1.0 The front page

Finally, the penny has dropped.  Well, $12 billion actually.  The Budget Policy Statement (BPS) and companion Half-Year Economic and Fiscal Update (HYEFU) announced in December sign-posted a significant shift towards a more active government.  An extra $12 billion for infrastructure spending – with $8 billion already allocated to specific (but unannounced) projects – is a clear signal that the building and construction sector will be even busier than recent.

This additional spending is made possible with a re-framing of the Budget Responsibility Rules towards a range for net debt, rather than a spot target. Given that net debt had already dipped below the original 20 percent of GDP target, this artificial rule was undoubtedly constraining the government’s ability to respond to spending pressures.  The HYEFU forecasts however, including the $12 billion package, see net debt peaking at only 21.5 percent in 2021/22, before declining to be back under 20 percent in 2023/24.  With this profile of debt it is arguable whether this government is being more tentative as opposed to truly transformational.

It remains unarguable that there is a slowing in growth, as measured by Gross Domestic Product (GDP).  This slowing is being experienced across the globe, with few exceptions.  Indeed, despite this slowing, the New Zealand economy remains one of the better growth performers.  Nevertheless, the Reserve Bank (amongst others) had called for fiscal policy to do some of the heavy lifting in terms of a policy response to the growth slowdown.  And it looks like the government has, finally, heeded the call.

Interestingly, the search for specific ‘shovel-ready’ infrastructure projects appears to have been difficult – with ‘roads and rail’ again being a trusty backstop option for any Government wishing to pump up spending.  Of the $8 billion already allocated, some $6.8 billion is for new transport projects “with a significant portion for roads and rail”.  It is no surprise that schools and hospitals are in line for some of this boost, although it is probably a surprise they are not more prominent.  Similarly, any infrastructure response to the climate change challenge also appears tentative, with only $200 million for “public estate decarbonisation”. Significant additional investments in alternative energy and fuels could have been the cheery on top for this package.  However, such alternative options are difficult to get ‘shovel-ready’.

Despite these concerns the infrastructure boost is clearly needed as a further catch-up for several years of minimal public capital spending.  The BPS shows the Government’s net capital spending totalling $6.5 billion in the year to June 2019, the highest it has been for 10 years.  Thereafter, this is projected to increase to $8.5 billion for the June 2020 year, and to just under $12 billion in the following year.  Whether these projections are met depends, to a large degree, on whether these shovel-ready projects are indeed ‘shovel-ready’.

Economic prospects generally remain muted, although the slowing in growth continues to be complicated by good employment growth, solid wage growth, and ongoing concerns about a tight labour market and skills shortages.  It is clear that ‘infrastructure’ will be the go-to word over the immediate short-to-medium term economic cycle.  Much rests on the capability and capacity of the building and construction sector to step up as the lead driver.

Slowing and uncertain prospects offshore is beginning to make its impact on New Zealand.  The export sector has gone off the boil, as log prices have receded and taken away the primary driver for forestry exports.  Nevertheless, total merchandise export receipts for the year to October were still 3.8 percent up on the previous year.  Annual revenues for dairy, meat, wine, and kiwifruit are still more than five percent up on the previous year.  The star performers, though, are infant formula (up 38 percent) and molluscs, mussels, and squid (up more than 55 percent).

Visitor numbers are still growing with 3.9 million international tourists for the year to October.  The rate of growth, though, is 2.3 percent on the previous year, which is well below what has been experienced in recent years.  However, visitor spending numbers remain reasonably solid with expenditure up by more than six percent on the year earlier.  The fly in the ointment is accommodation data, with data showing international visitor guest nights down 2.4 percent on the previous year.  This data, though, is restricted to commercial accommodation and does not include rapidly growing alternative accommodation options, such as AirBNB and the like.  It appears that the sector is not as bleak as the downbeat mood from many in the sector would indicate, although a slowing is certainly occurring in line with that facing other sectors.

