Monthly Economic Review - July 2020

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• Latest data and events
• Economic growth
• Employment and Unemployment
• Inflation
• External
• Finance
• International
• Topic of the month

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Latest data and events

New Zealand’s gross domestic product contracted by 1.6 percent in the March 2020 quarter, the largest quarterly contraction since the March 1991 quarter.  Thirteen of 16 industries recorded a reduction in value-added output in the quarter.  Investment in residential buildings and other fixed assets fell substantially, while the external sector added to growth (as the volume of imported goods and services fell by a larger degree than exported volumes).  Annual average GDP growth fell to 1.5 percent over the year ended March 2020.

The current account deficit was $1.6 billion in the March 2020 quarter in seasonally adjusted terms.  Services export revenues fell by $460 million in the March quarter, due to a $342 million reduction in spending by international visitors and students, and an $83 million reduction in transportation export services.  The value of goods imported fell by $352 million in the quarter with a reduction in imported consumer goods, while the value of exported goods rose by $261 million (with an increase in fruit, milk powder, butter and cheese exports).  The annual current account deficit was $8.5 billion (equivalent to 2.7 percent of gross domestic product). 

Tourism spending in May 2020 at $1,057 million was 48 percent lower than the same month a year earlier according to MBIE.  Those Regional Tourism Organisations (RTO) areas with the largest percentage decline in tourism spending in May 2020 compared with May 2019 included Fiordland, Queenstown, along with the Mackenzie and Wellington regions.  Nationally, in the year ended May 2020, tourism spending was 11 percent lower than the previous year. 

The Monetary Policy Committee of the Reserve Bank agreed to continue its $60 billion Large Scale Asset Purchase programme on 24 June.  The Committee also decided to keep the official cash rate at 0.25 percent, in line with its announcement on 16 March to keep the official cash rate at this level “for at least the next 12 months”.  The Committee also announced that it would favour an expansion of the Large Scale Asset Purchase programme rather than further reductions in the official cash rate if additional monetary policy stimulus was required.

Households have increased their bank deposit holdings as a result of COVID-19, with significant increases in transactional and savings account balances during the months of March and April.  Individuals also paid back their personal consumer loans with lending institutions during those two months, with the total value of personal loans outstanding falling in March and April (but these have since risen by 0.5 percent in May).    

The Treasury has launched a New Zealand Activity Index, which is a composite index that tracks eight separate indicators of economic activity.  According to the Index, economic activity in May 2020 was 6.5 percent lower than a year earlier.  This was an improvement upon April’s index level, which was 19 percent lower than a year earlier.

Topic of the month: Māori businesses

Economic growth

Background

A country’s gross domestic product (GDP) is a measure of economic activity during a period of time, normally reported on a quarterly and an annual basis. It is the sum of money values of all final goods and services produced in an economy. The primary indicator used for tracking economic growth over time is known as real gross domestic product, or real GDP. Real GDP is gross domestic product adjusted for changes in prices. New Zealand’s official gross domestic product figures are sourced from Stats NZ.

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Gross domestic product

Gross domestic product contracted by 1.6 percent in the March 2020 quarter, the largest quarterly contraction in economic activity in 29 years, as the economy felt the initial impacts of COVID-19.

Thirteen of the 16 industry groups recorded a contraction in economic activity in the March quarter.  The construction industry contracted by 4.1 percent in the quarter with building sites closing during the lockdown.  Economic activity in the transport, postal, and warehousing industry contracted by 5.2 percent in the quarter.  This industry was significantly impacted by the restrictions on travel.

Annual average GDP growth was 1.5 percent in the year ended in the March 2020 quarter, compared with 3.1 percent a year earlier.

Other data

The Treasury has launched a New Zealand Activity Index which is a composite of eight indicators covering consumer spending, unemployment, job vacancies, traffic volumes (light and heavy traffic), electricity generation, business outlook and manufacturing activity.  The index for May was 6.5 percent lower than for May 2019 (having been 19 percent lower in April than a year earlier).

Outlook

Treasury now expects gross domestic product to contract by around 20 percent in the June quarter (an improvement on the 23 percent contraction forecast in the Budget Economic and Fiscal Update 2020).  The OECD has forecast that the New Zealand economy will contract by nearly nine percent in 2020, assuming there are no further COVID-19 outbreaks (and contract by ten percent if there is a second global wave of outbreaks in the fourth quarter of 2020). 

Source:  Stats NZ.

Next Release:  Gross Domestic Product: June 2020 quarter.             Date: 17 September 2020.

Employment and Unemployment

Background

The unemployment rate measures the number of people unemployed as a proportion of those in the labour force. The labour force is the number of people of working age (15 years and over) who are working for wages or a salary, working for a family business, or who are unemployed and seeking work. In New Zealand, the official unemployment rate is sourced from Stats NZ’s quarterly Household Labour Force Survey (produced as part of its Labour Market Statistics).

