GDP surprisingly strong….will rates rise sooner?
Despite continued border restrictions keeping out international tourists and despite Auckland being in alert level 3 lockdown for 10 days, March quarter’s Gross Domestic Product was undeniably strong. Quarterly growth of 1.6% came in well ahead of economists’ expectations, including the Reserve Bank which had been forecasting a 0.6% GDP decline.
On an annual basis, GDP for the year ended March 2021 was down 2.3% on that for the year ended March 2020. Annual growth has been in negative territory since the June 2020 quarter (where GDP slumped 10.8%) but will likely turn positive once the June 2020 quarter drops out of the annual calculations.
he services industries, representing two-thirds of the economy, made the largest contribution to the quarterly result. Stats NZ noted that households spent more on accommodation, eating out, and purchasing big ticket items like furniture, audio-visual equipment, and motor vehicles. This helped support growth in retail trade, accommodation, and wholesale trade industries. Construction also rebounded from December quarter’s 8.4% slump, jumping 6.6% in March.
Economic activity in agriculture, forestry, and fishing rose 1.1% in the quarter. Rises in agriculture and forestry were partially offset by a fall in fishing. Annually, GDP for agriculture, forestry, and fishing was down 0.7% in the year ended March 2021.
Gross fixed capital formation grew 6.4% in the March 2021 quarter. Investment in plant, machinery, and equipment rose 15.5% and transport equipment rose 18.5%. That should be encouraging for future growth.
Net exports remained a drag on growth, however. Exports fell by 8.0%, driven by a 20.2% fall in services exports. To blame was border restrictions on international visitor and education spending at a time of year when it normally increases. Meanwhile, imports rose by 7.1%, driven by rises in most goods categories, but especially consumption goods and petrol.
With GDP a lot stronger than anyone expected (including yours truly), and with cost and price pressures intensifying, the Reserve Bank may have to start hiking the OCR earlier in 2022 rather than later as currently forecast.
Another drop for dairy prices.
This week’s Global Dairy Trade auction fell 1.3%, the fifth successive fall in its Price Index.
The overall result was dragged down by the two biggest commodities by volume, whole milk powder (down 1.8%) and skim milk powder (down 1.7%). Butter also fell (down 1.7%) but others rose – anhydrous milk fat (up 0.6%), cheddar (up 0.2%, and lactose (up 0.4).
The average selling price was $US4,083 and 21,522 tonnes were sold.
Although the GDT Price Index has fallen at six of the last seven auction over the past three months, it is still 37.0% higher than the same time last year.
Food prices rise.
Statistics NZ’s monthly Food Price Index for May showed an increase in food prices and a pickup in the annual rate of food price inflation.
Comparing May 2021 with April 2021, food prices rose 0.4%. After seasonal adjustment, they were also up 0.4%:
- Fruit and vegetable prices fell 0.1% (and down 0.3% after seasonal adjustment), with fruit down 5.2% but vegetables up 3.4%.
- Meat, poultry, and fish prices rose 0.5%, with beef and veal down 1.1% but mutton, lamb, and hogget up 4.2%.
- Grocery food prices rose 0.1% (and up 0.4% after seasonal adjustment), with bread and cereals up 0.5% and milk, cheese, and eggs up 0.6%.
On an annual basis, comparing May 2021 with May 2020, food prices were up 1.8%, an acceleration from the 0.7% annual increase in April:
- Fruit and vegetable prices rose 4.1%, with fruit up 3.9% and vegetables up 4.2%.
- Meat, poultry, and fish prices rose 0.2%, with beef and veal down 2.2% but mutton, lamb, and hogget up 2.2%.
- Grocery food prices fell 0.1%, with bread and cereals down 0.4% but milk, cheese, and eggs up 1.6%.
Current account dives.
New Zealand’s current account balance dived deeply into deficit in the March 2021 quarter, according to Statistics NZ’s Balance of Payments and International Investment Position.
The March quarter current account balance was a deficit of $5.02 billion (seasonally adjusted), the biggest quarterly deficit since June 2008.
For the first time since the March 2020 quarter, the value of imported goods was larger than the value of exported goods. Goods exports fell by $251 million and goods imports rose by $1.3 billion, resulting in a goods deficit of $1.5 billion. Meanwhile, the services deficit was $1.6 billion, $945 million wider than the December 2020 quarter.