Without doubt, risks from offshore add to uncertainty and volatility.  With the latest forecasts from the IMF reflecting that of the OECD and pointing to rising trade barriers and “elevated uncertainty surrounding trade and geopolitics”, 2020 will undoubtedly be a difficult year for those pining for a return to some form of normality.  The New Zealand economy, though, has to date weathered recent turbulent times better than most.  And with fiscal policy finally coming to the table with infrastructure being the key, there is no reason why the New Zealand economy should not continue to remain in such a relatively favoured position.

2.0 The temperature

3.0 People resources

The bald facts are:

• Unemployment (September 2019, seasonally adjusted) at 4.2%; up from 4.0% a year earlier.
• Underutilisation (September 2019) at 9.9%; down from 10.9% a year earlier.
• Employment growth (QES September 2019 on September 2018) at 1.1%; down from 1.2% a year earlier.
• Labour force participation rate (September 2019) at 70.1%; down from 70.6% a year earlier.
• Growth in total weekly earnings (September 2019 quarter on September 2018 quarter) at 3.7%; up from 3.3% a year earlier.
• Net migration (12 months to September) at +54,620; up from +49,540 a year earlier

Employment

Reflecting the moderate rate of growth in GDP during the middle of 2019, employment growth in the same period neither delighted nor disappointed.

According to the Household Labour Force Survey (HLFS) the total number of people in employment increased by 0.9 percent higher than a year earlier. Adjusting for full-time jobs growing substantially but a reduction in the number of part-time jobs, this translated to a 1.9 percent overall lift in employment.  The Quarterly Employment Survey (QES), which is a little narrower in scope than the HLFS, indicated that the number of filled jobs increased by 1.1 percent over the year; with the full-time equivalent measure recording a 1.6 percent lift.

The unemployment rate was 4.2 percent in, up from 3.9 percent during the June quarter and 4.0 percent a year earlier.  
Wages increased by 0.5 percent in the September quarter, and by 2.4 percent compared to a year previously.  Total weekly earnings in the September quarter was up by a solid 3.7 percent on the previous year.  These figures imply that wages are increasing noticeably more rapidly than prices, on both a quarterly and annual basis.

Migration

Migrant flows appear to have stabilised, going by the statistics
Previously we have outlined the changes to the statistics recording the level of permanent and long-term migrant arrivals and departures.  New Zealand has changed from recording the stated migration intentions of people arriving in and leaving from New Zealand.  We now record, from the passports at the border, whether people have been in New Zealand or outside New Zealand for more or less than 12 months in the last 16 months.

This shows, on that 12/16 month measure whether people have or have not actually emigrated from New Zealand or immigrated into New Zealand. 

The previous intentions measure had shown that, in calendar 2016 and 2017, the net annual inflow to New Zealand had been a high 70,000 people.  The new measure shows the net inflow in 2016 about 62,000 people, which reduced in 2017 to under 53,000 people.
The downside of the new measure is that we don’t get finalised figures until some 16 months after the event.  The estimates in the intervening months are labelled by Statistics New Zealand as provisional and subject to revision.  The best we can say is that, given the net flow for the 12 months ending December 2017, December 2018, and July 2019 have all been in a narrow range of 52,000 to 53,000, we do not expect the flows to blow out again to 70,000 per year or to contract to 30,000 per year in a hurry.

For the purpose of planning, a number of about 50,000 a year seems OK for now.

The country with the largest changes in net flows over recent time is India.  The net inflow from India was 17,000 in 2015, had dropped to about 9,000 in 2017, and may have reduced a little since.  Also China had an inflow of 10,600 in 2015, had declined to 8,800 by 2017, and may have increased somewhat more recently, although student flows could be causing temporary fluctuations.

The flow from South Africa increased strongly from 3,000 in 2015 to about 5,500 in 2016 and 2017.  Depending on the back-flows, the current rate could be above 8,500 per year.

Philippines had a steady flow of about 7,500 over the 2015 to 2017 period, but may be declining now.  The UK had flows around 3,200 from 2015 to 2017, and may be declining, whereas the US had net inflows of under 1,000 from 2015 to 2017, and may be increasing towards 2,000 per annum.   Smaller flows from a number of European countries like France and Germany have continued moderately strong, but with no large numbers or stand out increases.

There are no large, flashing green or red lights in these numbers to indicate major change over the forecast period.

