by Nick Clark, National Manager General Policy
No dip in inflation
The annual rate of inflation was unchanged at 7.2% in the December 2022 quarter, according to Statistics NZ’s Consumer Price Index.
The quarterly inflation rate was 1.4%. The biggest drivers were housing and household utilities (up 1.3%), food (up 1.8%), and recreation and culture (up 3.4%). Inflation was broad-based with 72% of items in the CPI having price increases, up from 66% in the September quarter, and various trimmed mean measures for core inflation were between 1.2% and 1.3%. There were also similar quarterly rates for non-tradable inflation (1.5%) and tradable inflation (1.4%).
The annual inflation rate of 7.2% was driven mainly by housing and household utilities (up 8.0%), food (up 10.7%), and transport (8.4%). The trimmed-mean measures ranged from 6.1% to 6.5%, a little lower and narrower than the September quarter’s range of 5.8% to 7.0%. Non-tradeable inflation was 6.6% while tradeable inflation was 8.2%.
The headline rate of annual inflation came in a little lower than the Reserve Bank’s November forecast of 7.5% but as noted in last week’s economic commentary this is no cause for celebration and a lot of hard work remains to be done.
Commentators are debating whether this means a 75-point increase in the OCR or a 50-point increase at the next review of monetary policy settings on 22 February. Recent economic data points to weaker economic activity but cost pressures and pricing expectations remain stubbornly acute.
The next big bit of data for the Reserve Bank to digest will be December quarter labour market statistics to be released on 1 February, followed by inflationary expectations survey on 15 February. The labour market has been red hot but if unemployment rises it could muddy the waters given the Reserve Bank’s dual mandate of price stability and contributing to maximum sustainable employment. The Reserve Bank will want to see a fall in inflationary expectations too.
The Reserve Bank will have a tough decision to make but on balance I think it will stick to a 75-point hike, although admittedly a lot can happen over the next four weeks.
Fighting the inflation pandemic
As well as more data, there should also be more clarity by then on the Government’s plan to focus on the economy and fight what the new Prime Minister has called an ‘inflation pandemic’.
The Government certainly has an important role to help the Reserve Bank do its job.
It needs to ensure in its Budget that its fiscal policy is responsible and that its spending, after several years of runaway growth, is contained and brought under firm control. This means ditching expensive policy wishes like the media merger, three waters, light rail, and income insurance. Reprioritising on the basics might even allow for some tax relief.
The Government needs to stop imposing the huge volume of costly regulation and other policies that have increased costs on businesses and consumers. And it needs to ensure all its policies drive higher productivity and promote rather than impede our economic competitiveness.
In the farming context, RMA reforms, agricultural emissions pricing, and unworkable freshwater rules don’t pass those tests. They should be ditched.
If the Government does its bit over the coming weeks, the Reserve Bank might be able to go easier with OCR hikes.
Fiscal forecasts as expected
As the Government considers its options, its Interim Financial Statements for the five months to November 2022 have shown fiscal indicators tracking mostly close to forecast.
Core Crown tax revenue for the five months was close to forecast at $45.4 billion, $78 million higher than expected, and total core Crown revenue was $50.0 billion, $186 million higher.
Meanwhile, core Crown expenses at $51.7 billion were $742 million higher than expected. Treasury said this was largely driven by higher finance costs due to increased interest rates, and higher health expenses due to timing of funding provided.
The operating balance before gains and losses was a deficit of $2.4 billion, $61 million lower than forecast.
Net debt was $71.8 billion (19.2% of GDP), $3.8 billion lower than expected, mainly the result of market movements impacting financial instruments (e.g., the NZ Super Fund’s investment portfolio). However, gross debt of $135.0 billion was $1.6 billion higher than expected.
Farm sales lift
In a rare bright bit of economic news, the Real Estate Institute of NZ’s Rural Market Statistics show a strong lift in farm sales volumes and prices in December, although still down annually.
Overall, there were 353 farm sales in the three months ended December 2022, up 41.8% from the three months ended November 2022. However, sales are still 32.0% lower than the same three-month period last year.
There were 1,509 farms sold in the full year to December 2022, down 19.5% compared to the year to December 2021. Dairy farm sales were down 15.2%, dairy support down 18.7%, grazing farms down 16.0%, finishing farms down 14.4%, and arable farms down 19.4%.
The median price per hectare for all farms sold in the three months to December 2022 was $32,490, up 0.2% on the three months ended November 2022, but down 5.8% compared to the same three-month period last year. The REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type, was up 0.4% in the three months to December 2022 compared to the three months to November 2022 and it was also up 0.4% compared to the same three-month period last year.
REINZ suggested that a lower number of sales compared to last year can be explained by a lower number of listings in many regions. It also said a late spring and a wet October across a number of regions saw a delay in the release of many listings with a healthy number of farms under offer (but not sold) at year end.
