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Monthly economic indicator

Monthly Economic Indicators June 2016

Disclaimer:

The Treasury has made every effort to ensure that the information contained in this report is reliable, but makes no guarantee of its accuracy or completeness and does not accept any liability for any errors. The information and opinions contained in this report are not intended to be used as a basis for commercial decisions and the Treasury accepts no liability for any decisions made in reliance on them. The Treasury may change, add to, delete from, or otherwise amend the contents of this report at any time without notice.

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Executive Summary

  • March quarter real GDP growth was stronger than expected, driven by construction, tourism and services and underpinned by population growth
  • The current account deficit narrowed, partly owing to an increase in the terms of trade that also supported nominal GDP growth
  • Global market volatility escalated in early June with uncertainty around the speed of US monetary policy normalisation and at the end of the month with the ‘Brexit’ referendum

Key economic data releases over the past month point to a slightly stronger economy than expected in the Budget Economic and Fiscal Update (BEFU).  Real GDP growth was slightly higher than Treasury and market expectations in the March quarter, although data revisions left annual growth in line with Treasury’s expectations.  While the quarterly growth figures were slightly firmer than forecast, there were few surprises in the details which confirmed construction, tourism and services as the key growth drivers, underpinned by high population growth.  Nominal GDP growth was also a little stronger than expected owing to higher real GDP growth and a larger increase in the terms of trade than anticipated.  Tax data in April suggest this momentum in the nominal economy has persisted into the June quarter.

Partial indicators for activity since March have been mixed but on balance look to be positive.  Consumer and business confidence has rebounded in June, while building consent data point to slowing growth in construction.  Annual net migration gains continue to increase although recent monthly data suggest a peak may be near.  House price growth remains high, but is slightly slower than in 2015.

The current account deficit narrowed to 3.0% in the year to March 2016.  The services surplus remains around its long-term average as tourism grew rapidly, and the primary income deficit narrowed.  These movements were partially offset by further widening in the goods deficit.

The Reserve Bank left the Official Cash Rate (OCR) unchanged at 2.25% in June and maintains an easing bias, dependent on data developments. Market analysts expect the OCR to fall further this year following the UK vote to leave the European Union and the New Zealand dollar’s strong rise against the US dollar in June.

Brexit was the main focus of international markets this month, as 52% of UK voters supported a UK exit from the European Union.  This outcome was not widely expected and as a result the pound and equities fell sharply, and the US dollar, Japanese yen, gold and government bonds rallied on safe-haven demand and expectations of more dovish global monetary policy.  Economic developments in advanced economies generally have been mixed, underpinning uncertainty around future global growth. The impact of the UK’s exit from the EU on the New Zealand economy is uncertain, but is not considered likely to be significant, at least in the short term.  This month’s special topic examines the UK vote to leave the EU in more detail, with a focus on its implications for New Zealand.

Analysis

Domestic economic data releases over the month of June point to a slightly stronger outlook than in the Budget Economic and Fiscal Update (BEFU).  Solid GDP growth in the March quarter was driven by construction and services. An increase in the terms of trade supported growth in nominal GDP and contributed to the narrowing of the current account deficit.  Strong growth appears to have continued in the June quarter. Beyond that, the outlook is slightly less certain, depending on how Brexit unfolds. This month’s special topic discusses Brexit’s implications for New Zealand.

GDP growth was slightly higher than expected in the March quarter...

The main data releases in June were the March quarter GDP and Balance of Payments figures.  Real production GDP rose 0.7% in the March quarter (Figure 1), slightly above Treasury’s forecast (0.6%) and market expectations.  Annual average growth eased to 2.4%, in line with BEFU, with small downward revisions to previous quarters offsetting the stronger March outturn.  While the quarterly growth figures were slightly firmer than forecast, there were few surprises in the details which confirmed construction, tourism and services as the key growth drivers.  Consistent with BEFU, we still expect these drivers to keep annual average growth around 2.5 - 2.8% over 2016, subject to how Brexit develops.

Figure 1: Real production GDP
Figure 1: Real production GDP   .
Source:  Statistics NZ

Real expenditure GDP growth was a little weaker than production GDP growth at 0.5% in the quarter (BEFU 0.3%).  Nominal GDP growth was relatively strong at 2.0%, above BEFU (1.6%), owing to a larger increase in the SNA terms of trade than expected.  On an annual average basis nominal GDP growth was 3.8%, broadly in line with BEFU (3.7%).  Tax revenue data for April indicate that this strength in the nominal economy has persisted into the June quarter.