Given the wide swings in migrant flows for many years and decades, the total flows can be expected to move somewhat from the 50,000 per year figure.  Our sense is that it could move towards the 40,000, rather than back up towards the 60,000 per year.

4.0 Capital resources

The bald facts are:

• TWI NZ$ exchange rate (November average) at 70.9; down from 74.1 a year earlier.
• Government 10-year bond rate (November average) at 1.35%; down from 2.69% a year earlier.
• SME business overdraft rate (November average) at 9.00%; down from 9.38% a year earlier.
• Growth in credit to non-agriculture business (October 2019 on October 2018) at 6.1%; up from 4.3% a year earlier. 
• Growth in number of residential building consents (3 months to October 2019 on 3 months to October 2018) at 17.0%; up from 0.9% a year earlier.
• Growth in area of non-residential building consents (3 months to October 2019 on 3 months to October 2018) at -7.1%; down from 5.4% a year earlier.

Investment and building activity

The data available from Statistics New Zealand on new housing building consents issued continues to show a strong upward trend in Auckland, as well as most other parts of New Zealand.

A notable exception is Canterbury. This indicates the rebuild (in housing at least) is practically complete.

Statistics New Zealand also produces a series estimating the volume of work put in place. This measure corrects for the rate of inflation and so goes some way in providing a “true” measure of how much new housing has actually been built, as opposed to showing merely an increase in price.

This volume data confirms the strong upward trend in consents has been matched with a strong upward trend in housing actually being built. We would expect this trend to continue as the consents data is by definition a leading indicator of the work in place data.  Although the “response” of the work in place data may slow a little as capacity constraints in the sector start to bite.

Money and credit

It’s been an interesting few months in the money markets, with New Zealand following central banks around the world and embedding in lower interest rates. With a housing market slowing, and low business sentiment, the Reserve Bank expects slowing GDP growth, prompting them to lower the Official Cash Rate (OCR) in August.  While a reduction in the OCR was expected, the cut was twice as large as in recent years, making the cut the largest since March 2011.  Now at just one percent, the OCR has fallen further into unprecedented territory.  The OCR is expected to stay low into 2020, with further cuts possible. 

With lower interest rates, the New Zealand dollar has fallen against most major currencies from a peak in late-July to early-August.  However, the New Zealand dollar remains relatively strong against the Australian dollar. It has picked back up to the 93 to 94 Australian cents range in recent weeks, having slipped to 91 cents immediately following the August OCR announcement.

In the market for residential homes, lowering mortgage rates (with several fixed rates now at around 3.5 percent) is likely to provide further support for the housing market.  However, the ability to save sufficient for a deposit is likely to remain the primary barrier to prospective first-home buyers getting onto the home-ownership ladder.

5.0 Home base

The bald facts are:

• Growth in value of electronic transactions (three months to November 2019 on three months to November 2018) at 3.0%; down from 5.4% a year earlier.
• Growth in core retail sales values (September 2019 quarter on September 2018 quarter) at 5.7%; up from 3.4% a year earlier.
• Core retail price inflation (September 2019 quarter on September 2018 quarter) at 0.3%; up from -0.3% a year earlier.
• Consumer price inflation (September 2019) at 1.5% per annum; down from 1.9% a year earlier.
• Core Crown tax revenue (four months July 2019 to October 2019) totalled $27.7bn; up 6.1% on the same period of the previous year.

Inflation

The New Zealand CPI Inflation is at 1.5 percent for the year to September, after a higher than had been expected quarterly result of 0.7 percent.

There were some shifts amongst the categories, with the largest movements in food (up 1.3 percent) and the household contents and services group where prices went up by 1.2 percent over last quarter. This group includes items such as furniture, tableware, home appliances, garden tools, and cleaning products.

The change in prices in the housing and household utilities category came mostly from solid fuel (dry firewood suitable for a log burner), with prices up 4.3 percent. Other items in this category included property maintenance materials (prices up 1.4 percent) and rent which increased by one percent.  All of the other items in this group increased only slightly or did not change.

The single item with the largest change this quarter was electrical appliances for personal care at 10.1 percent, this is similar to small electrical household appliances which rose 9.6 percent.

