A round-up of the week’s economic news by Nick Clark, Federated Farmers Manager General Policy
Farmer confidence bounces back
The results are out from Federated Farmers’ latest six-monthly Farm Confidence Survey. The survey showed a strong recovery in farmer confidence, albeit off a low base, returning it to levels of a year ago. Key points follow:
- A net 5.5% per cent of respondents consider current economic conditions to be good, a 34.1-point improvement on July 2020’s survey when a net 28.6% considered them bad. Looking ahead, a net 43.8% expect general economic conditions to worsen over the next 12 months, a 14.9-point improvement from July 2020 when a net 58.7% expected them to worsen.
- A net 49.3% of respondents reported making a profit currently, a 2.6-point improvement on July 2020 when a net 46.7% reported making a profit. Looking ahead, a net 18.3% expect their profitability to worsen over the next 12 months, a 17.2-point improvement from July 2020 when a net 35.5% expected it to decline.
- A net 13.6% of respondents expect their production to increase over the next 12 months, a 2.5-point decrease from July 2020 when a net 16.1% expected it to increase.
- A net 11.3% of respondents expect their spending to increase over the next 12 months, a 24.1-point increase from July 2020 when a net 12.8% expected it to reduce.
- A net 28.2% of respondents expect their debt to reduce over the next 12 months, a 3.4-point increase from July 2020 when a net 24.8% expected it to reduce.
- A net 35.8% of respondents reported it has been harder to recruit skilled and motivated staff, a 7.7-point increase from July 2020 when a net 28.1% reported it has been harder.
- The three greatest current concerns for farmers are regulation and compliance (chosen by 18.0% of respondents), followed by freshwater policy (16.7%), and climate change policy (13.6%). This result compares to July 2020 when the three top concerns were economic situation (15.6%), regulation and compliance costs (15.3%), and farmgate and commodity prices (11.1%).
- The three highest current priorities farmers would like the Government to address are the economy and business environment (25.3%), regulation and compliance costs (12.9%), and supporting agricultural exporters (10.9%). This compares to July 2020 when the top three priorities were economy and business environment (36.8%), fiscal policy (12.1%), and supporting agriculture and exporters (10.3%).
Consistent with recent commodity price movements, the improvement in farmer confidence was particularly strong for dairy farmers, with other farming groups more cautious about current conditions and less optimistic about future conditions.
A big thank you to the 1,091 farmers who completed the survey, which was held from 6-13 January and run for us by leading agricultural market research company Research First.
Six in a row
The Global Dairy Trade rose again at this week’s auction, the sixth successive rise since mid-November and the ninth rise out of the last ten auctions held since mid-September.
All but one of the seven products on offer gained in price. Whole milk powder was up 2.3%, anhydrous milk fat up 1.3%, butter up 6.2%, cheddar up 2.3%, lactose up 3.8%, and butter milk powder up 10.7%. The one product to drop was skim milk powder, which fell 1.5%. Demand was strong out of China.
The average selling price was US$3,614 and 28,707 tonnes were sold.
At 1136 the GDT Price Index is up 12.8% compared to the same time last year. The last time it was this high was in May 2014 but it is still well below the decade peak of 1573 in April 2013.
No surprise then that Fonterra lifted its 2020/21 forecast Farmgate Milk Price range to $6.90-$7.50 per kgMS, up from $6.70-$7.30. The midpoint was also increased to $7.20 (from $7.00).
Dairy drives up commodity prices
Meanwhile, a big increase in dairy prices saw the ANZ World Commodity Price Index lift 3.6% in January compared to December. Annual growth in the World Price Index has also been restored with the Index now 4.6% higher than in January 2020.
Dairy prices rose 6.6% in January, with prices back above pre-pandemic levels. There has been strong demand globally for dairy products, especially from China. Meat and fibre prices were also up 1.5% but the increase was driven solely by beef, with lamb and wool both continuing to ease. Lamb’s reliance on European and North American restaurant trade is seen as a real challenge at present.
Horticulture prices were unchanged, forestry prices were up 2.0%, and aluminium prices were down 1.1% (but they remain 13% higher than a year ago).
The strong exchange rate over recent months has trimmed the increase in world prices. With the Trade Weighted Index up a further 0.6% in January, the NZ Dollar Index increased a more modest 2.4% for the month. It remains 2.2% lower than in January 2020, although this has been improving (the annual decline was 10.9% in November).
Unemployment drops! What the…?
Employment was surprisingly strong in the December 2020 quarter, according to Statistics NZ’s quarterly Labour Market Statistics.
Most economists, including those in the Reserve Bank, thought unemployment would rise from the September quarter’s 5.3% of the labour force to around 5.6% on its way into the 6s in 2021. Yet it dropped to just 4.9% of the labour force (or from 151,000 to 141,000 people).
At 2.73 million, employment grew by 17,000 (+0.6%) for the quarter and is 19,000 (+0.7%) higher compared to December 2019. The labour force participation rate also increased slightly to 70.2%. Wage inflation remained low, with the Labour Cost Index for all sectors up 0.4% for the quarter and 1.6% for the year.
Overall, this was an astonishing result and took everyone by surprise. Unemployment of 4.9% is a remarkably low starting point for 2021. In fact, it’s not that far off the Reserve Bank’s estimate of ‘maximum sustainable employment’ (an unemployment rate of around 4%), relevant because these days it must weigh-up employment and inflation when setting monetary policy.