...with construction leading growth

Construction activity increased 4.9% in the quarter, consistent with other reports of strong growth in the industry, including dwelling consents. All construction sub-industries grew in the March quarter, with construction trade services and heavy and civil engineering the main drivers. Investment in construction also increased this quarter, with residential investment up 4.2%, non-residential investment up 4.4% and other construction, which includes infrastructure investment, up 12.0% on increased roading and telecommunications investment as ultra-fast broadband is installed.

Services activity continued to expand at a solid pace, up 0.8% in the March quarter. Ten out of eleven services industries recorded growth, led by health care and residential services, up 2.7%, likely a reflection of higher demand from population growth. Retail trade increased 1.3%, mostly due to increased food and beverage services activity and durable goods sales. The former was largely driven by population growth and tourism. Over the year ended March 2016, services industries expanded 2.5%.

Agricultural production fell slightly due to earlier livestock slaughter brought on by the El Nino weather pattern, driving the 0.4% fall in overall manufacturing.  Mining activity contracted sharply (-3.3%), with oil production lower, detracting slightly from GDP growth in the quarter.

Migration remains high, supporting GDP growth

Aggregate GDP growth figures continue to be bolstered by rapid population growth, which in turn has been supported by high net migration.  Real GDP per capita growth slowed to 0.5% in the year to March, with the population growing by 2.0%.  Similarly, real gross national disposable income (RGNDI) per capita, which adjusts GDP for terms of trade movements (i.e. a measure of the average real purchasing power of New Zealand’s disposable income), was unchanged in the year to March 2016, with population growth driving the 2.0% increase in aggregate RGNDI. Around three quarters of population growth in the year to March was from net migration. 

International migration data show that these high levels of net migration have persisted since March.  The annual net inflow of migrants increased to 68,400 in May, driven by increases in the number of arrivals, with the number of departures fairly stable at a relatively low level since early 2015 (Figure 2).  Students, those on work visas and NZ and Australian citizens largely drove the growth in permanent and long term arrivals.

Figure 2: Net migration
Figure 2: Net migration   .
Source:  Statistics NZ

Flattening monthly net inflows may be the first signs of the annual migration cycle reaching a peak.  In both April and May there was a seasonally adjusted net inflow of 5,500 people.  If monthly inflows continue at these levels, the annual inflow will peak in June and begin to decline thereafter.  The monthly trend figures are also in decline.

Private consumption growth eased...

Turning to the expenditure GDP breakdown, private household consumption grew 0.4% in the March quarter, below our expectations in BEFU (0.9%) and much slower than the previous quarter (1.0%).  Growth mostly came from increased expenditure on services (0.7%), consistent with the growth in services industries in the production GDP breakdown.  Growth in consumption of non-durable goods was subdued. 

While domestic consumption was subdued, spending by tourists remained strong.  Real expenditure by non-residents in New Zealand (i.e. tourists) grew 4.9% in the quarter, to be 16.8% higher in the year ended March 2016.  Spending by tourists is also measured in other personal travel services exports in the Balance of Payments data, which increased by 24.6% in the year to March, and contributed to the narrowing of the annual current account deficit.

Indicators for consumption since March have been mixed.  Seasonally adjusted electronic card transactions rose by 1.3% in April before falling 0.6% in May.  Similarly, the ANZ-Roy Morgan Consumer Confidence Survey showed a lift in confidence in April followed by a decline in May.  Confidence has since rebounded in June, although it continues to decline from its peak two years ago (Figure 3). The Westpac McDermott Miller survey of consumer confidence showed confidence falling below its long run average in the June quarter.

Figure 3: Consumer confidence
Figure 3: Consumer confidence .
Source:  ANZ-Roy Morgan, Westpac

While the partial indicators since March have been mixed, private consumption growth is expected to pick up in the June quarter.  Low interest rates, high net migration and solid labour income growth should sustain aggregate private consumption growth at a reasonable rate, although per capita consumption growth is likely to remain low.  High house price growth could also induce a “wealth effect” on consumption, but there is no evidence of this occurring just yet.  For example, although total household credit growth remains high (up 7.9% in April compared to a year ago), this appears to be driven by housing credit (8.3% higher than a year ago) related to high rates of house price growth.  Consumer credit growth (3.0%) is below nominal GDP growth.

...but was offset by strong investment

Investment lifted strongly in the March quarter (2.4%), unwinding the 2.2% decline in the previous quarter.  Growth was fairly broad based and contributed around 0.6 percentage points to quarterly GDP growth.  Residential investment saw its strongest quarterly growth rate since 2014, increasing by 4.2% in the quarter.  The outturn reflects both the uptick in the number of building consents issued late last year, as well as drier than usual weather allowing more work to be done.  Building consents data for the March quarter suggest that residential investment growth will ease in the June quarter, but retain a solid annual pace.  Recent consents data showed a slowing trend, which may reflect uncertainty ahead of the resolution of the Auckland Unitary Plan, pointing to more moderate residential investment growth in the second half of 2016.

