01. The Front Page
It feels like we have been braced for the onset of a recession for a while now. Consequently, the pertinent question now is: are we there yet? Actually, ever since the so-called green-shoots of recovery pronouncements in early-2009 (yes, way back then), there have been many warning of another downturn on the horizon. Along with a post-GFC recovery that in many countries has been fairly anaemic, associated with an unequal distribution of gains from that recovery, the use of conventional and unconventional monetary policy tools to stimulate and support growth, the sense that all is right, just hasn’t been as convincing as some would have been pedalling.
The worrying factor throughout is that the signs of a recession continue to linger. Further, these signs seem to continue accumulating, as opposed to receding.
Of course, common to periods of heightened uncertainty, there are a range of mixed and conflicting signals. There are several good signs pointing to growing activity and increasing investment. And there are quite a few bad signs that justify widespread concern. Then there are a set of indicators that are just plain ugly.
- Buoyant share prices almost everywhere
- Low interest rates for borrowing almost everywhere
- Strong Government surplus
- Sustained spending plans for both consumption and investment
- Continuing employment growth
- Export earnings recording solid growth
- Capital gains tax off political agenda
- First home buyer house prices remain at high multiples of household income
- Capital gains tax off political agenda
- Construction sector capacity sorely tested to meet investment plans
- Cover for workforce/skill shortages reliant on migration inflows
- Tourism export growth slowing considerably
- Monetary policy impotent
- Fiscal policy apparently unwilling to help monetary policy
- Weak and fragile business sentiment
- Negative real (and, in places, nominal) interest rates (in many places)
- Negative yield curves in places
- Confirmed slowing growth in China
- Trade disputes/wars between superpowers
- Future of European Union trade arrangements uncertain
- Climate change transition continues at snail’s pace (almost everywhere)
Firstly, the good
Asset prices around the globe have remained healthy post-GFC. With the exception of the Chinese market’s Shanghai index, all main share price indices have recorded average growth at above five percent per annum over the past ten years. The NZ index has been the star performer with close to 14 percent per annum growth, putting share values at more than 3.5 times their level ten years ago.
With the impetus for this boom being the monetary easing in response to the GFC, many question the sustainability of these values. And, as some argue, the higher they go the further they could fall. Nevertheless, a surge lasting 10 years appears pretty sustained by many definitions. Some point to volatility over the latest 12 months with losses recorded on the German DAX, the UK FTSE, the Japanese Nikkei, as well as the Chinese Shanghai indices. However, both the New Zealand and Indian Mumbai markets continue to record double-digit per annum growth, while the Australian and US markets are still over five percent up over the latest 12 months.
Additionally, low interest rates remain conducive to investment plans – for both the public and private sectors. Alongside a strong set of government accounts, there is ample opportunity for ongoing spending growth for both consumption and investment.
Similarly, employment growth numbers are holding up although there are tentative signs of an easing in the growth rate. However, the latest set of data recording a large lift in full-time employment as the expense of part-time jobs provides a boost for the optimists. Export growth can also be listed in the good column, with annual revenues from goods exports up more than seven percent on the previous year. Solid lifts in revenue have been accrued from dairy, meat, forestry, pulp, wine, kiwifruit, avocadoes, apples, infant formula, and mechanical machinery sectors.
Some would also add to the good list the reduction in uncertainty and anxiety in some sectors through the removal from the political agenda of a capital gains tax.
Secondly, the bad
House prices remain a conundrum, as first home buyers continue to face prices that are more than several multiples of their annual incomes. While average sale prices in Auckland are reportedly flat at $850,000, the national average continues to climb and is now at $585,000 up 4.5 percent on a year ago. Many first home buyers would put the removal from the political agenda of the capital gains tax in this bad column.
The troubles of the construction sector continue to sorely hinder activity and indeed ability of the public and private sector to meet ambitious investment plans. Construction activity, residential and non-residential, is growing but skill shortages along with increasing costs remain a drag on its contribution. Using migration inflows to plug skill shortages continues to concern. Further, conflicting indicators of employment in the sector (one Statistics New Zealand survey shows more jobs in construction, while another survey shows fewer jobs) compound a sense of uncertainty.
Worryingly, growth in the tourism sector is easing rapidly. International visitor numbers have slowed to be barely two percent up on a year ago, while international guest nights recorded in the commercial accommodation monitor are significantly down on last year. The impact of Airbnb and similar accommodation offering remains unclear, as does the impact of the new visitor levy. However, confirmation of a slowdown is provided in international tourist expenditure data showing growth now running at four percent per annum, compared to the 8-10 percent range a year ago.
The bad list is completed by noting the lack of a policy response in the face of slowing activity and associated signs. In particular, the ability of monetary policy to underpin activity is close to negligible given that interest rates are already very low. While the Reserve Bank of New Zealand (RBNZ) has explored unconventional means their likely success remains limited.
