by Nick Clark, Manager National Policy
A bumper issue this week with a flood of economic data. This will be my last economic update for the year. It’ll be back in the New Year. In the meantime, I wish readers a happy and relaxing Christmas and holiday period – and a prosperous 2022.
Economic activity fell by 3.7% in the September 2021 quarter, according to Statistics NZ’s Gross Domestic Product.
The drop reflects a widespread drop in economic activity due to Covid-19 restrictions implemented in the second half of the quarter and which lingered well into the December quarter.
The industries with the largest falls in activity were retail and accommodation (down 13.3%); arts, recreation, and other services (down 11.9%); construction (down 9.6%); and manufacturing (down 7.6%).
The primary sector was not immune. Economic activity in agriculture, fishing, and forestry fell 2.8% in the quarter, with agriculture down 3.3%. Agriculture’s drop was mainly due to a fall in dairy farm production, which in turn impacted on dairy manufacturing and dairy exports.
Despite the quarterly fall, GDP still rose by 4.9% over the year to September 2021 compared with the year to September 2020. Agriculture, forestry, and fishing’s GDP was up 5.6%.
The 3.7% quarterly fall in GDP could have been a lot worse – as recently as last month the Reserve Bank had picked a 7.0% fall. But it was still the second largest quarterly drop on record (June 2020 quarter took that dubious honour).
The current December quarter will have seen a rebound as restrictions were relaxed. We’ll know in March by how much.
Primary sector exports stronger than expected
Exports from the primary sector are performing better than expected, according to the Ministry for Primary Industries’ Situation & Outlook for Primary Industries December update.
Food and fibre sector exports fell 0.7% to $47.77 billion in the year to 30 June 2021. While a decline it wasn’t too bad given Covid-19’s impact on the global economy. The current year to 30 June 2022 is looking brighter with export revenue forecast to increase by 6.3% to $50.76 billion. Increases in revenues are being driven by recovering and improving export prices. Summaries from the report follow below for the dairy, meat and wool, and arable sectors.
Dairy export revenue is forecast to increase 9.6% to $20.93 billion, driven by weaker supply from key dairy exporting regions and strong demand from large importing nations such as China. Although New Zealand milk production is forecast to decrease, high export prices are likely to result in a record high farmgate milk price which will boost dairy farm revenue. Less positively, the dairy industry is facing COVID-19 related disruptions, high freight costs, and rising farm input costs.
Meat and wool export revenue is forecast to increase 6.3% to $11.05 billion. Export prices are recovering strongly, supported by a global protein shortage, economies reopening and restaurant activity beginning to recover. Global meat supplies are tight due to African swine fever reducing pork production and limited beef exports from Brazil, Argentina, and Australia. Wool and animal hide/skin exports have also begun to recover. Global freight issues and subdued restaurant activity continue to limit returns though.
Arable export revenue is forecast to increase 5.8% to $275 million. Demand for our arable exports remains solid. Key drivers include weather-related production issues in the northern hemisphere as well as low global inventories. Additionally, lockdowns in other countries have resulted in an increase in home gardening and a rise in vegetable and grass seed demand. The outlook for the domestic cereal market is positive with feed grain prices steadily increasing through 2021 and strong demand from the dairy sector expected to hold through 2022.
For other primary sector industries…
- Forestry export revenue is forecast to increase 2.9% to $6.72 billion.
- Horticulture export revenue is forecast to increase 4.8% to $6.90 billion.
- Seafood export revenue is forecast to increase 1.6% to $1.80 billion.
- Processed food and other products export revenue is forecast to decrease 0.7% to $3.09 billion.
It’s great to see the primary sector continuing to prosper and driving economic growth and wellbeing. According to MPI the wider sector (including processing and commercialisation) accounted for 82.4% of New Zealand’s merchandise trade exports, 11.2% of GDP, and 13.8% of employment. Long may that last.
Rabobank’s December quarter Rural Confidence Survey has found farmer confidence evenly split between optimists and pessimists.