Business investment grew by 2.0% in the quarter, mostly from construction-related investment (see page 2).  Investment growth in plant, machinery and equipment was modest but positive.  Growth in these areas was partly offset by sizeable declines in transport equipment and intangibles investment.  The former was chiefly due to fewer large capital imports in the quarter (there were no large aircraft imports this quarter, compared to two in September and one in the December quarter).  The decline in intangibles investment was led by a decrease in software purchases.  Less natural resource exploration may have also contributed, with a large exploration rig leaving the country’s waters in the quarter.

The June ANZ Business Outlook reported stronger business sentiment led by the construction and services sectors, with optimism about future prospects at a six month high. Investment intentions also rose, in line with the robust outturns seen thus far.

The current account deficit narrowed…

Largely reflecting a fall in meat and dairy export volumes, net exports of goods and services were a drag on real GDP growth in the first quarter of around 0.4 percentage points.  However, the stronger than expected terms of trade (up 3.6%), together with a positive movement in the primary income balance, led the annual current account deficit to narrow from (a downwardly revised) 3.2% of nominal GDP in December to 3.0% in March (Figure 4).  This was at the low end of market expectations and lower than expected in BEFU (-3.3%). 

The annual goods deficit widened from 0.9% of GDP to 1.0%, slightly smaller than the 1.2% anticipated in BEFU.  Nominal goods exports fell in the quarter (-2.1%), driven by a decline in real goods exports (-3.5%) as prices rose 1.4% in aggregate.  The decline in export volumes was chiefly driven by dairy and meat, the latter due to an earlier slaughter pattern in response to El Nino weather conditions.

Figure 4: Current account
Figure 4: Current account.
Source:  Statistics NZ

On the other side of the ledger, nominal goods imports fell by 3.9% owing to a decline in prices, particularly for oil.  Real goods imports were largely unchanged from the previous quarter.  However the composition of imports did change, with larger volumes of mineral fuels imported but less capital goods.
As alluded to earlier in the consumption section, travel services export values were strong in the March quarter, growing by 2.8%.  This was the main driver of the increase in the annual services surplus to 1.6% of GDP (from 1.4% in December). 

Some of the strength in travel services exports was likely a seasonal boost from Easter falling in March.  However, visitor arrivals have remained solid in April and May, allowing for the usual seasonal downturn (Figure 5).  This should continue to support travel services exports and help sustain the services surplus.

Figure 5: Short term visitor arrivals
Figure 5: Short term visitor arrivals.
Source:  Statistics NZ

The primary income (investment income) deficit narrowed from 3.6% to 3.4% of GDP.  The smaller deficit relates chiefly to a reduction in investment income from foreign investment in New Zealand in the quarter (smaller investment income outflows).  This outturn is consistent with relatively flat corporate tax returns in the March quarter.

New Zealand’s net international investment position (NIIP) deteriorated slightly from -61.8% of GDP in December to -63.1% in March.  The deterioration partly reflects market volatility in early 2016, which led to smaller increases in New Zealand’s international assets (e.g. offshore equities) than the increases in liabilities (foreign-owned assets in New Zealand, such as New Zealand equities).

...but the annual goods deficit continues to widen...

Overseas merchandise trade data showed the annual trade deficit at the end of May widened slightly to $3.6 billion.  On a seasonally adjusted basis, exports fell 0.6% in May.  Falls in diary
(-3.2%) and crude oil exports (-18.6%) were partially offset by gains in forestry (11.2%), meat (7.1%) and fruit (4.4%) exports.  Given exports to China were up 26.7% in the year, the increase in forestry exports may be linked to the recent surge in state-led infrastructure investment.  Seasonally adjusted imports fell faster than exports, down 1.3% in May.

Although the trade balance appears to be holding up better than expected, the annual trade deficit has widened considerably over the past 18 months. This deficit may widen further as dairy prices and volumes ease, as reflected in recent dairy auction outturns, and as oil prices rise.  Recent strength in the NZD will add further resistance (particularly for lamb exports to the UK, with the fall in the pound following the Brexit vote), although trade in services is expected to provide a significant offset.

...and key commodity prices remain low

Dairy prices have lifted slightly over recent GlobalDairyTrade (GDT) auctions but remain at low levels (Figure 6).  Prices for most dairy products on the GDT auction are only just returning to the levels seen in January of this year.  The outlook for dairy prices remains weak as global milk production remains high, particularly in the EU[1].  New Zealand milk solids production for 2015/16 was 1.5% lower than the previous season; Fonterra forecast production to decline by a further 3% in the 2016/17 season.