Clearly, as has been the case for some time, any significant policy response will have to come from the big round building across the other side of Bowen Street. Fiscal policy (i.e. government spending and taxes) remains anathema to economists and policy advisors trained over the last 30 years. Hence, the willingness of government to step in with a conventional Keynesian response appears to be lacking. As has been repeated many times, the government has a strong set of accounts and borrowing ability to launch such a policy response. The critical question is whether it will leave it too late to step in.
And now, the ugly
Topping this list is the state of business sentiment. This plummeted subsequent to this administration being sworn in, and has remained stubbornly in the doldrums ever since. While its link to actual economic activity are the subject of considerable conjecture, its importance in setting the tone for investment decisions is inescapable. This will become more critical should the administration rely on an investment spending package as its policy response to a looming recession.
Adding to the ugly list is that negative interest rates continue to haunt the financial marketplace. Despite all other indicators, this alone sends the categorical statement that all is not well at all across the global economy. Recall it was not that long ago (i.e. less than 10 years ago) that economists and financiers together were vehemently of the opinion that it was inconceivable for interest rates to go below absolute zero. This just reinforces just how uncertain, unclear, and sustainable are current balance sheet values (cf item #1 on good list) within our financial structures.
Alongside yield curves turning negative in place (in particular, the United States), the prominence of financial market indicators on the ugly list is telling. Consequently, the RBNZ alongside other central bankers around the globe will remain busy revisiting their modelling to confirm their understanding of the ability of their financial systems to withstand a range of shocks.
Coupled with a noticeable slowing in economic activity in China, world trade disputes between the superpowers are growing even uglier. Little can be done about world trade disputes from this part of the globe, but it is noticeable that exhortations to step back from the brink from OECD, IMF and other institutions are increasingly prominent. As measured GDP growth in China is now expected to reach just six percent per annum, the impact on close trading partners cannot be far away. Australia is already struggling and New Zealand will not be spared. The recent sharp decline in export log prices is worrisome.
In a nutshell
The New Zealand economy continues to grow, but at a slowing pace. Like other parts of the world, we await a ‘shock’ of some sort that will destabilise and likely contract trade and activity. The size and strength of the ‘shock’ and subsequent contraction remains a matter of conjecture. But the signs of an upheaval are not looking like going away quietly.
And also like other parts of the world, monetary policy will be nigh on impotent to cushion the New Zealand economy from such fallout. Hence, it will be incumbent on government – and fiscal policy in particular – to respond rapidly to provide a buffer to minimise any contraction.
02. The Temperature
Fiscal and Monetary Policy
- Lower interest rates here for longer.
- Impact of further OCR cuts unlikely to be significant.
- Finance Minister’s war chest needs to be unlocked promptly.
- Impact of BREXIT transition remains biggest unknown.
- Superpowers trade wars show no sign of resolution.
- Geo-political scene increasingly volatile.
- Will NZ exporters’ apparent immunity to these influences continue?
Monetary policy stance
- US Federal Reserve set to reverse on interest rates.
- Remarkable stability in global exchange rates despite tensions.
- Response to BREXIT scenarios still unclear.
- Fiscal policy, fiscal policy, fiscal policy; and the future of the Budget Responsibility Rules.
- Will construction sector growth wane under significant capacity pressures?
- What of the KiwiBuild “reset”?
03. People resources
The bald facts are:
- Unemployment (March 2019, seasonally adjusted) at 4.2%; down from 4.4% a year earlier.
- Underutilisation (March 2019) at 11.5%; down from 12.1% a year earlier.
- Employment growth (QES March 2019 on March 2018) at 1.1%; marginally down from 1.2% a year earlier.
- Labour force participation rate (March 2019) at 70.8%; down from 71.2% a year earlier.
- Growth in total weekly earnings (March 2019 quarter on March 2018 quarter) at 3.2%; down from 3.9% a year earlier.
- Net migration (12 months to May) at +50,541; up from +49,817 a year earlier.
According to the Household Labour Force Survey (HLFS), the number of people in employment in New Zealand was 1.5 percent higher in the year to March quarter of this year than it was in the same quarter of 2018. A year earlier, the annual employment growth rate was 3.1 percent. The Quarterly Employment Survey (QES), which has often been at odds with the HLFS, in terms of measuring employment growth, indicated an annual increase of 1.1 percent in the year to the March quarter of 2019.
Drilling further into the data, the HLFS also indicated an increase of 3.1 percent in full-time employment, but a decrease of 4.8 percent in part-time employment in the year to March. Female part time employment was down by 2.8 percent, but male part time employment fell by a staggering 9.4 percent.
