by Nick Clark, Federated Farmers Manager General Policy
Terms-of-trade sets new record
The goods terms-of-trade rose 0.7% to a new record high in the September 2021 quarter, according to Statistics NZ’s Overseas Trade Indexes.
The increase in the terms of trade reflected a 4.6% increase in export prices exceeding a 3.8% increase in import prices. Dairy export prices were up 7.1%, meat up 10.8%, and wool up 8.8%. On the imports side, petroleum prices were up 14.8% (after a 27.1% increase in the June quarter) and iron and steel up 15.3%.
The terms-of-trade is at a new record high, exceeding the previous peak set in June 2020. Economists expect a further pick-up in already high export prices but they also expect import prices to increase strongly.
On the volumes side, export volumes for goods fell 3.0% but import volumes rose 3.4%. Dairy export volumes were down 7.9% and forestry down 9.5%, but meat volumes were up 5.8% and wool up 8.9%.
Despite the record terms-of-trade lower export volumes combined with higher import volumes meant New Zealand recorded lower export values and higher import values and a big trade deficit of $6.3 billion in the September quarter.
The services sector continued to struggle, with volumes dropping with the closure of the trans-Tasman travel budget.
Ag debt falls…again
It sounds like a broken record but dairy again pushed agricultural debt down in October, according to the Reserve Bank’s monthly Sector Lending Statistics.
Agricultural debt was $62.15 billion in October 2021, down $152 million on August and down $583 million (or 0.9%) compared to October 2020.
In contrast to agriculture’s annual decline in lending, strong growth in housing lending continued on the back of the booming housing market, up 11.4%. Business lending was up 4.5% and personal consumer lending down 8.5%.
Agricultural credit was comprised of lending to the following sectors:
- Dairy cattle farms: $37.62 billion, down $184 million for the month and down $1.41 billion (3.6%) for the year.
- Sheep, beef cattle, and grains farms: $15.22 billion, unchanged for the month and up $96 million (0.7%) for the year.
- Horticulture: $6.22 billion, up $52 million for the month and up $663 million (11.9%) for the year.
- Other agriculture on farm: $2.36 billion, down $27 million for the month but up $16 million (0.6%) for the year.
Dairy debt has dropped by more than $4 billion since it peaked in July 2018.
Covid hits the books
The wage subsidy and other Covid-related fiscal support has hit the Government’s financial statements, according to an update for the four months ended 31 October 2021.
Core Crown tax revenue for the period was $31.79 billion, up $2.46 billion on Budget 2021’s forecast. Corporate tax and individuals’ tax were each more than $1 billion ahead of forecast. GST revenue was down though, probably reflecting the economic impact of lockdowns on consumer spending. So too was revenue from petrol tax and road user charges.
Although tax revenue was strong, core Crown expenses came in stronger at $41.86 billion, up $4.92 billion on forecast. This was entirely due to wage subsidies and Covid-19 resurgence support payments which were triggered by the August lockdown and have carried on since.
The operating balance before gains and losses was a hefty $7.76 billion, up $1.84 billion from forecast.
Despite the worse than forecast operating balance, net core Crown debt was $8.51 billion lower than forecast, coming in at $116.13 billion (34.2% of GDP). This was largely owing to a lower than expected 1 July starting point for the financial year (the Budget forecast was made in May, several weeks before).
That the books have been hit by Covid is no surprise and it’s understandable. However, as the economy reopens the Government will have to work to ensure any ongoing support is tightly targeted and tapered back over time and focus hard on keeping a lid on non-productive spending.
Business confidence slips further…
Business confidence fell in November, according to ANZ’s monthly Business Outlook Survey.
Headline business confidence, a measure of those who expect the economy to improve or worsen over the next 12 months slipped 3.0 points from October’s from -13.4 to -16.4. Agriculture continued to be the most pessimistic industry with a score of -40.9, although this was a 4.1 point improvement on October’s -45.0.