Vehicle fuels again influenced the overall CPI noticeably due to price fluctuations. In the quarter to September the price of petrol fell marginally after a strong 5.8 percent increase in the June quarter.  This sounds a lot, but is a shift from a weighted average price per litre of $2.01 in March, $2.13 in June, to $2.11 in September. 

Since June we have seen events in the Middle East which have caused another price spike, albeit briefly.  The price of oil remains sensitive to such threats to supply and the geopolitical situation remains volatile.  Increasing pressure on governments to take concrete action on climate change hasn’t succeeded yet, but when we do see policies to significantly cut carbon emissions this will certainly flow through to increased prices at the petrol station.

In the housing group, the largest change was in local authority rates, up 5.1 percent. The real-estate market continues to be a driver of what inflation we do have, rents are up 2.5 percent, and purchase of housing is up by 3.5 percent.

For food, prices for vegetables were down 8.2 percent lower than a year ago. The cost of meat, poultry and fish is up (2.7 percent), largely due to prices for fish and seafood being 4.6 percent higher.

As for last quarter inflation remains 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 one to three percent on average over the medium term.

As we were expecting in our last Birds Eye View the Reserve Bank did go ahead and cut the OCR to a new record low. We are now in a situation where the OCR is significantly lower than the rate of inflation.

Retail

In line with the overall slowing economy, the retail sector continues to grow steadily.  All sectors (excluding vehicle fuels) showed positive growth in the value of electronic transactions over the last three months.

Overall, transaction values over the core retail sector were 4.1 percent up on a year ago.  However, a 10 percent decline in transaction values in the fuels category (primarily from price reductions) takes growth in the total retail sector to 3.0 percent.  Recent international events have caused volatility in petrol prices with potential for further volatility.

There is also considerable retail sector growth being recorded in terms of the volume of sales (i.e. adjusted for price changes).  Total sales volumes for the year to September were 3.6 percent up on the previous year, with the core sector (excluding motor vehicles and fuels) up 4.5 percent. Furthermore, sales volumes over the three months to September were 4.5 percent up (5.4 percent up for the core sector), indicating that growth is perhaps accelerating.

Government accounts

The Government’s financial accounts for the four months to October 2019 report an operating balance before gains and losses (OBEGAL) deficit of $1.1 billion.  This is some $1.9 billion worse than the $800 million surplus expected as per the May Budget forecasts.

The Treasury note this discrepancy is predominantly driven by a lower than expected corporate tax take, which in turn results from “the phasing method used to forecast monthly corporate tax and is expected to reverse out during the year”.  This unfortunately limits our ability to see signs of an overall slowdown from the Government’s revenue figures.

Nevertheless, other components of tax remained close to Budget forecasts.  Tax revenue from individuals $71 million (0.5 percent) higher than Budget forecasts, GST was $26 million short (0.3 percent), and other indirect taxation was $33 million short (0.3 percent).  Overall, core Crown tax revenue was up 6.1 percent on the same period in the previous year, providing a comfortable indication that any slowdown in growth is fairly moderate.

As is well known, the Government has allocated three billion dollars over a three-year term to invest in regional economic development through the Provincial Growth Fund (PGF).

As of 11 September 2019 $1.7 billion of funding has been committed. The value of the committed projects ranges from a $300 million allocation to KiwiRail for rail-related projects; $94.8 million for Development Phase Project to Support Northland Rail Business Case; to $15,000 to Wairoa District Council for Wairoa Youth Employment Business Case; and $15,000 for Otaki Māoriland Hub Initiatives.

Of regional specific projects, Tai Tokerau/Northland has received $320 million of committed funding, 18 percent of total committed funding. Significant projects to receive funding are the previously mentioned $94.8 million for the development Phase Project to Support Northland Rail Business Case; $34.7 million for Te Uri O Hau Settlement Trust; and $34.4 million for Ngati Hine Forestry Trust as part of the One Billion Trees programme.

The $122 million committed to the the Bay of Plenty is the second highest value of committed funding. The projects to receive the most funding in the Bay of Plenty are the $19.9 million for the Rotorua Lakefront Development and $19 million for Ōpōtiki Mussel Farming and Production Facility - Stage 1 & 2.