By age group, employment was down by 1.5 percent among 15-24 year olds, but up by 5.0 percent among 25-34 year olds. Employment was up by 5.2 percent in Manawatu-Wanganui and 5.1 percent in Taranaki, but down by 4.8 percent in Southland. The relatively small electricity, gas and water industry had the best employment growth, at 9.2 percent, while the large education and training sector experienced a decrease of 7.1 percent.
Curiously, the HLFS data pointed to a contraction in employment in the construction sector. However, in contrast the QES data recorded an increase in employment in the construction sector. These data conflicts add to the lack of clarity in the current economic situation.
We expect employment growth to continue, but with the pact of job growth to ease in line with overall growth in activity. Unemployment remains subdued, with the official rate of jobless stable at around four percent.
Migration is (probably) tracking on at the rate of a net migrant inflow of about 50,000 a year. We have to say probably these days because under Statistics New Zealand’s new 12/16 month rule we will know exactly how many people emigrated and immigrated in any month. But we will only know that 16 months after the event. By then we will know exactly how many were in the country or alternatively out of the country for 12 of the last 16 months. That is the definition which says whether they have ‘come to stay’ or alternatively ‘left for good.’
Meanwhile we have to have some faith in Statistics New Zealand’s statistical modelling (SM) of the likely 12/16 arrivals and departures. We have eyeballed the graphs of those SM estimates with the curves from the intentions registered on the arrival/departure card numbers from 2015 to 2019. The general shapes of the arrivals, departures and net migrant curves from the two sources are quite similar.
But the differences are interesting. Arrival intentions tracked along at about 120,000 to 130,000, while the arrivals SM curve was fairly steady between 135,000 and 145,000. By 2018 the SM arrivals were steady at about 10,000 above the Intentions. So 10,000 more stayed than ‘intended’ to if the Statistics New Zealand modelling is close to correct.
Departure intentions went from an annual rate of about 58,000 to 62,000 over the period. However, the SM modelling showed departures at a level 30,000 higher. They were at 80,000 in 2015 climbing to 91,000 by the end of 2018.
All of that means that the more direct SM modelling of actual flows showed a net inflow over the last two years of 10,000 to 15,000 less than the intentions data. The SM net inflow data has been at around 50,000 since late 2017.
What about a forecast? Well the statistics revisions, new methodology and the gods are probably against our earlier forecast of the net inflow continuing to head down towards zero in 2021. The international uncertainty usually fuels increased net inward migration, although as some balance to it, the Australian economy may attract a few more Kiwis.
This would imply a continuing net inflow at a rate in the range of 45,000 to 50,000 a year.
04. Capital Resources
The bald facts are:
- TWI NZ$ exchange rate (June average) at 72.5; down from 73.5 a year earlier.
- Government 10-year bond rate (June average) at 1.63%; down from 2.90% a year earlier.
- SME business overdraft rate (May average) at 9.35%; unchanged from a year earlier.
- Growth in credit to non-agriculture business (May 2019 on May 2018) at 4.7%; down from 5.7% a year earlier.
- Growth in number of residential building consents (3 months to May 2019 on 3 months to May 2018) at 4.5%; down from 18.0% a year earlier.
- Growth in area of non-residential building consents (3 months to May 2019 on 3 months to May 2018) at 14.4%; up from 9.5% a year earlier.
Investment & building activity
The residential building sector is set to continue heightened levels of activity, with just under 35,000 consents issued in the year to May. This is the highest level since the house-building ‘glory days’ of the early-1970s, when close to 40,000 homes were built every year.
At the same time, activity in the non-residential sector has ramped up too. Non-residential building work put in place is a reasonable measure of investment in the New Zealand economy. This measure is designed to remove the effect of inflation in the price of buildings from the underlying data. Which allows us to understand more precisely how much building work has been put in place without confounding that with an increase in prices.
The total volume of non-residential building work put in place in New Zealand has skyrocketed to $488 million (measured in constant 1999 prices) for the 12 months ended March 2019. This represents a continuation of the upward trend we have observed since 2012.
We note the data on non-residential building consents is by definition a leading indicator of the volume of work put in place. This data exhibits a strong downward trend which seems to be reversing since 2016. This may imply that we can expect the uptrend in building work actually put in place (above) to continue for the next few periods at least.
The total value of farm building work put in place over the 12 months ended March 2019 increased 15 percent.
The trend for farm building volume put in place has been strongly upward since 2010, with some correction in 2014 - 2016. This points to farmers looking to increase productivity of their land. Either in the form of more commodities per land area (for example, maize, or milk solids). Or more valuable commodities per land area (for example; carrot and radish seeds, or sheep milk). Both these objectives could require extra capacity in terms of farm buildings.
While this data does paint a reasonably rosy picture, recession hawks amongst our reader base should be aware that these sectors (represented by non-residential building and farming) are high up in the structure of production, they are far removed from consumer goods. It’s understood that these “far removed” sectors are the last to respond to increases in the money supply through credit expansion. An increase in investment in these sorts of sectors (such as indicated by the data above) might be a sign that business people in these sectors are “overinvesting” in some sense.