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Labour market

New Zealand’s unemployment rate rose 0.2 percentage points to 4.2 percent in the March 2020 quarter, with 116,000 people unemployed (in seasonally adjusted terms). The labour force expanded by 0.9 percent in the quarter, resulting in an increase in unemployment despite an increase in employment.  Growth in part-time employment accounted for two-thirds of employment growth in the quarter.

Other data

The number of filled jobs rose by 0.8 percent in May according to Stats NZ’s Employment Indicators.  This followed a 1.6 percent drop in April and 0.2 percent fall in March.  Stats NZ noted that filled jobs numbers included those covered by the wage subsidy scheme.  Stats NZ also mentioned that those aged 15 to 24 years were more significantly hit by the job losses in April (and had a harder time filling jobs in May).

The number of those receiving Jobseeker Support was 190,456 on 26 June, up 45,795 from mid-March, but slightly lower than the early June peak of 190,607.  For those receiving Jobseeker Support and are work ready, the largest percentage increase has been for those aged 20 to 29 years.

There has been some improvement in firms’ employment intentions in the ANZ Business Outlook survey over the last two months.  However, a net 35 percent of firms still expect to reduce employment levels in their firm over the coming 12 months.

Outlook

The Treasury now expects an unemployment rate of around 7.5 percent in the June 2020 quarter.  The unemployment rate is forecast to peak in either the September or December 2020 quarters, with forecasts from 7.7 percent (ASB), 8 percent (Westpac), about 9 percent (Treasury), and 10 percent (ANZ and BNZ). 

  *change since the same quarter of the previous year based on seasonally adjusted data.  Source:  Stats NZ.

 Next Release:  Labour Market Statistics: June 2020 quarter.  Date: 5 August 2020

Inflation

Background

Inflation is the change in prices of goods and services over a certain period of time. The official rate of consumer inflation is measured by Stats NZ’s Consumers Price Index (CPI). The CPI tracks the price of a basket of household goods and services over time on a quarterly basis.

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Consumers Price Index

Annual inflation, at 2.5 percent in the year ended in the March 2020 quarter, was the highest annual inflation rate recorded since the year ended in the September 2011 quarter (which was impacted by the rise in the goods and services tax rate from 12.5 percent to 15 percent from 1 October 2010).

Annual inflation was driven by annual non-tradables inflation (i.e. domestic inflation) which was 3.4 percent in the year ended in the March 2020 quarter.  Stats NZ said that high domestic inflation was influenced by “higher prices for rents, cigarettes and tobacco, construction of new houses, and local authority rates”.

Other data

The national median house price was $620,000 in May according to the REINZ.  The REINZ House Price Index rose by 7.9 percent over the year.  There were 3,990 properties sold in May, a decline of 46.6 percent over the year earlier, due to Alert Level 3 restrictions during part of the month making it difficult to sell properties.  The median number of days taken to sell a property rose to 58 days in May (compared to 41 days in May 2019).

OneRoof and its data partner Velocity has reported that house prices have fallen by one percent since the lockdown commenced on 25 March.  Prices in the Queenstown Lakes district have fallen by 7.7 percent, and 5.7 percent on the West Coast region.

Outlook

The Reserve Bank has reported that a higher New Zealand dollar is dampening the outlook for inflation, along with lower domestic and international economic activity.  NZIER Consensus Forecasts has annual inflation declining “sharply over the coming year before recovering in subsequent years”.  Average annual inflation of 0.2 percent has been forecast for the year ended March 2021.    

 Source: Stats NZ.

Next Release:  Consumers Price Index: June 2020 quarter.                Date: 16 July 2020

External

Background

The balance of payments is the record of the receipts and payments between a country’s residents and the rest of the world, over a given period. The current account is that part of a country’s balance of payments which embraces its transactions of goods, services, primary income (i.e. international income), and secondary income (i.e. current transfers such as foreign aid). A “balance of payments deficit” refers to a deficit of the current account.

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Current account balance

New Zealand’s seasonally adjusted current account deficit for the March 2020 quarter was $1.6 billion, $372 million lower than the previous quarter.  The improvement in the deficit was driven by a $613 million improvement in the goods balance.  There was an increase in the value of fruit exports in the quarter (especially for kiwifruit), while milk powder, butter and cheese export values also rose.  The value of imported consumption goods fell in the quarter.

The annual current account deficit was $8.5 billion in the year ended 31 March 2020, equivalent to 2.7 percent of gross domestic product. 

Other data

New Zealand’s international investment position was negatively impacted by the decline in international equity prices in the March quarter.  At 31 March 2020, the net liability position was $182 billion, an increase of $10.1 billion from the position on 31 December 2019.  The number of international visitors arriving in April 2020 was 1,721, compared with 307,409 a year earlier.  Stats NZ estimated that there were approximately 125,000 to 145,000 visitors in New Zealand as at 5 June.

Outlook

The ANZ expects the current account deficit will average around 2.5 percent of GDP over the next couple of years.  The deterioration in international tourism revenues is expected to be offset by lower debt servicing costs due to lower interest rates, buoyant demand for goods exports (particularly for food products), and weak domestic demand.  Higher equity prices in the June quarter will unwind some of the deterioration in New Zealand’s net liability position.   