The ANZ World Commodity Price Index has followed a similar, broadly sideways trend in recent months, with a 1.0% lift in May following two small declines in March and April.  Nonetheless, the index remains 11.7% lower than a year ago.  The NZD price index is 3.5% lower compared to a year ago, providing some support to exporters.

Figure 6: Dairy prices
Figure 6: Dairy prices.
Source:  GlobalDairyTrade

Crude oil prices have lifted from their low levels earlier in the year, although they remain lower than a year ago and well down compared to two years ago.  Oil prices remained relatively stable throughout June, trading in a fairly tight range on either side of the US$50/barrel mark. Falls in crude oil prices made a sizable positive contribution to New Zealand’s terms of trade in the March quarter, but much of this contribution is likely to be unwound in the June quarter.  The rebound in oil prices is already evident at the pump, with June quarter average petrol prices around 5% higher than in the March quarter, putting upwards pressure on tradables inflation.

RBNZ left the OCR unchanged at 2.25%

Earlier in June the Reserve Bank left the OCR unchanged at 2.25%.  Prior to the decision analysts were split, although market opinion was leaning towards an “on hold” decision.  The Reserve Bank expects inflation to increase from its current low levels owing to increases in fuel prices, some increases in capacity pressures and expected depreciation of the NZD, although they noted further policy easing may be required depending on the emerging flow of economic data. Markets have interpreted the Brexit vote as increasing the probability of looser monetary policy, and most local commentators expect at least one further 25 basis point reduction this year.

The NZD appreciated sharply following the OCR announcement, with the TWI increasing 1.5%.  The NZD depreciated against the USD following the Brexit vote, but remains above 75.  If maintained, this will pose some downside risk to the Reserve Bank’s inflation forecasts through the exchange rate’s impact on tradables inflation.

House price growth remains elevated

While growth in consumer prices remains muted, house price growth does not.  REINZ data for May indicated that the national stratified median house price rose by 14.7% from a year ago, in part due to a 2.1% lift in the month of May.  Price pressures continue to spill over from Auckland, resulting in price increases in the Waikato and Bay of Plenty.  In Auckland itself, the median price fell slightly in the month but was 8.2% higher than a year ago.  Housing demand in Auckland has recovered following a drop in late 2015 when the market reacted to regulatory changes, supported by the strong fundamentals of high net migration inflows and low interest rates.

The seasonally adjusted number of house sales fell across most regions in May, with nationwide sales down 4.5%.  The fall in house sales in May reflects continued reductions in the number of houses available for sale, which occurred earlier in Auckland and is now happening increasingly in other regions. The number of properties available for sale is down by over 40% since May 2015, led by shortages across the North Island.

Brexit fuels global market volatility

After a period of relative calm in May, global market volatility escalated in June with uncertainty around the speed of US monetary policy normalisation and the ‘Brexit’ referendum at the end of the month. News of the ‘Leave’ majority rocked markets; in line with ‘risk off’ sentiment the GBP/USD fell 9% and equities declined, while the US dollar index rose 3% and both JPY/USD and gold rose 4%. Bonds rallied, with the German and Japanese 10-year bond yields falling further into negative territory. Consequently, the VIX (a measure of market volatility) returned to its high, early-2016 levels, although remains well below mid-2015 levels (Figure 7). Central Banks stand ready to inject additional liquidity, with the Bank of England (BoE) saying it “will not hesitate to take additional measures”. Market implied odds for future rate cuts have increased in many countries, including NZ. However, in the week since the referendum polls closed, markets have stabilised somewhat.

Figure 7: CBOE Volatility Index (VIX)
Figure 7: CBOE Volatility Index (VIX).
Source:  Thompson Reuters

UK votes to leave European Union

Economic growth in the UK is expected to be adversely affected by the vote to leave the European Union (EU). Recent UK activity has been positive, rebounding from previous weakness with the unemployment rate reaching 5.0%, industrial production growth surging to 2.0% in April, and retail sales growing 0.9% in May (Figure 8). However, some commentators have suggested a shallow recession is possible in the second half of 2016 from declining trade, labour and capital flows from the EU and heightened uncertainty. Capital costs may also increase, with two rating agencies downgrading the UK’s sovereign rating.

The BoE left its policy rate unchanged in June ahead of the referendum, but market pricing for a cut at the 14 July meeting has since risen to 28%. Headline consumer price growth was steady at 0.3%, but in future may be fuelled by the lower pound, with weaker growth acting as an offset.