We note that the OCR is at record lows, combined with the flow of money from overseas markets means money market rates are low too. While we have no confirmation, this data lends some weight to the concern that the “everything bubble” may be close to bursting.
Money & credit
The Reserve Bank of New Zealand (RBNZ) has been making waves over the past quarter, lowering interest rates while pulling major banks into line.
The cut to the Official Cash Rate (OCR) in May puts the New Zealand credit market further into unprecedented territory, with talk of additional cuts later in the year. With the OCR already at an all-time low, there is growing concerns that monetary policy has lost its power, and other policies may need to be considered to stimulate the economy. With the 10-year government bond yield also at an all-time low of 1.53 percent, fiscal policy is becoming the more obvious policy tool to boost sluggish activity levels.
The exchange rate has remained relatively stable for New Zealand’s export and import industries. The NZ$ has remained close to 95 Australian cents and 65 US cents over several months.
The RBNZ has also caused considerable unrest within banking circles over proposed increases to their minimum capital requirements. The proposal suggests the minimum capital banks are required to hold be raised from the current 10.5 percent up to 18 percent. It is expected the change would require the banks to retain most of their profits over the next five years to hold as a buffer to improve the financial stability of the financial sector. Some major banks have stated that this shift may have widespread effects on the New Zealand economy, including reducing the ability of New Zealand businesses to invest. In a submission to The Reserve Bank, ANZ stated they may need to “review and reconsider the size, nature and operations of the New Zealand business”. The RBNZ will no doubt take these concerns to heart when finalising its decisions.
Overall monetary conditions remain permissive, with nominal GDP expanding at an annual rate of four percent while broad money and private sector credit indicators are growing at closer to six percent.
05. Home Base
The bald facts are:
- Growth in value of electronic transactions (three months to May 2019 on three months to June 2018) at 3.1%; down from 3.8% a year earlier.
- Growth in core retail sales values (March 2019 quarter on March 2018 quarter) at 4.2%; down from 4.6% a year earlier.
- Core retail price inflation (March 2019 quarter on March 2018 quarter) at 0.3%; up from +0.1% a year earlier.
- Consumer price inflation (June 2019) at 1.7% per annum; up from 1.5% a year earlier.
- Core Crown tax revenue (11 months July 2018 to May 2019) totalled $79.7bn; up 8.5% on the same period of the previous year.
Inflation in New Zealand dipped slightly in the three months to June, to 1.7 percent. Price categories with the biggest changes this quarter were in the transport and education sectors.
The largest percentage change was for alcohol and tobacco, up 4.2 percent due to annual excise tax increases. Inflation in the education sector returned to positive, having previously been strongly negative following the introduction of the tertiary first year fees free policy.
Recreation and culture saw a small increase, and food was up to 1.7 percent despite fruit and vegetables costing nearly nine percent less than they did in June 2018.
On the producer side, input prices are well above a year ago, particularly so for utilities (electricity, gas, and water). This may prove to be inflationary as these higher costs flow through the value chain.
Internationally food prices are up slightly, though below the level of a year ago because of a fall in the prices of meat and dairy. In general however, world commodity prices are flat in the absence of inflationary pressures.
Locally, our inflation remains stubbornly below the Reserve Bank of New Zealand (RBNZ) target of two percent, but in line with the broader target to keep inflation within a range of 1–3 percent on average over the medium term.
While the number of electronic card transactions continues to grow, they are increasing ever more slowly. In our last Birds Eye View we speculated about the possible reasons for this, but without new data sources we can’t yet identify with certainty which trends are having an influence. Both retail sales values and volumes continue to grow at bit over three percent per annum.
Spending on petrol is slightly below what it was a year ago. This is due to lower prices, with the number of fuel transactions slightly higher.
Hospitality sales are up from the same month a year ago across the first half of 2019, despite the reduction in tourists visiting New Zealand.
Credit card billings continue their rising trend, although household debt as a percentage of disposable income has flattened off.
Budget 2019 has come and gone since the last Birds Eye View and now we must patiently wait to see if it truly is transformational. Budget 2019, self-titled as the “Wellbeing Budget” seeks to tackle New Zealand’s long-term challenges of mental health, child poverty, children in state care, family violence and homelessness.
At the time of the budget announcement, Treasury and the Government expected that net core Crown debt as a percentage of GDP was forecast to be 19.9 percent in 2021/22 after peaking at 20.7 percent in 2020/21. Treasury also forecast that total Crown operating balance before gains and losses (OBEGAL) was forecast to increase to $6.1 billion by 2022/23 with revenue growing at a faster pace than expenditure.