The survey found farmer confidence in the agri-economy inching fractionally higher to a net 1% expecting improvement, up from a net-zero reading in September. The proportion of farmers expecting conditions in the agricultural economy to improve in the coming 12 months rose 5 points to 28%. There were also more farmers expecting conditions to worsen, rising 4 points to 27%. The number of farmers expecting the performance of the agricultural economy to stay the same fell 9 points to 43%.
Dairy farmers were significantly more positive about the agri-economy but sheep and beef farmers and horticulturalists significantly more pessimistic. Rising commodity prices were the key factor cited by farmers with an optimistic outlook, while government policy, rising input costs, and labour shortages were the key concerns among those with a negative outlook.
Farmers’ confidence in their own farm business performance was slightly weaker, with a net 6% expecting it to improve, down 5 points from September. Those expecting performance to improve was unchanged on 28% but those expecting it to worsen was up 5 points to 22%. 49% expected performance to be unchanged, down 5 points.
Federated Farmers next six-monthly Farm Confidence Survey will be undertaken in mid-January.
Fiscal outlook brighter
The Delta variant and the Government’s response to it has had a profoundly negative impact on the Government’s finances but the medium-term outlook is forecast to be much better than earlier predicted.
This week’s Half Year Economic and Fiscal Update has forecast negligible GDP growth of 0.8% for the 2021/22 year, inflation rising to 5.1% but ultra-low unemployment of just 3.2%. It’s forecasting a $20.8 billion fiscal deficit for the 2021/22 year, a big increase on the previous year’s $4.6 billion deficit. Although core Crown tax revenue will be up $4.6 billion to $102.6 billion core Crown expenses will be more than $20.2 billion higher due to Covid support measures which kicked in from August rising to $128.0 billion. Net core Crown debt will also increase $34.1 billion to $136.3 billion – or 37.6% of GDP.
This looks grim and in normal times it certainly would be grim but as we all know these aren’t normal times. More positively Treasury reckons the economy will rebound in 2022/23, helped by relaxation of Covid restrictions (including the border), pent-up demand, and growth in construction. GDP growth is forecast to hit 4.9%, inflation is expected to ease back to 3.1%, while unemployment will stay rock bottom. With tax revenue forecast to strengthen further and spending to reduce with the end of Covid support measures, only a small $0.8 billion deficit is forecast for 2022/23, with growing surpluses thereafter. Debt will peak at $165.5 billion in 2023/24 (39.9% of GDP) before falling thereafter.
This all sounds good and it will give the Government all the encouragement it needs to ramp up its spending (no prospect of tax cuts, alas). However, the fiscal room the Government thinks it has will heavily depend on the realisation of rosy economic forecasts. There are still plenty of risks out there – global and domestic. Prudent fiscal policy, with a steady hand on the tiller and a focus on value for money, will still be needed. And we come to this next.
Budget priorities outlined
As well as publishing updated economic and fiscal forecasts the Government has also outlined its priorities for next year’s Budget. Its Budget Policy Statement 2022 will look to progress three goals:
- Continuing to keep New Zealand safe from Covid-19.
- Accelerating the recovery and rebuild from the impacts of Covid-19.
- Laying the foundations for the future, including addressing key issues such as climate change response, housing affordability, and child poverty.
In particular the Government wants Budget 2022 to focus on embedding its health reforms and making progress on emissions reduction targets.
The Budget Policy Statement is forecasting a massive $6 billion operating allowance (i.e., new spending) for Budget 2022. This is mainly to help support its significant reform programmes, including transformation of the health system. Operating allowances will ease back to $4.0 billion in 2023 and $3.0 billion each in 2024 and 2025 but they are still seriously big numbers which will drive operating spending higher. There will also be a $9.8 billion multi-year capital allowance for capital spending.
In addition, the Government will hypothecate revenue from the ETS to a ‘Climate Emergency Response Fund’ which will support initiatives to reduce emissions. It expects to allocate $4.5 billion over the next five Budgets to the Fund.