Figure 8: UK economic indicators
Figure 8: UK economic indicators.
Source:  Haver Analytics

US GDP revised higher, but non-farm payrolls disappointment took June hike off table

US March quarter GDP growth was revised up 0.1ppt to 0.3%, but subsequent outturns have been subdued. May retail sales growth was moderate (0.5% mpc, 2.5% apc), the unemployment rate declined to 4.7% and the housing market appears to be recovering from the GFC. However, both industrial production and manufacturing output fell in May (led by motor vehicle production declines), and indicators of future activity were mixed.

The main outturn for the month was the May non-farm payrolls report, which disappointed both the Fed and markets by coming in at only 38,000 additional jobs (160,000 expected). The weaker labour market took a June policy rate hike off the table, with the Fed striking a decidedly more dovish tone at its meeting. While the Fed’s preferred measure of core annual inflation was 1.6% in April and May, concerns about the labour market and Brexit mean future moves are uncertain.

Australia’s growth strong in first quarter

Australia’s first quarter GDP growth surprised at 1.1%, as net exports, private consumption and residential investment offset weak business (particularly mining) investment. Recent domestic activity has been moderate, as retail sales growth eased to 0.2% in April, and the unemployment rate was steady at 5.7% in May. House prices fell in the March quarter for the first time since 2012.

The Reserve Bank of Australia left its cash rate unchanged at 1.75% without an explicit easing bias, stating “overall growth is continuing, despite a very large decline in business investment.”

Mixed euro area growth

Euro area March quarter GDP was revised up slightly to 0.6% as private consumption rebounded from a weak December quarter. Subsequent outturns were mixed, with flat retail sales growth in April, but industrial production surging 1.1% after two months of contraction. Unemployment was steady at 10.2% in April, while Germany’s rate sank to its lowest level since reunification (4.2%).

The European Central Bank kept its settings unchanged in advance of the UK referendum and the launch of existing stimulus (e.g. TLTRO II), despite the fourth consecutive month of consumer price deflation in May and core inflation of 0.8%.

Japan’s GDP surprise unlikely to be sustained

Japan’s March quarter GDP growth was revised up slightly to 0.5% due to a smaller contraction in private business investment, but subsequent developments have been weak. Retail sales growth and the unemployment rate were flat in April, while industrial production grew only 0.3% in March. However, these outturns were above expectations given the Kumamoto earthquakes.

The Bank of Japan left its policy rate unchanged at -0.1% in June, despite consumer prices continuing to fall in April. PM Abe delayed a consumption tax increase to support consumption, but this move was followed by Fitch Ratings lowering its outlook for Japan to negative, saying it doubted the government’s commitment to fixing its public finances. Despite the limited monetary and fiscal headroom, more stimulus is expected to offset the impact of the higher yen, which would otherwise lead to lower growth and inflation.

Activity in China mixed

China’s activity in May was mixed. Industrial production growth was steady (at 6.0%), real retail sales growth stronger (9.7%) and state-led infrastructure investment growth continued its rapid pace (20% annual). However, growth was weighed down by a softening property market and easing manufacturing investment growth. M2 money and consumer price growth declined to 12.7% and 2.0% respectively, both below target.

Economic risks mainly long-term

Brexit has added to the risks facing global economic growth, with the chance of a UK recession and by placing further pressure on EU growth and cohesion. However, markets have shown short-term resilience. BoE Governor Carney noted that banks have larger capital buffers and holdings of liquid assets than before the GFC. Market movements, while dramatic in the past few days, have been orderly with no sustained market disruptions reported. Finally, market volatility remains well below that during the GFC (the VIX peaked at 26.7 compared to around 65 in 2008). Key risks relate to what will happen in the longer-term, as the practical steps of the UK exit from the EU play out.

Notes

MEI Special Topic: Implications of Brexit for the NZ economy

On 23 June the UK voted 52% to 48% in a referendum to leave the EU (“Brexit”).  Although the referendum was regarded as binding, it will require parliamentary approval to activate Article 50 of the Lisbon Treaty which sets out the procedure for negotiating an exit from the Union. The exit process can take up to two years (or longer, with the agreement of all the parties).  This special topic discusses the implications of the referendum vote for the New Zealand economy.

Vote led to widespread volatility…

The outcome of the referendum was not widely expected as polls (narrowly) and betting odds (strongly) pointed to a Remain vote.  Because of this, it triggered widespread financial market volatility with the pound falling 12% the next day.  It also led to political upheaval as PM David Cameron said that he would step down so that a new leader could take the exit negotiations forward.  The referendum result also poses a risk to the internal unity of both the UK and EU, with Scotland and Northern Ireland voting to remain in the EU, and anti-EU political parties active in some other EU member countries.