The interim Financial Statements of the Government of New Zealand for the 11 months ended 31 May 2019 provides the first comparison against the budget forecasts. OBEGAL was $7.0 billion in surplus for the 11 months ended 31 May 2019. This was $2.5 billion (56 percent) greater than the $4.5 billion surplus forecast for the period in Budget 2019.
The cause of this higher than expected surplus was core Crown tax revenue being $2.2 billion above forecast at $79.7 billion. Corporate tax revenue has been stronger than expected with taxable corporate profits $700 million greater than forecasts. GST was also $300 million greater than forecast on the back of stronger than expected residential investment.
Looking towards the year-end results, Treasury expects that the surplus will weaken from its current position to be slightly lower by year-end. Nevertheless, Treasury anticipates that the underlying strength in tax revenue is likely to persist.
Net core Crown debt is $1.4 billion below forecast at $57 billion. This has ensured that Government continues on track to meet its budget responsibility rule to reduce the level of net core Crown debt to 20 percent of GDP within five years of taking office. Current net core Crown debt is 19.3 percent of GDP compared to a forecast of 19.7 percent.
The Budget Economic and Fiscal Update from 30 May 2019 forecasts that beyond 2019/20 GDP growth is expected to ease as the stimulus from increased Government spending fades, population growth fades and monetary conditions tighten.
With the Official Cash Rate at its lowest ever level, there is limited scope for monetary policy to support continued growth. To ensure growth continues Government can make use this greater than expected surplus and use fiscal policy to stimulate economic activity in the absence of traditional monetary policy levers. Net core Crown debt is already below the self-imposed rule meaning additional spending is possible while continuing to meet this objective.
06. Abroad and Beyond
The bald facts are:
- Growth in merchandise export receipts (3 months to June 2019 on 3 months to June 2018) at 7.0%; up from 6.2% a year earlier.
- Growth in merchandise import payments (3 months to June 2019 on 3 months to June 2018) at 1.7%; down from 12.1% a year earlier.
- Growth in international tourist spending (3 months to May 2019 on 3 months to May 2018) at 9.1%; up from 3.7% a year earlier.
- Growth in India GDP (March 2019 quarter on March 2018 quarter) at 5.8%; down from 7.7% a year earlier.
- Growth in China GDP (March 2019 quarter on March 2018 quarter) at 6.4%; down from 6.8% a year earlier.
- Growth in Australia GDP (March 2019 quarter on March 2018 quarter) at 1.8%; down from 3.1% a year earlier.
Tourism, including tourism & goods
Growth in tourism continues to fluctuate, but remains positive. However, over the last few months there are clear signs that growth in tourism is slowing. The number of nights international visitors spent in commercial accommodation was down by 2.3 percent, the lowest growth rate since 2013. Meanwhile, the number of nights domestic visitors spend in commercial accommodation continue to grow comfortably at 3.9 percent. We note that this data will soon be unavailable as Statistics New Zealand will cease this particular survey. This is not a welcome move given the importance of this sector to overall economic activity.
The amount spent by tourists continues to grow, but is also growing at a slower rate than previously. Growth in spending by international visitors has slowed to 2.2 percent, again the last time it was this low was 2013. Luckily the expenditure per tourist has increased to counterbalance this slowing growth rate.
There are a number of new developments in the tourism space.
The International Visitor Conservation and Tourism Levy (“IVL”) has been introduced and has been effective from 1 July 2019. The IVL means international visitors will pay a levy of $35 through the immigration system. This revenue will be invested in sustainable tourism and conversation projects. However, Australian citizens, who make up nearly 39 percent of New Zealand’s international visitors, will be excluded from paying this levy. Permanent residents and people from many Pacific Island countries are also excluded from paying this levy.
Available rentals on Airbnb in Auckland have dropped since the beginning of last year. This may have been due, in part, to the Auckland Council introducing an Accommodation Provider Targeted Rate (“APTR”) that is charged to hotels, motels, serviced apartments and the online accommodation sector. The funds raised by the APTR will contribute towards Auckland Tourism, Events and Economic Development.
Cruise Critic has announced its Top-Rated Australia & New Zealand Destinations for 2019, with New Zealand taking out 3 of the 5 top spots. Napier has been rated the second best destination, Wellington third and Akaroa in fifth place.
On another note, last year a private equity fund was established to invest solely in tourism businesses. The private equity fund seeks to help grow tourism businesses and provide good returns to investors.
Goods (merchandise) exports
Export receipts continue to grow strongly, bringing $57 billion to New Zealand in the year to June 2019. All major exports have had a strong quarter, with growth in dairy, meat, horticulture and forestry. In total, revenues for the year to June were seven percent up on the previous year. Double-digit annual percentage increase numbers have been recorded by infant formula and mussels (both up 33 percent), kiwifruit (up 23 percent), forestry (up 13 percent), and apples (up 11 percent).
