by Nick Clark, Federated Farmers Manager General Policy
Economy contracts – are we back in recession?
Economic activity measured by Gross Domestic Product fell 1.0% in the December 2020 quarter, reflecting an easing of activity following September quarter’s post-lockdown catch-up, slower population growth, and the continued absence of international visitors. GDP growth was well below economists’ expectations and that of the Reserve Bank.
Compared to the September quarter, 7 of 16 industries declined, with the biggest drops being for construction (down 8.7%) and retail (down 5.0%). Both had bounced back very strongly in September from the June quarter. The transport, postal, and warehousing industry had the biggest quarter-on-quarter increase, up 7.0%. Agriculture, forestry, and fishing GDP was down, falling 0.9% for the quarter. Digging deeper we see that agriculture fell by 2.0%, while fishing and forestry both rose.
The annual story can be presented in two ways, first by comparing a quarter with the same quarter the previous year and the second by comparing a full year (i.e., four quarters combined) with the previous full year.
Firstly, comparing the December 2020 quarter with the December 2019 quarter, GDP was down 0.9%. The biggest drop was for transport, postal, and warehousing (down 25.5%), where transport has felt a cold wind from a lack of international tourists travelling to and within New Zealand. Mining was next worst, down 17.5%. Not surprisingly, given the pandemic health response and bigger government, the largest increases were for health care and social assistance (up 3.9%) and public administration and safety (up 3.6%). Agriculture, forestry, and fishing was virtually unchanged, up 0.1% compared to the December 2019 quarter. Agriculture was down 1.1% while forestry and fishing both increased.
Secondly, for the full year-ended December 2020, GDP was down 2.9% compared to the year-ended December 2019. Most industries posted year-on-year drops, with the biggest drops again being for transport, postal, and warehousing (down 25.6%) and mining (down 11.6%). And again, the biggest increases were for public administration and safety (up 4.5%) and health care and social assistance (up 2.3%). Agriculture, forestry, and fishing was down 2.5% year-on-year. Agriculture was down 2.8%, while forestry was also down but fishing was up.
The December quarter’s 1.0% drop followed the post-lockdown 13.9% increase in the September quarter. The annual year-on-year decline of 2.9% reflects the fact that GDP has fallen in three of the last four quarters.
New Zealand’s quarterly drop was worse than those for countries we like to compare ourselves to (including Australia’s which was up 3.1%), but the comparisons look better when comparing countries’ December 2020 quarters with their December 2019s.
It’s not surprising that GDP numbers are jumping around with great variability between industries. But looking ahead the risk is high that the current March quarter will also show a fall. This is due to the continued absence of international visitors and slow population growth.
Another drop in activity would put New Zealand back into recession and confirm that 2021 will be a hard grind, especially if our borders remain closed for an extended period. It will also be another reminder that there’s a big difference between the exuberantly frothy housing market and the real economy.
The financial markets did not seem overly perturbed by the weaker than expected outcome, with the NZ Dollar appreciating on Thursday and wholesale interest rates edging up.
External deficit widens.
New Zealand recorded a larger current account deficit in the December 2020 quarter, according to Statistics NZ’s Balance of Payments and International Investment Position.
The quarterly seasonally-adjusted current account deficit was $2.10 billion, $1.60 billion more than September quarter’s deficit. The bigger deficit was mainly due to a $955 million increase in goods imports, outpacing a $233 million increase in goods exports, and a worsening in the services balance. Services exports were down $733 million due to a big drop in spending by international tourists while services imports were up $334 million. The quarter saw a small $215 million surplus for goods trade but a rare deficit for services of $677 million.
The annual current account deficit for the year ended December 2020 was $2.55 billion (0.8% of GDP). This was similar to the deficit for the year ended September 2020 but it was down from a $10.56 billion deficit for ended December 2019 (3.3% of GDP).
Meanwhile, New Zealand’s international investment position at 30 December 2020 was a net liability position of $177.1 billion (55.0% of GDP), $97 million smaller than at 30 September 2020.
Dairy prices had their first fall since early November at this week’s Global Dairy Trade auction as supply onto the platform increased, especially for whole milk powder.
Overall, the GDT Price Index lost 3.8% compared to the previous auction a fortnight ago, partly unwinding the huge 15.0% increase at that auction.
The drop was driven by whole milk powder which lost 6.2% while butter was also down 2.8%. There were increases though for skim milk powder (up 0.7%), anhydrous milk fat (up 3.7%), and lactose (up 8.6%). The average selling price was $US4,089 and 26,872 tonnes were sold.
This week’s drop broke a run of eight consecutive increases but the GDT Price Index remains 39.4% higher than at the same time last year.
Choppy economic outlook?
The seasonally adjusted PMI for February was 53.4 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). While this was around the survey’s long-term average, it was down 4.6 points from January. All the sub-indexes were lower, with employment and deliveries remaining in contraction. Supply issues remain to the fore, according to BNZ.
The PSI for February was 49.1, which was up 1.1 points from January. However, it was still a contraction and well below its long-term average of 53.8. February was also the fourth consecutive month below 50.0. Business NZ noted a slower return to ‘business as usual’ post holidays compounded by the two separate lockdown periods in mid and late February, with Auckland hit hardest.
The net effect of the two surveys and their results over recent months suggests a decided choppy economy and that March quarter GDP could even be negative.
Kiwis driving migration gain.
Annual net migration of New Zealand citizens has exceeded that of non-New Zealand citizens for the first time since citizenship data started in the late 1970s, according to Statistics NZ’s International Migration Statistics.
For the year ended January 2021, provisional net gains of 20,800 New Zealand citizens and 12,300 non-New Zealand citizens made up an overall estimated net migration gain of 33,200.
Historically, New Zealand has had an annual net loss of New Zealand citizens and an annual net gain of non-New Zealand citizens. But there has not been a flood of returning ex-pats with fewer New Zealand citizens coming home compared to the previous year. Instead, the net migration gain has been caused by far fewer New Zealanders leaving the country, which should be no surprise given border restrictions and disruptions to international travel.
Visitor numbers slump.
Meanwhile, the struggles of the tourism industry during what are usually their best months have been laid bare once again by Statistics NZ’s International Travel Statistics.
The data shows overseas visitor arrivals were down by 405,300 to just 5,400 in January 2021, compared with January 2020 – that’s down a massive 98.7%. Australian numbers were down by far the most, slumping 121,400 to just a little over 1,000 visitors. Little wonder the calls for a trans-Tasman travel budget have been growing.
It’s the same story in the other direction with only 3,600 New Zealand residents returning form an overseas trip in January, down by 322,700 or 98.9%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 18 March) show soils being mostly dryer than usual in the North Island, with it particularly so in eastern Bay of Plenty to East Cape. Far North, New Plymouth, and Horowhenua are relatively normal. In the South Island, Grey and southern Fiordland are wetter than usual while Kaikoura, Hurunui, Banks Peninsula, and Clutha to eastern Southland are dryer than usual.
The NZ Dollar increased on Thursday despite the weaker than expected GDP outcome, and over the course of the week it was up 0.3% against the TWI. It was also up against all our key trading partners, 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 2 basis points. The 10 year Government Bond yield was also up 2 points.
The Reserve Bank will next review monetary policy settings (including the OCR) on 14 April.
|This Week (18/3/21)||Last Week (11/3/21)||Last Month (18/2/21)||Last Year (18/3/20)|
|90 Day Bank Bill||0.34%||0.32%||0.28%||0.68%|
|10 Year Government Bond||1.79%||1.77%||1.51%||1.40%|
Source: Reserve Bank of NZ