by Nick Clark, Manager General Policy
Ancient history, big questions
Economic activity was strong in the June quarter, even stronger than expected. But it’s nearly three months since its end and growth has since taken a hit. There are also plenty of questions on the outlook.
Statistics NZ’s Gross Domestic Product for the June 2021 quarter recorded a 2.8% increase over the March 2021 quarter, a very strong quarterly growth rate and much higher than economists’ expectations. The June 2021 quarter was 17.4% higher than the lockdown-hammered June 2020 quarter, while annual growth for the year-ended June 2021 over the year-ended June 2020 was a robust 5.1%.
Agriculture, forestry, and fishing had a strong June quarter, with its GDP up 5.5% on the March quarter and its annual growth rate was a solid 4.6%.
The strongest quarter-on-quarter growth was recorded by transport, postal, and warehousing (up 14.0%) and retail trade and accommodation (up 9.5%). The biggest annual increases were for retail trade and accommodation (up 16.0%) and construction (up 14.3%).
Alas, the September quarter has seen a sharp reversal of fortunes. The opening of the trans-Tasman travel bubble in April boosted growth in the June quarter but it was closed in late July. And as we all know New Zealand was plunged into level 4 lockdown in mid-August. Although most of the country is now in level 2, Auckland remains in level 4. The economic impacts will be tough on most sectors but will hit retail and accommodation particularly hard.
Based on last year’s post-lockdown bounce, the economy will rebound once restrictions are relaxed. How quickly, how strongly, and how enduringly will depend on the answers to a lot of big questions.
Will we have any more community outbreaks? How long will Auckland remain in level 4? How long will it take for Auckland and the rest of the country to return to level 1? What will level 1 look like under Delta? How long will it be before we are sufficiently vaccinated to allow New Zealand to reopen to the world, including to tourists and migrants?
And there are big questions about economic policy. Huge fiscal and monetary responses were employed in 2020 to fight the pandemic’s economic impacts and stimulate a recovery. The big guns have been fired and there’s less ammunition available today. So how will Government use fiscal policy to support recovery without plunging us into deeper deficits, a mountain of debt, or higher taxes? And how will monetary policy be normalised to take pressure off rampant house prices and broader inflationary pressures without hurting the real economy?
Big questions indeed, but regardless New Zealand farmers and growers will keep feeding us and producing the goods that fuel our exports, our economy, and our collective wellbeing.
Deficit widens
New Zealand’s annual current account deficit widened in the June quarter, according to Statistics NZ’s Balance of Payments and International Investment Position.
The annual current account deficit was $11.2 billion for the year ended June 2021. This was up from $8.2 billion for the year ended March 2021 and also up from $4.7 billion for the year ended June 2020.
Expressed as a percentage of GDP, the current account deficit was 1.5% in June 2020, dropped to 0.8% in December 2020 but then rose to 2.5% in March 2021 and further to 3.3% in June 2021. However, it remains relatively low by historical standards.
The change from a services surplus (which had been typical for 20 years pre-Covid) to a services deficit has been the biggest driver in the increasing current account deficit. The collapse in international tourism has been the main factor in this reversal.
Meanwhile, as of 30 June 2021, New Zealand’s net international liability position was $155 billion, down from $165 billion as of 31 March 2021 and $181 billion as of 30 June 2020. The improving net liability position was mainly due to market price changes and other valuation changes. Statistics NZ noted that international equity markets have continued to perform well pushing up the value of New Zealand investments abroad.
Food prices up
Statistics NZ’s monthly Food Price Index increased 0.3% in August compared with July (and up 0.2% after seasonal adjustment).
In August 2021 compared with July 2021:
- Fruit and vegetable prices rose 0.4% (but down 0.2% after seasonal adjustment), with fruit down 0.8% and vegetables up 1.0%.
- Meat, poultry, and fish prices rose 1.3%, with beef & veal up 1.7% and mutton, lamb & hogget up 5.2%.
- Grocery food prices fell 0.1% (but up 0.2% after seasonal adjustment), with bread & cereals up 0.9% and milk, cheese & eggs up 0.3%.
On an annual basis food prices increased 2.4% for the year to August, a slowdown from the 2.8% increase for the year to July. In August 2021 compared with August 2020:
- Fruit and vegetable prices increased 2.1%, with fruit down 0.4% and vegetables up 3.5%.
- Meat, poultry, and fish prices increased 2.2%, with beef & veal down 0.4% and mutton, lamb & hogget up 9.0%.
- Grocery food prices increased 1.9%, with bread & cereals up 0.5% and milk, cheese & eggs up 5.4%.