Forestry exports may have peaked after five years of growth, making forestry an almost $5 billion export industry. The recent fall in demand for New Zealand logs in China has caused concern across the sector, driving log prices down in July. No data is available for this period yet, though a slowdown in harvests and exports will be expected as prices have fallen by more than 15 percent. If this low demand continues, the downward pressure on prices could pose a significant risk for forestry in New Zealand, particularly with MPI forecasting record harvests over the next five years.
Wine export receipts continued their upward trend to $1.8 billion up 6.7 percent on 2018. While this growth is positive, the return per litre has been stubborn at $6.70, with 270 million litres exported in the year to May 2019. Wine prices have been stagnant at $6.70 per litre since late 2016.
Strong growth in kiwifruit exports has also continued this year. With 24 percent annual growth, the kiwifruit receipts now exceed those for wine. In the year to April 2018, wine and kiwifruit exports were equal, while now kiwifruit exceeds wine exports by almost $500 million.
Mussels and squid exports also had a stellar year, driving mollusc exports up to 60 million tonnes fetching $450 million in the year to June 2019, up 33 percent on 2018. The growth is driven by a 70 percent growth in squid volumes exported, while the export price has also increased from $6.83 to $7.50 per kilogram.
Trade and payments balances
Continued strong growth in goods export receipts has finally seen our merchandise trade balance start to improve. After hitting an annual deficit of $6.7 billion in the year to February 2019, the balance is now only $4.9 billion in the red for the year to June 2019. If the trend this year for strong growth in merchandise export values continues in the later part of 2019, then the merchandise trade balance will continue to head back towards the black.
The strong decline in our merchandise trade balance seen in 2018, had been caused by double-digit growth in New Zealand’s annual import bill. In April 2019 the growth in our annual import bill finally dropped below 10 percent. This slowing of growth in our import bill has come from a slowing of growth in our imports of plant and transport equipment over the last 6 months. At the same time very strong increases in our annual crude oil import bill, has seen us pay $4.7 billion for crude oil over the last year.
For the year to June 2019 the value of our imports rose by 7.9 percent compared to the previous year, while at the same time our export receipts grew by 7.1 percent.
In contrast, trade in services (including education and tourism export revenue) remains in solid surplus. This is based on data for the year to March 2019 which saw our trade in service surplus close at $4.5 billion. Overall, tourism contributed the largest share of our service export revenue, with $12.6 billion in earnings, while education earned a further $5.3 billion.
Australia’s housing market continues to be a source of vulnerability and concern. While house prices in Melbourne and Sydney remained effectively flat in June, on an annual basis house prices in these cities declined 9.2 percent and 9.9 percent, respectively. Annual prices in Darwin, Brisbane, and Perth have also fallen, with Canberra and Hobart the only major cities to see gains (1.4 percent and 2.9 percent for the year to June, respectively). Analysts suggest there is more to come with prices expected to continue to decline into 2020.
The housing downturn, along with soft growth in China, Australia’s largest trading partner, contributed to lower than expected growth. GDP grew 1.8 percent in the year to March 2019, continuing to decline from 2.8 percent annual growth in September 2018.
Fiscal stimulus in the form of tax cuts and tax offset payments will be supportive of employment growth in the next year. Already locked in and due to flow from 1 July 2019 is a lump-sum tax offset payment of up to $530 for low- and middle-income earners announced in 2018. This payment will flow to more than 10 million Australians. In the 2019 Budget the Australian Government increased this payment to $1,080.
Tax cuts in the form of income bracket movements announced in 2018 and expanded upon in the 2019 budget should also begin to have an effect on the Australian economy in the coming year. At the same time the Reserve Bank of Australia lowered the official cash rate to one percent in July 2019, to provide monetary stimulus to the economy. Previously the Reserve Bank of Australia had undertaken a cut to the official cash rate in June this year, seeing the cash rate drop from 1.5 percent at the start of the year to its current one percent.
The growth rate in China’s GDP has been the talking point for a number of years. Continuing that theme we note that the official GDP statistics indicate the economy of China grew 6.4 percent in the year to March 2019. GDP has not grown above seven percent in China since 2015 and is a far cry from the heady days of 2007 where we say GDP growth rates of 14 percent plus (14.5 percent in June 2007).
In a paper published in 2019 titled A Forensic Examination of China's National Accounts, Chen, Chen, Hsei, and Song detailed their findings that the statistics used to calculate GDP reported by the local governments to the National Bureau of Statistics (NBS) are often overstated. The NBS does adjust the official GDP to account for this overstatement but Chen et al find that the overstatement since 2008 has been greater than the adjustment. So GDP growth for years after 2008 is, according to Chen et al, approximately overstated by 2 percentage points.