Despite big increases in operating spending the Budget Policy Statement estimates that core Crown expenses as a percentage of GDP will fall from a peak of 35.3% of GDP in 2021/22 to 29.3% in 2025/26. Partly this is because 2021/22 provides a high starting point for spending due to Covid-19 support measures, which will drop away, but it also relies on strong GDP growth. Over the same period core Crown tax revenue is forecast to increase from 28.3% of GDP to 29.5% of GDP.
As mentioned above, much is going to depend on the rosy economic forecasts. Better to be cautious and not get caught short than the opposite.
Imports drive bigger deficit
Growth in imports has widened the current account deficit, according to Statistics NZ’s quarterly Balance of Payments and International Investment Position.
New Zealand’s seasonally adjusted current account deficit for the September 2021 quarter was $4.80 billion, $1.70 billion larger than the June quarter deficit. The increased deficit was mainly driven by higher goods imports (up $1.75 billion) and services imports (up $123 million), while goods exports were up $209 million and services exports were down $114 million.
The current account deficit for the year ended 30 September 2021 was $15.86 billion (4.6% of GDP) substantially larger than the $2.39 billion deficit for the September 2020 year (0.7% of GDP).
New Zealand’s net international liability position as at 30 September 2021 was $163.9 billion, up from $154.9 billion at 30 June 2021.
Food prices fall
Statistics NZ’s monthly Food Price Index was down in November, but annual food price inflation increased to 4.0%.
On a monthly basis, comparing November 2021 with October 2021, food prices fell 0.6% (but rose 0.3% when seasonally adjusted), with:
- Fruit and vegetable prices down 6.7% (down 2.3% seasonally adjusted), with fruit up 1.7% but vegetables down 11.8%.
- Meat, poultry, and fish prices up 0.4%, with beef & veal down 0.3% and mutton, lamb & hogget down 0.1%.
- Grocery food prices up 0.7% (up 0.3% seasonally adjusted), with bread & cereals up 0.7% and milk, cheese & eggs up 0.2%.
Despite the monthly drop in food prices, the annual increase rose from 3.7% for the year to October 2021 to 4.0% for the year to November 2021, with:
- Fruit and vegetable prices up 5.6%, with fruit down 1.9% and vegetables up 11.6%.
- Meat, poultry, and fish prices up 3.6%, with beef & veal up 1.4% and mutton, lamb & hogget up 8.4%.
- Grocery food prices were up 4.2%, with bread & cereals up 3.0% and milk, cheese & eggs up 7.2%.
Ups and downs for manufacturing and servicing
The seasonally-adjusted PMI for November was 50.6, down 3.6 points from October. A PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining. New orders and production remained positive but employment, finished stocks, and deliveries all fell into contraction. The proportion of negative comments also rose. BNZ said the PMI’s “implications for economic (and employment) growth seem clear – soft. But with obvious difficulties remaining on the supply side, we’d suggest that inflation is still rising”.
Meanwhile, November’s PSI was up 1.6 points for the month but remains below 50.0 at 46.5. Activity/sales, stocks/inventories, and supplier deliveries all remained in contraction but new orders/business and employment were both in positive territory. BusinessNZ said that “the stagnant nature of recent results exemplifies the difficult trading conditions many businesses currently find themselves in”. BNZ was more upbeat about the future predicting activity to improve in December thanks to the less restrictive traffic light system.
Rebound continues for retail spending
Statistics NZ’s monthly Electronic Card Transactions showed a seasonally-adjusted 9.1% increase from October to November to $8.08 billion, after a 9.4% the previous month.
There was a particularly big 53.5% month-on-month jump in spending on apparel, with spending on durables (e.g., department stores, furniture, electronics, hardware, etc.) up 22.6%. Spending was also up on services (up 13.1%), vehicles (up 10.0%), and fuel (up 9.9%). All these industries had been badly affected by earlier lockdowns. In contrast, spending on consumables (e.g., supermarkets and grocery stores) was down 0.6%. Its spending jumped during the August lockdown but has eased back since. Hospitality spending can’t be seasonally-adjusted due to the impact of Covid restrictions.