 Next Release:  Balance of Payments: June 2020 quarter.    Date: 16 September 2020

Finance

Background

The trade weighted index (TWI) is an index of the New Zealand dollar’s value against a basket of 17 overseas currencies, where each currency is weighted by a combination of the size of the associated country’s bilateral merchandise trade with New Zealand (including the Euro area) and their gross domestic product.  The Official Cash Rate (OCR) is the interest rate that applies to overnight borrowing and lending between banks and the Reserve Bank.  The S&P/NZX 50 is the main share index of the New Zealand Exchange. It tracks changes in the share prices of the top 50 publicly listed companies by free float market capitalisation on the NZX market. It is a gross index, so it includes the payout of dividends in its calculation.

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Recent trends & data

As per the Reserve Bank’s announcement in March that it was keeping the official cash rate at 0.25 percent “for at least the next 12 months”, the Bank’s Monetary Policy Committee kept the official cash rate at 0.25 percent on 24 June.  The Committee also announced that it was continuing its Large Scale Asset Purchase programme of purchasing New Zealand Government Bonds, Local Government Funding Agency Bonds, and New Zealand Government Inflation-Indexed Bonds.  The size of the programme is currently set at $60 billion.

Both borrower and depositor retail interest rates have fallen in recent months.  While floating mortgage rates have fallen by 70 - 76 basis points, fixed mortgage rates have fallen by less.  Term deposit rates have also fallen, with deposit rates for a $10,000 deposit ranging from 0.39 percent (one year) through to 2.15 percent for a term of 18 months or five years.  These deposit rates are particularly unfavourable (especially net of tax) when compared with the current annual inflation rate of 2.5 percent.

Outlook

The Reserve Bank has said that it is willing to provide additional stimulus, such as increasing the size of its asset purchase programme or using additional monetary policy tools, if necessary.  ANZ expects that the size of the asset purchase programme will rise to $90 billion, while Westpac believes it will be expanded to $100 billion in order to keep interest rates low.  A negative official cash rate has not been ruled out, although ASB believes the Reserve Bank will utilise other monetary policy tools first.  Westpac expects an official cash rate of -0.5 percent next year. 

*Last business day of the month.  Sources: Reserve Bank; NZX.

Next Official Cash Rate (OCR) decision:  12 August 2020

International

Background

New Zealand’s economic growth rate, unemployment rate and central bank interest rates are compared with our main OECD trading partners. The first table below illustrates the seasonally adjusted quarterly growth rates in economic activity.  The second table below shows the harmonised unemployment rate in each OECD country/area, while the third shows the main central bank interest rates for various countries (and the Euro).

Economic growth

OECD Composite Leading Indicators are pointing to a sharp slowdown of the global economy, although the Chinese economy is showing initial positive signs.  The OECD mentioned that there was considerable uncertainty surrounding outlook, given the impact of lockdowns on each country’s economy (and the transition out of lockdowns).

While noting a high degree of uncertainty around its forecast, the International Monetary Fund (IMF) expects the global economy to contract by 4.9 percent in 2020.  COVID-19 is having a more negative impact on economic activity than initially forecast.  The speed of the economic recovery is also forecast to be more gradual than previously expected. 

Unemployment

The unemployment rate within the OECD is projected to have risen to around 11.5 percent in mid-2020.  Unemployment levels are forecast to “moderate gradually” as economies reopen, but will remain substantially higher than prior to the outbreak.

Central banks

The Australian Reserve Bank Board noted in early June that the Bank’s policy package was helping to lower funding costs and support the economy.  As such, it reaffirmed a cash rate target of 0.25 percent, targeting a yield of 0.25 percent for three-year Government bonds, and the provision of funding for businesses (especially SMEs) through the Bank’s Term Funding Facility.

Topic of the month

Māori businesses

Stats NZ has released Tatauranga umanga Māori – Statistics on Māori businesses, which provides information on Māori businesses in 2019. 

Māori authorities

There were 1,200 Māori authorities in 2019, which are businesses involved in the collective management of assets held by Māori.  Of these, about a third were involved in the non-residential property industry, and around a quarter were involved in the primary industries.  These Māori authorities employed 12,300 employees as at February 2019, which is a head count of all salary and wage earners.

In the 2019 calendar year, Māori authorities exported a total of $741 million, with $354 million of exports going to China.  Fish, crustaceans and molluscs were a significant export commodity for Māori authorities, with exports totalling $365 million in 2019.

Māori small to medium enterprises

There were 492 Māori small to medium sized enterprises in 2019, which were predominantly located within the manufacturing; agriculture, forestry and fishing; and business services industries.  Māori small to medium sized enterprises have fewer than 100 employees, and are not Māori authorities.  These enterprises had 9,900 employees in 2019.

Māori small and medium sized enterprises exported $202 million worth of commodities in 2019, with $48 million of exports to Australia.  Eighteen percent of Māori small and medium sized enterprises undertook research & development (R&D) in 2019, with the same proportion of Māori authorities also undertaking R&D during the year.

Grant Cleland

Research Services Analyst - Economics

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