Also of interest is the People’s Bank of China (PBOC)’s response to the GFC and subsequent Great Recession of 2008. When GDP growth dipped to around six (or four if adjusted) percent the PBOC engaged in a policy of aggressively increasing the money supply. It is thought that pumping money into an economy reduces the market interest rates which induces people to borrow and spend more and so makes the economy grow. The reality is that pumping money into an economy does push down the market interest rates, it also pushes up demand for goods and services.
Related to this monetary response has been the PBOC’s policy of capital controls. Since the yuan began to face downward pressure in 2016 the PBOC has been more strictly monitoring capital outflows. Conversion from yuan to other currencies is capped at $50,000 a year per person. This policy is an attempt to crudely by-pass the Mundell-Fleming trilemma, which says that a government can follow only two of the following policies: fixed exchange rates, free movement of capital, autonomous monetary policy. But not all three at the same time.
Some commentators link these capital control policies to the increase in asset prices (particularly residential housing) in countries like Canada and Australia. It is believed that, expecting greater controls in future, people from China who would be affected by these controls have been using these markets to defensively move their capital out of the Chinese financial environment.
Notwithstanding the President’s trade wars with major US trading partner, the Mueller investigation, further threats to Iran and even North Korea, the US economy has been trucking along steadily.
US employment has been steadily moving upwards since early 2010. Continuing this upward growth in 2019 by adding an additional 227,000 jobs from May 2018 to May 2019. During this same period unemployment dropped from 3.8 percent in May 2018 to 3.6 percent in May 2019.
US GDP growth was at 3.2 percent for the year to March 2019, compared to 2.6 for March 2018. This growth was supported by steady consumer spending over this period.
Europe (incl. UK)
The political situation in the UK remains changeable, with the new leader of the Conservative Party and consequently Prime Minister announced as Boris Johnson this week. In anticipation of the previous BREXIT deadline of 29 March, manufacturers stockpiled imports leading to a strong first quarter, contributing to GDP growth of 1.8 percent on the previous year. This is still below the historical long-term average of two percent. British economists say the threat of no-deal moved second quarter activity ahead. The next general election in the UK is scheduled for 2022 but with Prime Minister Johnson prepared to exit the EU without a deal, a “vote of no confidence” could lead to an early election if the Irish border issue is not resolved.
Meanwhile, GDP growth in the EU sits at 1.5 percent, continuing a slowdown from a high of 2.9 percent in December 2017. This lines up with the EU Commission forecast of 1.4 percent over 2019. The Commission’s summer forecast notes trade tensions between the US and China, the possible impact on oil prices of conflict in the Middle East, and the risk of a no-deal BREXIT are weighing on confidence in the manufacturing sector.
The EU Commission elected their 13th President in mid-July to succeed Jean-Claude Juncker when he steps down in October – Germany’s Minister of Defence Ursula von der Leyen. The new President has committed to:
- An EU-wide minimum wage
- A “green deal”, including an EU carbon border tax and ambitious carbon reduction targets
- An unemployment reinsurance scheme to prop up national welfare systems in an economic crisis.
Managing Director of the IMF, Christine Lagarde, was nominated as President of the European Central Bank (ECB) around the same time. It is widely held that Lagarde will continue the ECB’s current monetary policy stance overseen by Mario Draghi, with interest rate cuts and a resumption of quantitative easing if required.
Greece held elections in July also, and a new conservative party was sworn in. The new government faces serious and prolonged economic challenges exacerbated by the burden of bank bailout debts owed to international creditors. The unemployment rate sits at 18 percent and up to 600,000 skilled and educated Greeks have left in the past 10 years. The economy has shrunk by a quarter over that time, and poverty rates are estimated at around 35 percent.
Elsewhere in Europe, French employers are complaining of a labour shortage and 330,000 jobs remain unfilled. Some point to the generosity of the unemployment welfare system leaving little incentive to seek work. Despite this, unemployment fell to 8.7 percent in March 2019, the lowest rate in 10 years. This is still three times Germany’s unemployment rate and President Macron is pushing for tighter unemployment system rules.
Overall, the EU is sitting with low inflation, low interest rates, and low growth, and unemployment is below pre-GFC levels in most countries, with the exceptions being Spain, Italy, and Greece.