…but economic impact on NZ is expected to be minimal at this stage

The referendum result has had – and will continue to have – widespread ramifications across political, financial and economic spheres for the UK, the EU and the world as a whole.  There is not expected to be much impact on the New Zealand economy in the short term; in the medium and long term its impact may be negative, but that is also uncertain as it depends on how events unfold.  At this stage, there is insufficient information and analysis to change the outlook for the NZ economy from the Budget Update.

Impact on UK economy expected to be negative…

The uncertainty created by the referendum outcome is expected to lead to lower growth in the UK in the short and medium term.  Growth was already weakening prior to the vote because of the uncertainty it created; that uncertainty has now increased as it is not clear what future trade access and other regulatory arrangements will be.  Firms are likely to continue to hold off on investment plans – or cancel them – and households may also become more cautious in their consumption decisions given the heightened uncertainty and the implications of the decision.

Financial market adjustments and volatility are also likely to have negative effects on economic activity, even though the Bank of England has stated that it is ready to provide additional liquidity to support financial institutions and that it will assess economic conditions and consider any additional policy responses in coming weeks.  Nevertheless, the fall in the pound (it appears to have settled at about 8% down from its pre-Brexit level against the USD) will have an impact on incomes and purchasing power in the UK economy.  Many forecasters consider that a mild recession is likely in the second half of 2016.  Other economic impacts are also likely, including higher inflation as a result of the fall in the value of the pound which will further reduce real incomes.

Economic analysis prior to the referendum indicated that growth was likely to be lower once the UK exits the EU as a result of more restricted access to EU markets (around half of UK exports are to the EU), in addition to the direct impact on sectors such as the finance industry.  HM Treasury, OECD and IMF had a range of estimates of the impact on growth between -1.5% to -6.0% over the next 2-3 years, depending on the severity of the shock and the nature of the market access to the rest of the EU under the new arrangements.  An update to June Consensus Forecasts for the UK has marked growth down from 1.9% and 2.1% in 2016 and 2017 to 1.4% and 0.4% respectively.

…and for the EU and world economy

Economic growth in the EU is expected to be adversely affected by weaker demand from the UK and ongoing uncertainty, although not to the same extent as in the UK as exports to the UK represent only 3% of other-EU GDP.  Estimates of the impact on growth vary, but range up to 0.5% points per year over the next 1-3 years.  The updated Consensus Forecasts have reduced euro area economic growth in 2016 and 2017 from 1.6% in each year to 1.5% and 1.0% respectively.

The direct impact on economic growth elsewhere is generally considered to be small at this stage, apart from any impact via financial market adjustments or volatility; for example, the appreciation of the yen since the Brexit vote is likely to lead to slower growth and lower inflation in Japan.  The stronger USD may also affect the US economy, but China, Asia and Australia are not expected to be directly affected at this stage, although there could be financial impacts in Asia.

Importance of the UK market to NZ…

Compared to the early 1970s when it joined the European Economic Community (as it was then), the UK is now a less important export market for New Zealand.  In the year to March 2016, the UK ranked as our sixth largest export market (after Australia, China, Japan, the EU ex-UK, and the US), accounting for 3.3% of goods and 7.3% of services exports, amounting to 4.6% of goods and services combined.  NZ’s major goods export to the UK is sheep meat (lamb), accounting for 36% of goods exports to the UK in 2015, followed by wine at 22%.  The UK accounted for a fifth and a quarter respectively of NZ exports of those products in 2015, making them relatively dependent on the UK market.

The UK is also important for services exports, especially tourism (travel services).  In the year to March 2016, there were 214,000 visitors from the UK, accounting for 7% of total arrivals and ranking fifth after Australia, China, the rest of Europe and the US.  Long-term migration flows between NZ and UK are also important, with the UK accounting for 11% of total arrivals (124,000) in the year to March 2016; it is also an important destination for people leaving NZ longer-term, especially young people.  Ten thousand people left for the UK in the year to March 2016 (17% of total departures).  The UK is also a source of foreign direct investment (FDI) in NZ, accounting for 4% of the stock of FDI at the end of 2015.

…and of the rest of the EU

Given its greater size, the rest of the EU is a larger export market for NZ.  It accounted for 8% of goods exports and 9% of services exports in the year to March 2016.  NZ’s exports are more diversified than for the UK given the range of different markets, but lamb is also the major product (23% of goods exports in 2015), and fruit (especially kiwifruit), dairy products and wine are also important.  The EU ex-UK accounted for more than a quarter of sheep meat exports in 2015, making the combined UK-EU market particularly important for that product.