The annual current account deficit for the year ended March 2021 was $7.24 billion (2.2% of GDP). This was a widening of the year ended December 2020’s deficit of $2.44 billion (0.8% of GDP).
As at 31 March 2021 New Zealand’s net international liability position was $160.9 billion (49.5% of GDP), down from $178.4 billion (55.5% of GDP) at 31 December 2020.
House prices up again.
The housing market is showing few signs of slowing, according to the Real Estate Institute of NZ’s monthly Residential Market Statistics.
The median house price in May 2021 was $820,000, up 1.9% from April’s $805,000, and just shy of a record high while there were 7,550 house sales, up 1.3% from April’s 7,453.
The annual increases were huge, with the national median sales price up a 32.3% from May 2020’s median sales price of $620,000, while the increase in sales volumes was 81.4%. Both were off COVID lockdown impacted bases.
Five regions hit new record high median sales prices, including Auckland’s, which was up 26.9% to $1,148,000. But the biggest annual percentage increases were in the regions, such as Gisborne (up 49.4%), Manawatu-Wanganui (up 38.6%), Hawkes Bay (up 34.9%), West Coast (up 33.6%), Marlborough (up 32.7%), Otago (up 32.6%), and Bay of Plenty (up 32.3%). The smallest regional increase was in Southand (up ‘only’ 15.9%).
Reserve Bank to add another tool.
Meanwhile, the Reserve Bank announced it intends adding debt serviceability restrictions to its macroprudential policy toolkit.
It reckons such restrictions, including a Debt-to-Income (DTI) limit, will be the most effective additional tool to support financial stability and house price sustainability. A DTI would be complementary to mortgage Loan-to-Value Ratio (LVR) restrictions, with a DTI considered particularly effective against investors, while not impacting so greatly on first home buyers.
The Reserve Bank will now do more work on the proposal and any final decision will be preceded by public consultation.
Bubble boosts travel.
Statistics NZ’s International Travel Statistics has shown a jump in border crossings in April.
There were 85,900 border crossings in April 2021, made up of 47,000 arrivals and 38,900 departures. Total border crossings were well up compared with the earlier months of 2021, which averaged 26,300 border crossings a month.
Stats NZ noted that despite this increase, arrivals and departures were significantly lower than levels before COVID-19, when April border crossings were as high as 1.2 million. The bubble opened on 19 April and May will be its first full month in operation, although late that month Melbourne’s fourth lockdown caused a pause in the bubble between New Zealand and Victoria.
Meanwhile, International Migration Statistics showed an estimated net migration gain of only 6,300 for the year ended April 2021 compared with a net gain of 90,000 in the year ended April 2020, a drop of 83,700. There was a net migration gain of 15,800 New Zealand citizens and a net migration loss of 9,500 non-New Zealand citizens in the year ended April 2021.
Manufacturing and services in expansion.
The manufacturing and services sectors are both showing pretty healthy levels of expansion, according to the May 2021 BNZ-BusinessNZ Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI).
The PMI for May was 58.6, up 0.3 points from April. A score over 50 indicates manufacturing is generally expanding while a score under 50 that it is declining. Business NZ observed that Production (65.3) and New Orders (63.7) remain the cornerstones of ongoing expansion in the sector. The other indicators (employment, finished stocks, and deliveries of raw materials) were all above 50, although employment’s score has been slipping.
Meanwhile, the PSI was 56.1, down 5.1 points from April’s very strong score. Business NZ observed that Orders/Business (62.1) and Activity/Sales (58.7) were strong but Supplier Deliveries (45.1) was contracting, reflecting supply side stresses.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 17 June) show significantly drier than usual soils on the east coast of the North Island, especially from Hawkes Bay to Wairarapa and also to a lesser extent in the Manawatu and Whanganui areas. In the South Island, much of Canterbury’s soils remain significantly wetter than usual.
The NZ Dollar was down 0.4% for the week against the Trade Weighted Index. It was up against the Australian Dollar and the Euro but down against our other 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 up 1 basis point to 0.33%. The 10 year Government Bond yield was up 7 points to 1.78%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 14 July.
|This Week (17/6/21)||Last Week (10/6/21)||Last Month (17/5/21)||Last Year (17/6/20)|
|90 Day Bank Bill||0.33%||0.32%||0.35%||0.27%|
|10 Year Government Bond||1.78%||1.71%||1.89%||0.85%|
Source: Reserve Bank of NZ