Another feature of the stats was a continuation of recent increases in prices for restaurant meals and ready-to-eat meals (i.e., takeaways) – this subgroup’s annual increase was 4.6%, driven in part by higher wage pressure in hospitality.
Confidence recovers
Business confidence recovered at the start of September, according to ANZ’s Business Outlook Survey preliminary results.
A net 6.8% of businesses expected economic conditions to worsen over the coming year, a 7.4 point improvement on August’s result. Own activity expectations were down slightly but remained positive – down 1 point to a net 18.2% expecting their activity to increase.
ANZ reported that employment and investment intentions each lost a couple of points but remained solid, while profitability expectations dropped 7.6 points to a net 13.1% of firms expecting lower profits. Cost pressures remained extreme, with a net 82.7% of firms reporting higher costs (versus 85.3% in August). Inflation expectations were stable around 3% though.
The final result for September will be out at the end of the month. It will include industry breakdowns (unlike the preliminary results).
Lockdown hits card spending
Not surprisingly, Statistics NZ’s monthly Electronic Card Transactions showed retail card spending down a seasonally-adjusted 19.8% as the country went into lockdown in the second half of August.
As happened in last year’s level 4 lockdown, spending on consumables was up strongly. While the category overall was up a seasonally-adjusted 9.3% for August compared to July, within it supermarkets and grocery stores did very well (up 12.4%) but specialised food (down 22.1%) and liquor (down 24.7%) were hit hard.
It was down across the board for other retail categories. Fuel was down 27.2%; durables (e.g., furniture, electrical, and hardware retailing, recreational goods, department stores, etc.) down 35.5%; motor vehicles (excluding fuel), down 44.5%; and apparel, down 40.7%.
Hospitality’s spending was not seasonally adjusted but in actual terms its spending was also down 46.7% compared to July.
Deflated bubble hits travel
Statistics NZ’s monthly International Travel Statistics have shown arrivals and departures across the New Zealand border falling in July from the previous two months.
Total movements across the border in July 2021 were 147,900. This was down from 189,500 in May and 175,500 in June.
Ongoing interruptions to two-way quarantine-free travel with Australia were to blame. With the trans-Tasman bubble suspended in late July and unlikely to be resumed any time soon movements will have since slowed to a trickle.
Meanwhile, Statistics NZ also estimated net migration of 4,400 in the year ended July 2021 compared with 78,500 in the year ended July 2020, a drop of 74,100.
The net gain was the difference between 47,000 migrant arrivals and 42,600 migrant departures. There was a net migration gain of 14,300 New Zealand citizens and a net migration loss of 9,900 non-New Zealand citizens.
House prices continue their rise
An economic indicator defying lockdown was house prices. The Real Estate Institute of NZ’s latest monthly Residential Property Data showed house prices up in August compared with July and maintaining very strong annual growth.
In August 2021 the median house sales price was $850,000, up 3.0% on July 2021 and also up 25.5% on August 2020.
Auckland’s median sales price was up 3.0% for the month and up 26.4% for the year to hit $1.20 million. Some regions posted month-on-month declines, dragging down their annual increases, but others continued to rise. There were robust annual increases in Manawatu-Wanganui (up 35.3%), Bay of Plenty (up 26.3%), Taranaki (up 25.0%), and Canterbury (up 24.3%). The smallest annual increases were in Southland (up 8.6%), Gisborne (up 8.7%), and Northland (up 8.9%) – all had drops compared to July on sharply lower sales volumes.
Sales volumes took a hit and were at their lowest August levels since 2014. The 5,753 houses sold nationwide in August was down 21.6% from the 7,342 sold in July and down 26.5% from 7,828 sold in August 2020. Lockdown will have been a factor but inventories are also low.
The median days to sell a house was 30, three days less than the same month last year.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 16 September) show Hawkes Bay soils continuing to be significantly drier than usual for this time of year (as has been the case for some weeks). The rest of the country’s soils are either normal or wetter than usual, the latter especially so across eastern areas of the South Island.
Exchange Rates
The NZ Dollar was up slightly this week, rising 0.3%. It was up against most of our key trading partners, except the UK Pound and the Japanese Yen.
Source: Reserve Bank of NZ
Wholesale Interest Rates
This week the yield for the 90 Day Bank Bill was up a further 8 points to 0.61%. However, the 10 year Government Bond yield dropped 12 points to 1.80%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 6 October.
This Week (16/9/21) | Last Week (9/9/21) | Last Month (16/8/21) | Last Year (16/9/20) | |
OCR | 0.25% | 0.25% | 0.25% | 0.25% |
90 Day Bank Bill | 0.61% | 0.53% | 0.67% | 0.30% |
10 Year Government Bond | 1.80% | 1.92% | 1.70% | 0.60% |
Source: Reserve Bank of NZ