6.0 Abroad and beyond

The bald facts are:

• Growth in merchandise export receipts (3 months to October 2019 on 3 months to October 2018) at 3.1%; down from 8.5% a year earlier.
• Growth in merchandise import payments (3 months to October 2019 on 3 months to October 2018) at -0.4%; down from 15.1% a year earlier.
• Growth in international tourist spending (3 months to October 2019 on 3 months to October 2018) at 9.7%; up from 6.4% a year earlier.
• Growth in India GDP (September 2019 quarter on September 2018 quarter) at 4.5%; down from 7.0% a year earlier.
• Growth in China GDP (September 2019 quarter on September 2018 quarter) at 6.0%; down from 6.5% a year earlier.
• Growth in Australia GDP (September 2019 quarter on September 2018 quarter) at 1.7%; down from 2.5% a year earlier.

Exports

Tourism

Tourism is flattening off, but not alarmingly so.  Similar to earlier assessments, we continue to have an increased number of tourists visiting New Zealand.  These tourists are continuing to spend more than in previous years.  Latest data put tourist spending at a promising nearly 10 percent up on the previous year.

However, the number of nights international visitors spent in commercial accommodation continues to decrease.  Given the rise of AirBNB and other alternative accommodation options, we are now hampered in not having good data to explain where a large portion of the tourists are staying.

International tourists from China have decreased since this time last year and their spending has also decreased by -0.8 percent over the last 12 months.  We will be keeping an eye on this trend, as an indicator of overall tourism prospects.

Goods (merchandise) exports

Export receipts have been flat through the winter, despite some exports posting record highs.

Mollusc exports have reached an all-time high of 68 thousand tonnes in the year to October, over 40 percent higher than that of the previous year.  Export receipts from molluscs totalled $511 million for the year (up 55 percent on the previous year) and puts this industry on a par with wool in terms of contribution to export earnings.  The growth in exports of mollusc (primarily squid) has driven the increases in fish exports to a high of $1.8 billion.
 

Forestry export receipts have fallen considerably, with the three months to October more than 18 percent down on the same period a year earlier. This is due to the slowing demand for logs in China, and competition from other log exporters.  With log prices rebounding slightly the dip may flatten in the near future, though there is no indication of a prompt return to earlier peaks.

With flat dairy prices, infant formula has continued very high growth rates. In the year to October 123 thousand tonnes of infant formula was exported, an increase of 37 percent on the year to August 2018.  With annual exports receipts now at $1.7 billion, continuation of this growth will see infant formula overtake wine exports next year.

Trade and payments balances

After showing signs of improvement earlier in 2019, our merchandise trade balance has flattened in recent months.  For the year to October 2019 the merchandise trade balance recorded $5.0 billion in the red, after hitting an annual deficit of $6.7 billion in the year to February 2019.  In the last three months New Zealand’s strong growth in export values has slowed down, although growth in import payments have also slowed.

For the year to October 2019 the value of our imports rose 2.2 percent compared to the previous year, while at the same time our export receipts grew by 3.7 percent.

In contrast, trade in services (including education and tourism export revenue) remains in solid surplus, though that surplus is diminishing.  Latest data is for the year to June 2019, which saw our trade in services balance show an annual surplus close to $4.2 billion.  This was down from the $4.6 billion surplus recorded for the year to March 2019.  Tourism contributed the largest share of our service export revenue, with $12.8 billion in annual earnings, while education earned a further $5.0 billion.

The world

Australia

The economic story for Australia continues to be the housing downturn, softening household consumption, along with soft growth in China, Australia’s largest trading partner. This has all contributed to a slowing Australian economy, with GDP growth at 1.7 percent for the year to September 2019, a far cry from the 2.5 percent annual growth seen in September 2018.

The policy response in July consisted of announcements of a fiscal stimulus from the Federal Government and looser monetary policy from the Reserve Bank.  So far the early signs of these policies are positive, with a small median house price increases in most state capitals.  The Reserve Bank of Australia cut the Official Cash Rate (OCR) again in October, following cuts in June and in July.  The OCR now stands at 0.75 percent, on the back of concerns for global growth and a small increase in unemployment.