On an annual basis, comparing November 2021 with November 2020, actual card spending was up a more subdued 1.2% to $8.39 billion. This reflects the ongoing impact of Covid restrictions. The biggest annual increases were for durables (up 11.4%), fuel (up 6.9%), consumables (up 6.4%), and vehicles (up 6.1%). In contrast spending was down for hospitality (down 20.8%), services (down 9.4), non-retail industries (down 2.5%), and apparel (down 0.3%).
REINZ Housing Market
House prices continued to rise in November but year-on-year growth is tapering, according to the Real Estate Institute of NZ’s monthly Residential Market Statistics.
The median selling price in November 2021 was $925,000, but 3.7% compared to October 2021 and up 23.8% compared to November 2020. Auckland’s median price was $1,300,000, up 26.2% for the year.
The biggest annual price increases were in the West Coast (up 42.9%), Canterbury (up 31.4%), and Gisborne (up 29.2%), while the smallest were in Southland (up 9.6%) and Nelson (up 9.9%).
There was a pick-up in sales volumes with 8,381 houses sold in November 2021, up 12.4% compared to October 2021 and up 18.0% compared to November 2020.
The median time to sell a house was 29 days, the same as in November 2020.
Although the housing sales data still look frothy, economists believe the market has peaked. Looking ahead, higher interest rates, tougher LVR requirements, and increasing supply could see a sharp easing in house price inflation, although few believe prices will actually drop significantly.
Net migration goes negatives as migrants depart
After having annual net migration gains since June 2013, we are now seeing an annual net migration loss, according to Statistics NZ’s monthly International Travel and Migration Statistics.
In total there were an estimated 46,300 migrant arrivals and 48,000 migrant departures for the year to October 2021, resulting in a net migration loss of 1,700 people. This is a stark contrast to a 91,700 net migration gain for the year to March 2020, when border restrictions were imposed.
The migration loss was driven by more non-New Zealand citizens departing than arriving, a reversal of recent history. For the year to October 2021 a net gain of 7,400 New Zealand citizens was more than offset by a net loss of 9,100 non-New Zealand citizens.
Meanwhile, the total number of people crossing the New Zealand border picked up slightly in October. There were 20,800 border crossings in October 2021 (up from 16,100 in September 2021), made up of 11,000 arrivals and 9,800 departures. Border crossings include all arrivals and departures, either for short-term trips or longer-term migration, by people living overseas or in New Zealand.
Next week – Banking Survey
There won’t be an Economic Update next week but for those wondering the results from our November Banking Survey will be released on Monday.
NIWA Soil Moisture Data
There’s been a lot of rain this week and this is reflected in NIWA’s latest soil moisture maps (as at 9am Thursday 16 December). Most of the country’s soils are significantly wetter than usual for this time of year, with only Southland drier than usual. Soil conditions are particularly waterlogged (the darkest of dark blue on the soil moisture anomaly map) in Bay of Plenty, Whanganui, Manawatu, Horowhenua, Wairarapa, Wellington, Marlborough Sounds, Kaikoura, and coastal Waimakariri.
The NZ Dollar lost further ground this week, down 0.3% against the Trade Weighted Index. It was down against all our major trading partner currencies, except the Euro.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 3 points to 0.92% but the 10 year Government Bond yield was down 13 points to 2.34%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 February 2022. Another increase is likely.
|This Week (16/12/21)||Last Week (9/12/21)||Last Month (16/11/21)||Last Year (16/12/20)|
|90 Day Bank Bill||0.92%||0.89%||0.86%||0.25%|
|10 Year Government Bond||2.34%||2.47%||2.67%||0.86%|
Source: Reserve Bank of NZ