It also highlighted increased environmental compliance has required greater preparation by sellers and more due diligence by buyers pushing out traditional selling times, while challenging economic conditions, including higher input costs and interest rates are contributing to caution in the market. Many are waiting and seeing.
Manufacturing and services end the year in a rut
The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI) both continued to be below par as 2022 drew to a close.
Compared to November, the December PMI was unchanged at 47.2. A score above 50.0 indicates expansion in activity while a score below 50.0 indicates contraction. It means that for the last quarter of 2022 manufacturing was in contraction for all three months. All but one of the five sub-indexes were below 50.0, the exception being finished stocks which came in at 50.1. New orders had the lowest score of 46.1. Meanwhile, 63.5% of respondents made negative comments, up from 58.4% in November.
The PSI for December was 52.1, down 1.7 points from November. Although still in positive territory it has dropped 6 points since October and is below its long-term average. A little more encouraging was that the score for new orders was a relatively strong 58.4, up 1 point, indicating that demand is still robust. However, as with manufacturers there was an upswing in negative comments to 58.2%, perhaps not surprising given the economic situation and predictions for a recession.
Net migration goes positive
After being negative for 19 months, re-opened borders and immigration tweaks have seen annual net migration return to positive territory in November.
Statistics NZ’s International Migration Statistics showed there were 98,000 migrant arrivals for the year to November 2022, up 77% compared to the year to November 2021. There were 92,300 migrant departures, up 36%. This resulted in a net migration gain of 5,700 for the year compared to a net migration loss of 12,700 the year previous.
The increase in migrant arrivals was due to a 160% increase in non-New Zealand citizens (while returning New Zealanders fell) and most of the increase in departures was due to a 72% increase in New Zealanders leaving. The pre-pandemic migration pattern appears to be returning, albeit so far on a much smaller scale.
Tourist numbers crack a million
Inward and outbound annual visitor arrivals have both broken back the 1 million mark, according to Statistics NZ’s International Travel Statistics.
The 1.07 million overseas arrivals for the year to November 2022 was up 867,000 compared to the year to November 2021’s paltry 207,000. On a monthly basis, November 2022’s overseas arrivals were 62% of those for November 2019, so still a way to go to recover to pre-pandemic levels.
Meanwhile, the 1.20 million New Zealand resident traveller arrivals was up 1.06 million compared to the year to November 2021’s 141,000. November 2022 month’s resident traveller arrivals were 75% of those for November 2019.
Households poorer but saving more
Statistics NZ’s quarterly National Accounts (Income, Saving, Assets and Liabilities) show that household net worth fell $56.8 billion, or 2.5%, in the September 2022 quarter, following similar falls in the March and June 2022 quarters. Cumulatively, over the first nine months of 2022 household net worth fell $179.4 billion, or by 7.4%.
Asset prices took a pounding in 2022, so no surprise that driving the fall in net worth was a decline in assets. Owner-occupied property was down $91 billion and financial assets (including shares and investment funds) down $79 billion. On the liabilities side household debt rose $9.6 billion. This trend will likely have continued in the December quarter too.
Meanwhile, household saving of $2.2 billion in the September 2022 quarter was up 31% compared to the June quarter. This was due to a 2.5% increase in net disposable income outpacing a 1.6% increase in household spending. The saving ratio was 3.9%, up from 3.1% in the June quarter. Tougher economic times tend to encourage people to save as people tighten their belts.
Thank you
Many thanks to the 1,103 Federated Farmers members who responded to the January 2023 Farm Confidence Survey. We’re now busy analysing the results and expect to get them out within the next two weeks.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 26 January) continue to show most of the North Island’s soils being wetter than usual for this time of year, although less so than last week. In contrast the South Island is mostly drier than usual, except for a patch in inland Mid Canterbury. The West Coast and Southland are particularly drier than usual.
Exchange Rates.
The NZ Dollar was a little stronger this week, up 0.2% against the Trade Weighted Index. It was stronger against the US Dollar, UK Pound, Japanese Yen, and Chinese Renminbi, but weaker against the Australian Dollar and 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 4 points to 4.85% and the 10-year Government Bond yield was up 9 points to 4.08%.
The Reserve Bank next reviews monetary policy settings (including the OCR) on 22 February 2023.
| This Week (26/1/23) | Last Week (19/1/23) | Last Month (28/12/22) | Last Year (26/1/22) | |
| OCR | 4.25% | 4.25% | 4.25% | 0.75% |
| 90 Day Bank Bill | 4.85% | 4.81% | 4.65% | 1.08% |
| 10 Year Government Bond | 4.08% | 3.99% | 4.46% | 2.59% |
Source: Reserve Bank of NZ