The fiscal stimulus package was in the form of tax cuts and tax offset payments which were to be supportive of employment growth in 2019 and 2020.   The lump-sum tax offset payments are already locked in and were due to flow from 1 July 2019, with up to $1,080 for low- and middle-income earners.  This payment will flow to more than 10 million Australians.  The tax cuts were in the form of income bracket movements, but these should also begin to have an effect on the Australian economy in the coming year.

China and India

Both the major drivers of the Asian economy are also experiencing a considerable slowdown in growth in economic activity.  Latest data records GDP in China at six percent above year-earlier levels, or 1.5 percent above those of the previous quarter.  This represents a noticeable slowing from the 6.5 to seven percent range for annual growth that has been recorded in recent times.

Similarly, growth in India is now at an annual rate of 4.5 percent, which is well below previous rates in the seven to eight percent range.

With little leeway in either economy for a monetary stimulus, the response of fiscal policy will be critical.  Of course, China has witnessed significant public infrastructure activity for several years now.  We should not underestimate the ability of China to re-double its efforts in this regard.  India, however, is a bit late to the fiscal policy stimulus game given the paltry state of the Government’s finances.  Nevertheless, the re-elected Government has signaled ambitious investment plans over the medium term.

Needless to add, both Asian superpowers are also embroiled in a range of political tensions that could easily spillover to complicate any economic plans.

United States

Still ongoing, as discussed in our earlier assessments, is the strained trade relationship between the US and China.  It shook global stock markets and triggered an inversion of the US Treasury yield curve, yet again fanning fears of a recession.  The US President has stated on various occasions in recent months that a deal could happen sooner than people think.  He again reiterated this in his recent U.N. speech, but made it clear he wanted a deal that would rebalance the relationship between the two economic superpowers.

While manufacturing and housing data suggest the US economy continued to slow, this was counter balanced by strong consumer spending, backed by the lowest unemployment rate in nearly 50 years. Low unemployment and high job creation means that nearly every American that wants to work is employed.

Europe (incl. UK)

GDP growth in the European Union (EU) remains low at 1.2 percent, slightly lower than the 1.4 percent of the previous quarter, continuing a slowdown from a high of 2.9 percent in December 2017.  This is in line with the EU Commission 2019 forecast.

Outgoing President of the European Central Bank (ECB), Mario Draghi, cut interest rates from minus 0.4 percent to minus 0.5 percent in a bid to defend the EU from the continued economic slowdown.  The ECB also restarted quantitative easing (QE) and will be buying €20 billion of EU sovereign bonds every month until they’re ready to raise interest rates again.  In addition, Eurozone countries will need to turn to fiscal policy, as the limits of monetary policy are being reached in the region.  Former International Monetary Fund manager, Christine Lagarde, took over as President of the ECB in November.

Meanwhile, Germany is on the doors of recession as a manufacturing slump deepens.  The convergence of global trade hostilities, impending BREXIT with ongoing uncertainty, and the continuing risk of tariffs on car exports to the United States of America (USA) contracted their economy in the June quarter and recorded borderline growth in the September quarter.  The USA and China are Germany’s biggest and third-biggest export markets, respectively.  The weakening economic outlook in China is increasingly affecting economic performance in Germany, and the mere suggestion of 20 percent tariffs into the USA has halted auto industry investment.

The threat of a no deal BREXIT also continues to loom over the economic fortunes of the United Kingdom (UK) and the EU.  EU carmakers have warned that “no deal” will impact consumer choice and affordability on both sides of the Channel.  Their reliance on just-in-time supply chains would see considerable disruption.  Tariff and non-tariff barriers are also expected for pharmaceuticals, chemicals, and agriculture.  While trade interruption seems easier to forecast, economists are unable to predict the impact on public perception and confidence, and political policy in the face of unending ambiguity.

Elsewhere in Europe, Spain had its fourth election in as many years as Pedro Sánchez’s centre-left Socialist Party failed to form a government. The results of the election last month left prospects for the formation of a new government uncertain.  However, the bond markets continue to ignore the noise with limited economic impact from the ongoing political gridlock.

7.0 Forecast data tables