07. Forecast Data Tables
|annual average % change, March years|
|GDP (expenditure measure)||4.2||3.7||2.7||2.8||2.4||2.2||2.5|
|GDP (production measure)||3.6||3.7||3.1||2.7||2.5||2.2||2.5|
|Employment (QES annual % change)||3.1||3||1.2||1.9||1.8||1.7||1.7|
|Unemployment (% of labour force)||5||4.7||4.4||4.3||4.2||4.3||4.1|
|Net migration (annual 000s)||63.8||58.7||48.9||51||50||52||49|
|annual % change, March quarters|
|GDP deflator (average annual % change)||0.7||2.4||2.9||1.1||2.3||2.4||2.2|
|Wages (avge hourly earnings)||2.4||1.5||3.5||3.4||3.3||3.2||3.2|
|Consumer prices (CPI)||0.4||2.2||1.1||1.5||1.6||1.6||1.8|
|Producer prices (PPI outputs)||0.1||4.1||3.5||2.6||2.7||2.8||3|
|Current account balance ($bn)||-5.8||-7.1||-9.5||-10.1||-10.6||-11.6||-12.5|
|Current account balance (% of GDP)||-2.3||-2.6||-3.3||-3.3||-3.4||-3.7||-4|
|Net international investment position (% of GDP)||-62.9||-56.7||-53.5||-54.8||-55.6||-56.4||-57.3|
|Government OBEGAL ($bn)||2.3||4.4||6||4||3.5||2.8||1.9|
|Government OBEGAL (% of GDP)||0.9||1.6||2.1||1.3||1.1||0.9||0.6|
|average levels, March quarters|
|Exchange rate (TWI)||72.2||78||74.9||74||73.1||72.7||72.4|
|90-day bank bill rate||2.6||2||1.9||1.9||1.3||1.3||1.5|
|10-year bond rate||3.1||3.3||2.9||2.2||1.4||1.4||1.6|
|Merchandise export receipts (fob $m, June years)||46,723||47,653||53,062||55,802||57,121||58,426||59,651|
|Merchandise import payments (cif $m, June years)||50,075||51,131||57,094||60,851||63,186||65,448||67,582|
|International visitor arrivals (000s, March years)||3,255||3,544||3,820||3,868||3,907||3,966||4,039|
|Residential new building consents (000s, March years)||27.8||30.6||31.4||34.5||34.2||34.2||34.2|
|New car registrations (000s, March years)||239.8||259.4||272||247.2||245.5||251.6||258.3|
|Core retail sales nominal (annual % chge, March years)||5.4||6.2||5.7||4.2||3.6||3.3||3.5|
|Total QES employment (000s)||1,881||1,938||1,961||1,999||2,035||2,070||2,106|
|FTE employment growth (annual % change)||3.1||3.0||1.2||1.9||1.8||1.7||1.7|
|Official unemployment rate (% of labour force)||5.0||4.7||4.4||4.3||4.2||4.3||4.1|
|Labour force (000s)||2,581||2,654||2,744||2,793||2,838||2,879||2,920|
|Participation rate (% of labour force)||69.5||69.8||70.6||70.6||70.6||70.5||70.5|
|Not in labour force (000s)||1,134||1,149||1,141||1,163||1,184||1,206||1,224|
|Working age population (000s)||3,715||3,803||3,885||3,956||4,022||4,085||4,144|
|Migration (annual year to June)|
|Gross inflow (000s)||145,831||144,168||139,419||145,000||141,000||147,000||147,000|
|Gross outflow (000s)||81,997||85,480||90,493||94,000||91,000||95,000||98,000|
|Net inflow (000s)||63,834||58,688||48,926||51,000||50,000||52,000||49,000|
|annual $m, June years|
|Machinery & transport eqpmt||2,481||2,450||2,564||2,680||2,755||2,826||2,883|
|Exports of Goods (fob)||46,723||47,653||53,062||55,802||57,121||58,426||59,651|
|as a % of GDP||18.2||17.4||18.4||18.6||18.1||17.7||17.2|
|annual $m, June years|
|OT trade balance (fob-cif)||-3,352||-3,478||-4,031||-5,049||-6,065||-7,023||-7,931|
|BoP conceptual adjustments||973||668||496||1,019||1,400||1,400||1,400|
|BoP merchandise trade balance||-2,379||-2,810||-3,535||-4,030||-4,665||-5,623||-6,531|
|Balance on goods and services||2,647||2,265||1,779||551||123||-620||-1,306|
|Investment income balance||-8,235||-8,851||-11,055||-10,297||-10,439||-10,675||-10,917|
|Current Account Balance||-5,847||-7,117||-9,548||-10,052||-10,623||-11,602||-12,530|
|as a % of GDP||-2.3||-2.6||-3.3||-3.3||-3.4||-3.7||-4.0|
|annual $m, June years|
|Core crown revenue||76,120||81,785||86,780||89,515||93,270||97,085||101,055|
|as a % of GDP||29.6||29.9||30.1||29.8||29.6||30.8||32.1|
|Core crown expenditure||73,930||76,340||80,575||85,240||89,530||94,050||98,820|
|as a % of GDP||28.7||27.9||27.9||28.4||28.4||29.8||31.3|
|Total crown OBEGAL||2,280||4,415||5,960||4,020||3,480||2,755||1,945|
|as a % of GDP||0.9||1.6||2.1||1.3||1.1||0.9||0.6|