by Nick Clark, National Manager General Policy
The ANZ World Commodity Price Index lost ground in June for the third month in a row, falling a further 0.4% and taking the annual increase down to 4.8%.
Dairy prices lifted 1.7% for the month, reversing a recent downward trend, with constrained global milk production helping to underpin prices. Horticulture prices were also up 4.8%.
Meat & Fibre prices fell 3.0%, with beef prices down and lamb prices stable. Chinese lockdowns disrupted demand, reducing prices for beef and mutton. New Zealand lamb production was restricted by labour shortages limiting processing capacity.
Forestry prices were down 3.0% in June and aluminium prices were down 9.3% after another even bigger drop the previous month.
The NZ Dollar more than did its bit to offset weaker world prices, with the NZ Dollar Index up 0.7% for the month to a hit a new record high. The annual increase was 14.5%.
GDT falls again
This week’s Global Dairy Trade continued the softening of New Zealand export commodities, with the GDT Price Index down 4.1% compared to the previous auction a fortnight ago.
Most commodities traded dropped in price, with whole milk powder down 3.3%, skim milk powder down 5.2%, anhydrous milk fat down 3.1%, butter down 9.1%, and butter milk powder down 7.6%. Cheddar was the odd one out, increasing 1.4%.
Overall, the average selling price was $US4,360 and 23,461 tonnes were sold.
The GDT Price Index has fallen at seven of its last eight auctions and it’s now down 19.2% from its peak at the start of March. However, it’s still 6.0% higher than at the same time last year.
Business opinion takes a hit
NZIER’s latest Quarterly Survey of Business Opinion has recorded a severe slump in business confidence, joining other similar surveys.
For the June quarter a net 62% of businesses expected a deterioration in general economic conditions over the coming months, even worse than the March quarter’s net 34%. Meanwhile a net 1% reported a decline in activity in the quarter, although this was an 8 point improvement from the March quarter.
Construction, services, and retail all had dismal levels of confidence. Capacity constraints and strong cost pressures were common reasons for pessimism but some were also worried about weaker demand arising from low consumer confidence. Inflation pressures continued to intensify with more businesses passing increased costs onto consumers. Profitability remains weak and businesses are paring back on investment, both in buildings and in plant and machinery.
The QSBO is respected and credible with its results are followed closely by policymakers, including the Reserve Bank.
The answer to these problems is not to boost demand with more sugar. Policy makers should instead find ways to boost supply by increasing the productive capacity of the economy. Doing so would ease pressure on costs and increase confidence to invest. The Government needs to unwind or at least put a pause on harmful policies and regulations affecting businesses, including farms. There’s nothing sexy about this and few short-term votes in it. But it’s becoming increasingly necessary.
Although the QSBO doesn’t directly survey the agricultural sector, many businesses that buy from or sell to farmers are captured by it.
Consumer confidence worsens
Consumers are also depressed. After recovering a little in May, ANZ-Roy Morgan Consumer Confidence Index fell 1.8 points in June to sit at 80.5. A score less than 100 indicates more pessimists than optimists and a score of 80 is plumbing the depths.
Most of the indicators within the Index worsened compared to May. The notable exception was a 9 point improvement in those thinking it a good time to buy a major household item.
After dropping in May, inflation expectations picked up again to 5.6% (from 5.1%), while house price expectations also picked up a little to 1.4% (from 1.1%).
Job ads decline
Job advertisements dropped 2.7% in June, according to the BNZ/SEEK Employment Report. The fall comes after a run of strong increases and is the first ‘non-trivial’ decrease since August 2021 when the Delta lockdown was imposed.
Most industries had declines in advertisements. The farming, animal and conservation industry had a 4% drop but this was dwarfed by big drops for real estate and property (down 19%), insurance and superannuation (down 15%), construction (down 14%), and marketing and communication (down 13%).
Job ads can bounce around month-to-month so it’s too early to say if this is a true reversal or a blip. Other measures such as quarterly and annual changes and monthly trend analysis are all still strong.
Smaller than expected deficit
The Government’s Interim Financial Statements show a smaller than expected fiscal deficit for the 11 months to May 2022.
Core Crown tax revenue was $2.88 billion higher than forecast in the May 2022 Budget, at $98.9 billion. This was mainly due to higher than expected corporate tax, source deductions, and other individual’s tax. Meanwhile, core Crown expenses were $1.36 billion lower than expected, coming in at $113.2 billion, mainly due to timing delays for department spending.
The net effect was an operating deficit excluding gains and losses of $7.55 billion, still big but $5.48 billion better than expected.
Net debt of $59.1 billion (16.6% of GDP) was $4.29 billion higher than expected, mainly due to unfavourable market conditions which have impacted on financial asset values.
The full year results for the just ended 2021/22 year won’t be released until October.
Record consents continue
Statistics NZ’s monthly Building Consents Issued set a new record of 51,015 residential building consents for the year ended May 2022. This was up 17.3% compared to the year ended May 2021. They were valued at $20.0 billion, up 23.6% for the year and also a new record high.
However, growth seems to be slowing. Comparing May 2022 with May 2021, consents were up a more modest 7.8%. There was also a seasonally-adjusted 0.5% fall in house consents comparing May to April which had followed an 8.6% fall between April and March.
There was stronger monthly growth for non-residential building consents, up 32.6% comparing May 2022 with May 2021. On an annual basis non-residential consents were worth $8.94 billion for year ended May 2022, up 12.3% from the year ended May 2021. Within this farm buildings consented were worth $328 million, up 16.8%.
Consents are still strong but the bigger concern is whether the houses and other buildings will be able to be built and if so when and at what cost considering growing problems in the construction sector.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 7 July) show soil conditions being about average for this time of across the whole of the North Island, except South Wairarapa. In the South Island, soil conditions are significantly drier than usual in coastal Canterbury south of the Waimakariri and coastal Otago, while they are significantly wetter than usual over much of the South Island High Country.
Overall, the NZ Dollar was almost unchanged for the week, slipping 0.1% against the Trade Weighted Index, but there were ups and downs against our main trading partner currencies. The NZ Dollar was down against the US Dollar, the Japanese Yen, and the Chinese Renminbi, and it was up against the Australian Dollar, the Euro, and the UK Pound.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was down 1 point to 2.85% while the 10 year Government Bond yield was down another 20 points to 3.69% (after falling 13 points last week).
The Reserve Bank will review monetary policy settings (including the OCR) next week on Wednesday 13 July. It will almost certainly increase the OCR by 50 basis points to 2.50%. This comes after two previous 50 point hikes at each of the April and May reviews. Given high inflation and continued pressures this is the right thing to do.
|This Week (7/7/22)||Last Week (30/6/22)||Last Month (7/6/22)||Last Year (7/7/21)|
|90 Day Bank Bill||2.85%||2.86%||2.52%||0.34%|
|10 Year Government Bond||3.69%||3.89%||3.70%||1.64%|
Source: Reserve Bank of NZ