. The risk is that inflation falls further than we currently anticipate.
COVID-19 and associated containment policies is severely denting economies around the world. This is putting downward pressure on global food prices. But, to date, not as much as some may have thought. Food demand remains, albeit with a different profile and through different channels. While risks abound and heavily depending on the evolution of COVID-19, we expect world prices for NZ primary products to generally fall further in 2020, but remain at reasonable levels, before improvement in 2021. Local primary exporter returns are being materially supported by a lower NZD.
As Awful As Feared
There were no surprises in today’s ANZ Survey data, but we are none the happier as a consequence. As highlighted by the more recent responses in NZIER’s Quarterly Survey of Business Opinion, business confidence, in everything, has collapsed. About the only good news is that the outcomes probably can’t get much worse.
QSBO’s Sense of Downhill…Before the Avalanche
The main thing to note about today’s NZIER Quarterly Survey of Business Opinion (QSBO) was that it predated New Zealand’s move into full lock-down mode on 26 March. Because of this it was always going to appear behind the game. And it did. While there was a semblance of hanging in there in early March, the QSBO also made it clear a tipping point was already coming into view.
Growth Was Reasonable, If Slowing
It was only last quarter but it feels like a world ago now. But, for the record, New Zealand’s GDP rose 0.5% in the final quarter of last year. This saw annual GDP growth slow to 1.8% in Q4 from 2.3% in Q3.
Dairy Offers Some Hope
Dairy prices have come under downward pressure over recent months. COVID-19 has spread to numerous countries, severely denting the world’s economic prospects in the process. For evidence, look no further than country lockdowns. Travel restrictions have tightened rapidly. Fast and large falls in global equity markets, amid extreme volatility, is a sign of heightened uncertainty and caution. A hit to global economic growth is detrimental to dairy demand. Prices have declined. And let’s be clear, we think prices will likely fall further. But, it is important to recognise there are at least some factors that may offer some support.
External Accounts’ Relatively Good Starting Point (Too)
It’s not just New Zealand’s fiscal and banking position that’s in good stead going into this virus-led turmoil. So too are the nation’s external accounts. To be sure, they face a test of similar-sized proportions. But it’s good to know the current account deficit, and net international liability position, start out substantially smaller than they were going into the 2008/09 recession.
Government announces $12.1 billion support package
Today, the Finance Minister made the first, of what will be many, announcements as to how it would support the economy through to the end of the Covid-19 shock. The support offered so far will bolster GDP by 2.0% but even this will not be enough to prevent a recession and a marked increase in the unemployment rate. Naturally, the Government will need to raise more cash and it is looking increasingly likely that it will look to the RBNZ to provide for some of it via Quantitative Easing.
New Zealand’s services sector dropped to its lowest level of activity since 2012, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for February was 52.0, which was 5.2 points down from January (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). The February result was the lowest level of expansion since September 2012, and below the long term average of 54.4 for the survey.
BusinessNZ chief executive Kirk Hope said that the slowdown in overall activity was across the board.
“All the main sub-indexes for the PSI displayed lower levels of activity in comparison with the previous month. Supplier deliveries (44.2) was hit hardest, with its lowest level since November 2008.”
“Like its sister survey the PMI, there was a marked increase in the number of respondents mentioning Covid-19. How much more this plays out in the months ahead will obviously depend on the ability to slow down its spread both domestically and offshore.”
BNZ Senior Economist Doug Steel said that “the February PSI and PMI readings look like the calm before the storm. The upcoming readings will help give a timely assessment of activity levels.”
Rescue bid under way
The RBNZ has slashed the cash rate and eased the banking system’s capital requirements. Government is about to announce a massive spend up. The rescue mission is underway but, even with this help, be prepared for a significant economic downturn. It’s time to batten down the hatches. This is going to be a very rough ride.
Calm before the storm?
New Zealand’s manufacturing sector experienced expansion for the first time in three months, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for February was 53.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up 3.4 points from January.
BusinessNZ’s executive director for manufacturing Catherine Beard said that despite the positive February result, much focus will be on the coming months given the effect Covid-19 is having on the global economy.
“Looking at comments from respondents, there was a noticeable increase in Covid-19 being mentioned, either directly or through the impact on shipping from China. Even those who made positive comments tempered it with concerns about the months ahead”.
“While the sector has not been hit hard by Covid-19 as yet, offshore experiences show how rapidly the situation can change, especially for those manufacturers who source materials offshore and cater for particular markets”.
BNZ Senior Economist, Craig Ebert said that “The most encouraging aspect of the PMI – considering the global ructions beginning to emerge in February – was arguably its new orders. These gained to 55.3, from 50.9 in January. And with widespread reports of supply-chain disruptions around the world, it was also interesting to see the PMI’s Deliveries of Raw Materials index had picked up to 53.1, from 47.7”.
BNZ/SEEK Employment Report
It’s tempting to view February’s 8.4% drop in job advertising as clear evidence of COVID-19 virus fears and uncertainties. However, there are reasons to believe it’s too early for such a conclusion (with March data arguably the first real test). February’s advertising was always going to struggle to hold up, after it posted such a big lift in January (+7.1%). February’s drop has, so far at least, mainly flattened the trend, after it was looking strong in January.
ANZ Survey Awful
Today’s survey supports our view that economic growth has stalled. Moreover, it makes the odds of a RBNZ rate cut in March that much higher (though not 100% by any stretch). Indeed, it was interesting that Adrian Orr today highlighted that “current monetary policy is already very stimulatory” and “time is on our side”. This does not sound like a man in a rush. We definitely remain unconvinced that a 50 point cut should even be contemplated at this stage.
Peer Pressure Drives RBNZ Cut?
Given market pricing, and frenzied responses elsewhere in relation to Covid-19, it is going to be very difficult for the RBNZ to sit on its hands. So, we are formally shifting to the view of Bank cutting its cash rate 25 basis points, to 0.75%, at its scheduled March 25 meeting, with the possibility of a further cut in May.