Services exports to the EU ex-UK (particularly tourism) are also important, with 273,000 visitor arrivals in the year to March 2016, 8% of the total.  Permanent and long-term arrivals from the rest of Europe in the same period were similar to the UK at 14,000 (11% of total arrivals), but it was less important as a destination for New Zealanders going overseas, with less than half the outflow to the UK, at around 5,000 in the past year.

The UK and EU are also important sources of imports for New Zealand, with motor vehicles the major item (20% of goods imports from the UK and 12% from the rest of the EU).  In the year to March 2016, the EU-28 (i.e. including the UK) was the largest market for goods imports with an 18% share, ahead of Australia (17%) and China (16%).

Short-term impact on the NZ economy likely to be limited…

The impact of the UK’s decision to leave the EU on the NZ economy is likely to be limited in the short term.  The main transmission channel for any immediate effect is financial markets; ongoing volatility is likely to lead to the postponement of trade, investment and consumption decisions in the UK.  For example, the fall in the pound against the NZ dollar may make it more difficult to secure export contracts in the UK.  The extent of that effect – and whether it is just a change of timing – will depend on how long the volatility continues.

In addition, while major developed economy bond rates have fallen (on expectations of more accommodative near-term monetary policy and a switch from risk assets to bonds), risk premiums and spreads to other bonds have increased.  NZ bond rates have also fallen, but funding costs for NZ banks could increase.  Local banks are understood to be well funded at present, so this is unlikely to have an immediate impact.

Ongoing uncertainty about the outlook would also affect business and consumer confidence, leading to reduced economic activity.  Falls in asset values, particularly equities, may also curtail firms’ and households’ spending plans.  These effects appear minimal at this stage; a timely measure of consumer confidence in Australia dipped only slightly this week from prior to the referendum.

…medium-term impacts likely negative but less certain…

The impact of the UK’s withdrawal from the EU on New Zealand in the medium term is less certain as it depends on how a number of factors develop.  Lower economic growth in the UK in the second half of 2016 and in 2017, especially if combined with a weaker pound, would adversely affect demand for NZ products and services.  The same would apply to the rest of the EU, although to a lesser extent as its growth is not expected to be affected as much and the euro has not fallen as far.  There could also be effects via third markets; for example, if a lower pound makes UK exports more competitive relative to NZ exports in those markets.

The impact of the weaker pound on NZ imports from the UK is uncertain:  it may lead to increased imports from that market and/or lower import costs and so lower inflation.

Services exports to the UK are likely to be affected in the medium term, given lower income growth and a weaker bilateral exchange rate (GBP/NZD), two of the main drivers of tourism demand given its discretionary nature.  Economic activity arising from the 2017 Lions Tour of New Zealand may be affected by these developments with lower spending and/or fewer visitors.

Slower growth in the UK and a weaker currency may increase New Zealand’s net migration inflow.  Some New Zealanders may return from the UK, especially if it enters a recession in the second half of 2016, and fewer young people are likely to go there to seek work, especially in the finance industry if it is directly affected by Brexit.  Whether more British people migrate to New Zealand is uncertain.  UK foreign direct investment is likely to be adversely affected by weaker growth and a lower pound.

…as are longer-term impacts…

What impact recent developments have on the NZ economy in the long term is difficult to estimate as it depends on future trade arrangements and other regulatory settings.  In particular, the EU and UK will have to negotiate new trading arrangements with each other, and New Zealand and other countries will have to negotiate new trading arrangements with both of them.  This could lead to a period of uncertainty extending beyond the two-year Brexit negotiating period.  There may be other long-term impacts as well, for example access for New Zealanders to the UK and EU labour markets.

Weaker demand from that part of the world for some of New Zealand’s key export products might mean lower export prices and terms of trade in the long term and weaker demand for services exports (tourism).  However, the long-term effects depend largely on what access arrangements are agreed and what the future growth path is in those economies.  There may also be positive opportunities in this regard.

Global risks also increased

The main impact on the global economy is an increase in uncertainty at a time of already heightened risk.  Brexit was one of the risks identified in the Budget Update, along with China’s slowdown and transition from investment to consumption, slowing growth generally in developing economies and an ongoing slow recovery in developed economies, and geopolitical risks especially in the Middle East.

The risks are further exacerbated at present by low growth in the world economy and the lack of both monetary and fiscal policy room, with policy rates near or below zero and government debt high in major developed economies. However, at this stage it is considered unlikely that Brexit would lead to a global financial crisis.  On the other hand, the recent developments highlight a trend towards protectionist policies which would be negative for world trade and economic growth.