For own activity, a better indicator for GDP, a net 15.0% expect their activity to increase over the next 12 months, down 6.7 points on October’s net 21.7%. Agriculture was again the most pessimistic with a net 22.7% expecting their activity to reduce, a huge 37.7 point turnaround from October’s net 15.0% expecting it to increase. This is hard to explain unless it reflects a view among farmers that very high current farmgate prices they are enjoying will reduce.
Although both were down compared to October, headline business confidence was a little better and own activity indicator was around the same as in November’s preliminary result.
Other take outs from the survey include a continuation of acute cost pressures and no easing in pricing intentions or inflation expectations, while profit expectations slipped further into negative territory. More positively the survey saw improvements in investment and employment intentions, although a super tight labour market will weigh on the latter in practice.
…as does consumer confidence
It was a similar picture for consumers, with the ANZ Roy Morgan Consumer Confidence Index edging further into negative territory in November.
The overall index was down 1.4 points to 96.6, taking its decline over the past five months to 17.5 points. A score of over 100 indicates more optimists than pessimists and a score under 100 indicates the opposite.
Perceptions about current personal financial situations lifted 7 points back into net positive territory and there was a 1 point improvement in those thinking it a good time to buy a major household item (to -6%). However, other indicators slipped. There was a 5 point drop in respondents expecting to be better off this time next year (to +15%), a three point drop in those expecting New Zealand to have good times over the next 12 months (to -28%), and a 6 point drop in those expecting continuous good times over the next five years (to -2%).
Better news was a moderation in Inflation expectations, both for prices in general and for house prices. The former dropped 0.5 points to an inflation rate of 5.7% (but still the second highest on record) and the latter dropped 0.8 points drop to an expected annual house price increase of 5.9%.
Co-ops’ importance highlighted
The importance of co-operatives to the New Zealand economy has been highlighted in a report by PwC for Cooperative Business New Zealand on the New Zealand Co-operative Economy.
In 2020 New Zealand’s top 30 co-operatives generated revenue of $41.65 billion (or 12.9% of New Zealand’s GDP), held assets worth $39.5 billion, employed 41,159 people, and had 1.52 million members. Interestingly, Australia’s top 30 co-ops contribute just 1.3% of its GDP.
Co-ops are particularly prominent in New Zealand agriculture and food production, with 72% of the top 30’s revenue coming from 11 agri-food business. With co-ops’ impact being so significant here in New Zealand, the report states that co-ops need to be able to continue to thrive. It urges the Government, educators, and the business community to work together to ensure they can.
Residential consents remain at record levels
In October 2021 4,043 new dwellings were consented, according to Statistics New Zealand’s monthly Building Consents Issued.
The month’s tally was down a seasonally-adjusted 2.0% for the month but the annual tally of 47,715 dwellings consented for the year to October 2021 was up 25.6% on the previous year and it is another new annual record. Each month since March 2021 has seen a new annual record after busting through the previous annual record of 40,025 set way back in February 1974.
October 2021’s value of non-residential building work consented $814 million, up 59.8% on the same month last year, with farm building consents worth $27 million, up 45.1%. Meanwhile the value of non-residential consents for the year to October 2021 was $8.03 billion, up 16.5% from the previous year. The annual value of farm buildings was $293 million, up 4.1%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 2 December) show soils in Bay of Plenty, Taupo, Wairarapa, and South Otago significantly drier than usual. Far North, Gisborne, New Plymouth, Horowhenua, Mackenzie, Central Otago, and western Southland are significantly wetter than usual.
Exchange Rates
The NZ Dollar lost further ground this week, down 1.1% against the Trade Weighted Index. It was down against all our major trading partner currencies, except the Australian Dollar.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 6 points to 0.86%, but the 10 year Government Bond yield lost 17 points to 2.40%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 February 2022. Another increase is likely.
| This Week (2/12/21) | Last Week (25/11/21) | Last Month (2/11/21) | Last Year (2/12/20) | |
| OCR | 0.75% | 0.75% | 0.50% | 0.25% |
| 90 Day Bank Bill | 0.86% | 0.80% | 0.80% | 0.25% |
| 10 Year Government Bond | 2.40% | 2.57% | 2.52% | 0.89% |
Source: Reserve Bank of NZ