Labour Market Data Kind of Frozen in Time
Timing, as they say, is everything. It’s certainly important in understanding today’s June quarter labour market data, whether it be the stuck-low jobless rate (4.0%, from 4.2%), the minimal fall in employment (-0.4%) or the relative resilience in the rate of labour force participation (69.7%, from 70.5%). To an extent, these were frozen in time, because of the lockdown New Zealand endured through in the quarter. The question is, what happens as things thaw?
NZ Businesses Lose the Rebound Memo
Having shown some good promise in early July, the ANZ business survey disappointing in its full and final read for the month. Throughout, there was a lack of follow-through, leaving the economic outlook – from a business perspective – with a clearly negative hue. This remains an important over-arching message, especially when many of the immediate economic indicators are doing well, some remarkably so.
Over the line
Like its sister survey in the manufacturing sector, activity in New Zealand’s services sector rose back into expansion, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for June was 54.1, which was 16.6 points up from May (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was the first time the sector exhibited expansion since February, and the highest value since January.
BusinessNZ chief executive Kirk Hope said that the comments from respondents underlie the two broad effects COVID-19 is currently having on the sector.
On the positive side, a number outlined a catch-up or bounce back from post lockdown conditions. However, those outlining negative comments are squarely centred on the disruption COVID-19 is still playing on their business. With comments split 44.4% vs 55.6% in terms of a negative stance, there is still scope for improvement ahead.
BNZ Senior Economist Doug Steel said that “activity/sales and new orders, which were hit hard over recent months, have led the bounce back. The activity/sales index has ramped up to 58.7 from 32.7 in May, while new orders jumped to 59.6 from 35.2. It is positive, if only one step forward after a giant leap backwards.”
Back in black
New Zealand’s manufacturing sector showed expansion for the first time since February, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for June was 56.3 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up 16.5 points from May, and the highest result since April 2018.
BusinessNZ’s executive director for manufacturing Catherine Beard said that a return to expansion for the sector was obviously a welcome result given the very difficult period experienced over the last three months. However, given the path towards recovery has simply meant trying to get back to standard operational levels for many, it was just a matter of time before the sector would be back in black.
Leading the way were the key indices of production and new orders (both at 58.6). Like the main result, these were at the highest level of expansion since April 2018.
Overall, we should remain cautious that one expansionary result does not represent a trend given ongoing offshore uncertainty around COVID-19. A consistent trail of new orders over the coming months would go a long way towards ensuring the second half of 2020 is better than the first.
BNZ Senior Economist, Doug Steel said that “New Zealand’s PMI average through April and May was at the bottom when looking across usual comparator countries. But with the country at alert level 1, activity has picked up. Long may it continue.
Lower Inflation Amid Loud Noise
Today’s CPI release revealed a 0.5% decline in Q2, pulling annual inflation down to 1.5% from 2.5% in Q1. The price decline in the quarter was not quite as big as many thought might be the case, with market expectations at -0.6%. We had -0.7%, as did the RBNZ. But no major surprises here, given the circumstances.
QSBO Shows COVID Shock
Today’s NZIER Quarterly Survey of Business Opinion did not make pretty reading. It was never going to, given the economic disruption and dislocation the nation has suffered over the past few months. In short, the QSBO confirms the economic damage done. So, nothing to move financial markets. But the Q2 outcomes were worse than what firms previously expected, bringing abrupt adjustment. That adjustment is not yet complete.
Property Market Under Pressure
The New Zealand property market is under pressure. The combination of slowing population growth, falling employment and structural change spells bad news for property owners of most types. The attached chart pack presents a pictorial overview of how we are seeing the environment for this sector currently.
RBNZ In Hibernation
The RBNZ has sat firmly on its hands, as we had anticipated. In short, it did nothing, and intends doing nothing for a while yet. But, if it does do anything, it will be to increase the size of its Quantitative Easing (QE) programme rather than lower its cash rate.
Tourism Not Only Influence On External Accounts
New Zealand’s annual current account deficit stood at 2.7% of GDP in the year to March 2020. This was no surprise matching both market and our expectations. But it does continue the trend narrowing in the annual deficit over the past 18 months. The annual deficit was 3.0% of GDP for the year to December 2019. But we see enormous pressures – in both directions – over the coming year.
Limited Service
Activity in New Zealand’s services sector improved somewhat for May after its lowest ever result in April, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for May was 37.2, which was 11.5 points up from April (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was just above the March result, but still showing strong contraction for the month.
BusinessNZ chief executive Kirk Hope said that the result for May was similar to that of the manufacturing sector, with improvements made but still well below anything considered business as usual.
“The proportion of negative comments for May (72.9%) did drop from 91% in April. Looking ahead, around two-thirds of June will be at level 1, so we would expect ongoing improvements in activity in the months ahead”.
BNZ Senior Economist Doug Steel said that “we’d caution that just being allowed to open doesn’t guarantee more activity. Standing back, there is no denying the outright level of the PSI remains woeful and still sits well below the lows at around 45 recorded during the 2008/09 recession”.
Road to Recovery
New Zealand’s manufacturing sector showed some signs of recovery, albeit off a very low base, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for May was 39.7 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up 13.8 points from April, and higher than the level of activity recorded in March.
BusinessNZ’s executive director for manufacturing Catherine Beard said that given half of May was at alert level 2, this provided firms with a greater ability to boost production and new orders, which was seen in those two sub-indices showing the strongest increases from the previous month (sitting at 38.4 and 40.0 respectively). In contrast, employment (39.4) took another hit. With the wage subsidy to end soon for many businesses, a soft employment result in the months ahead may make the road to recovery that bit longer.
“Looking at comments, the lift in overall activity levels also saw the proportion of positive comments increase from 10.3% in April to 28.5% in May.”
BNZ Senior Economist, Craig Ebert said that “still, a negative tone remains evident in the fact that, even with its bounce in May, the NZ PMI merely got back to the sort of levels in sank to during the 2008/09 recession.”
BNZ/SEEK Employment Report
With economic statistics being shaken by COVID-19 it is important to look at them in levels terms, not just rates of change. Job advertising on SEEK.co.nz provides a good example. It posted an encouraging jump of 72.3% in May. However, this was from the extreme low point it plumbed in April. So, even with its bounce May’s advertising was still far shy of what it was before the virus. Its level compared to May 2019 was down 58.2%, which puts things in perspective.
Business Survey Infers Stalled Recovery
At face value, this afternoon’s ANZ business survey update, taken in early June, appeared to maintain the gradual-recovery message. But look closer and this didn’t bear up much at all in the detail, which instead gave a sense of stalled recovery.
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.
Rock bottom
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
many”.
*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.
Lockdown lows
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.