The Reserve Bank next reviews monetary policy settings, including the OCR, on 24 February. Combining the bullish labour market with the bounce-back in GDP, stronger commodity prices, rising business cost pressures, a rampant housing market, and higher consumer price inflation, it seems less and less likely the Reserve Bank will need to cut the OCR any further to stimulate the economy. Indeed, some economists are now musing that it might start increasing the OCR although probably not until 2022.
On the other hand, our economy and labour market could lose a bit of steam this year as the post-lockdown rebound fades and head-winds build from the prolonged closure of the border, ongoing weakness in the global economy, and the strong exchange rate. And there’s always a risk of another COVID outbreak leading to lockdown and economic impacts.
For now, expect monetary policy to remain accommodating, with the OCR kept on hold and continuation of the existing programme of large scale asset purchases. However, the Reserve Bank will need to be thinking about how to normalise monetary policy.
Jobs up in December, but growth slow
Consistent with its quarterly Labour Market Statistics, Statistics NZ’s monthly Employment Indicators showed filled job numbers rising in the month of December, although annual growth remains below pre-COVID-19 levels.
There were 2.25 million filled jobs in December 2020, up 37,693 (or 1.7%) from November 2020. However, compared with December 2019, jobs were up by only 12,746 (or 0.6%). At 0.6% annual growth is rather below the pre-pandemic annual growth rates of 2-4%.
In December there were 113,581 filled jobs in agriculture, up 4,932 (or 4.5%) from November and up 1,541 (or 1.4%) compared with December 2019. December is generally the peak month for employment in agriculture.
Government finances looking better
The Government’s Interim Financial Statements for the five months ended 30 November 2020 have shown stronger economic activity bolstering tax revenue, improving the Government’s fiscal position – even relative to what was forecast as recently as six weeks ago.
Compared to December’s Half Year Economic & Fiscal Update, core Crown tax revenue for the first five months of the 2020/21 year was $699 million (1.9%) more than forecast, with both GST revenue and corporate tax being well above forecast. Meanwhile core Crown expenses was $546 million (1.2%) less than forecast, mainly due to delays in work programmes impacted by the pandemic.
The operating balance before gains and losses, the preferred measure of government surplus or deficit, was a deficit of $4.34 billion, $1.88 billion smaller than the $6.22 billion earlier forecast.
Net core Crown debt at the end of November was $98.96 billion, $860 million (0.9%) less than forecast. This is up over $37 billion compared to November 2019, with net core Crown debt as a percent of GDP up from 20.1% to 30.9% – a big increase for sure but still low by international standards.
Is inflation coming back?
Business confidence continues to improve but cost and pricing expectations have risen and profitability expectations have dropped.
The preliminary results from ANZ’s February Business Outlook Survey show a net 11.8% of businesses expecting general economic conditions to improve over the next 12 months, up 2.4 points on the previous survey in December. Own activity improved a little, with a net 22.3% expecting their activity to increase, up 0.6 points. Employment intentions also improved.
Less positive was an increase in cost pressures, with a net 71.1% of businesses expecting higher costs over the current year, up 14.3 points, and a net 47.9% expecting to increase their prices, up 12.8 points. Expectations for profitability also took a hit, down 6.3 points to a net 0.5% expecting their profits to increase.
These were preliminary results for February. The final results, including industry breakdowns, can be expected at the end of February.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 4 February) show the North Island drying out, with most of its regions having soils significantly dryer than usual for this time of year, especially so in the Far North and eastern Bay of Plenty. The South Island’s soils are more ‘normal’ overall. They are significantly dryer than usual in Golden Bay-Tasman Bay and the Catlins but significantly wetter than usual in parts of North Otago and western Southland.
Consumer confidence rising
Consumer confidence started the year positively with the monthly ANZ Roy Morgan Consumer Confidence Index lifting 1.8 points in January to 113.8.
A score above 100 indicates there are more optimists than negative and the Index is not far off its historical average of around 120. It had slumped to as low as 84.8 in April 2020.
The proportion of people who believe it is a good time to buy a major household item lifted 3 points to a net +21%. The expectation for consumer price inflation was 4.5%, which is historically elevated. The same can be said for house price inflation, expected to be 6.9%.
Building consents up
Statistics NZ’s monthly Building Consents Issued show that for the year ended December 2020, the number of new dwellings consented was 39,420, up 4.8% from the December 2019 year, with their value also up 4.6% to $14.53 billion. This followed a very strong December month (with the number of consents up 26.9% on December 2019 and values up 28.0%).
Non-residential buildings also had a strong finish to the year, but earlier weakness meant the $7.05 billion value of consents for the year to December 2020 was down 5.5% from the December 2019 year. The annual value of farm buildings consented was $290 million, up 3.5%.
Residential building consents are close to their 1973 peak, but New Zealand’s population is considerably higher now than it was then (5 million versus 3 million).
The NZ Dollar strengthened over the week, up 1.1% against the TWI. Most of the increase came on Wednesday in response to the surprisingly strong employment data. It was up against all our major trading partners.
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 basis point but the yield for 10 year Government Bonds shot up 28 basis points, with it increasing each day.
The Reserve Bank will next review monetary policy settings (including the OCR) on 24 February.
|This Week (4/2/21)||Last Week (28/1/21)||Last Month (5/1/21)||Last Year (4/2/20)|
|90 Day Bank Bill||0.28%||0.29%||0.27%||1.25%|
|10 Year Government Bond||1.35%||1.07%||0.95%||1.23%|
Source: Reserve Bank of NZ