Impact on NZ uncertain at this stage…

Overall, the impact of the UK’s exit from the EU on the New Zealand economy is uncertain at this stage, but is not considered likely to be significant, at least in the short term.  If financial market volatility continues, it may have a temporary adverse effect on trade and investment.  Medium-term impacts will depend on how quickly the current uncertainty and volatility is resolved; if it continues for a period of time, it could have some negative impact through financial and confidence channels (e.g. a lower value of the pound leading to weaker services exports to the UK). 

Longer-term impacts will depend largely on what sort of relationship the UK negotiates with the rest of the EU and with its other trading partners, including New Zealand.  If New Zealand access to either the UK or EU for key products (e.g. lamb) is restricted, demand for those products will be affected, although other markets may offset some of that loss.  However, there may also be some positive opportunities from new arrangements.

…but NZ is in a relatively strong position to withstand any shock

If a crisis did develop, the New Zealand economy is in a relatively strong position to withstand an economic shock.  Economic growth in the year to March 2016 was 2.4%; the banking sector is well capitalised, particularly as a result of the policy changes introduced by the RBNZ following the global financial crisis; the exchange rate would adjust first in response to any external shock; the OCR is at 2.25% with room to be reduced further; the fiscal position is broadly balanced and net core Crown debt is relatively low at around 25% of GDP.  However, any shock could still have a material impact on the New Zealand economy.

New Zealand Key Economic Data

June 2016

Quarterly Indicators

Quarterly Indicators
    2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q1

Gross Domestic Product (GDP)

               
Real production GDP qtr % chg[1] 0.9 0.2 0.3 0.8 0.9 0.7 ...
  ann ave % chg 3.7 3.6 3.3 3.0 2.5 2.4 ...
Real private consumption qtr % chg[1] 0.2 0.6 0.5 0.7 1.0 0.4 ...
  ann ave % chg 2.7 2.6 2.7 2.4 2.5 2.5 ...
Real public consumption qtr % chg[1] 0.3 0.8 0.9 0.1 -0.3 0.5 ...
  ann ave % chg 2.7 2.3 2.1 2.0 2.0 1.8 ...
Real residential investment qtr % chg[1] 4.3 -0.1 0.6 1.4 1.3 4.2 ...
  ann ave % chg 14.6 11.5 8.6 7.8 5.9 7.0 ...
Real non-residential investment qtr % chg[1] -0.1 -2.4 1.1 2.8 -3.0 2.0 ...
  ann ave % chg 9.6 9.0 7.5 4.9 1.9 1.4 ...
Export volumes qtr % chg[1] 5.8 1.3 0.2 1.9 0.0 -1.0 ...
  ann ave % chg 3.0 4.2 5.7 7.3 6.5 5.0 ...
Import volumes qtr % chg[1] 2.4 0.7 1.5 -2.6 0.8 0.2 ...
  ann ave % chg 7.9 7.4 6.6 5.5 3.5 1.9 ...
Nominal GDP - expenditure basis ann ave % chg 5.1 3.6 2.8 2.8 3.2 3.8 ...
Real GDP per capita ann ave % chg 2.2 1.9 1.5 1.1 0.6 0.5 ...
Real Gross National Disposable Income ann ave % chg 5.1 3.5 2.3 1.5 1.5 2.0 ...

External Trade

               
Current account balance (annual) NZ$ millions -7,464 -8,064 -8,259 -8,096 -7,989 -7,504 ...
  % of GDP -3.1 -3.4 -3.4 -3.3 -3.2 -3.0 ...
Investment income balance (annual) NZ$ millions -9,449 -9,217 -9,049 -9,094 -8,721 -8,207 ...
Merchandise terms of trade qtr % chg -2.4 1.2 1.5 -3.8 -2.0 4.4 ...
  ann % chg -5.0 -5.6 -4.2 -3.6 -3.2 -0.1 ...

Prices

               
CPI inflation qtr % chg -0.2 -0.2 0.4 0.3 -0.5 0.2 ...
  ann % chg 0.8 0.3 0.4 0.4 0.1 0.4 ...
Tradable inflation ann % chg -1.3 -2.4 -1.8 -1.2 -2.1 -1.2 ...
Non-tradable inflation ann % chg 2.4 2.4 2.1 1.5 1.8 1.6 ...
GDP deflator ann % chg -2.2 -0.9 0.5 0.8 0.4 1.3 ...
Consumption deflator ann % chg 0.7 0.6 0.6 1.1 0.7 0.8 ...

Labour Market

               
Employment (HLFS) qtr % chg[1] 1.1 0.6 0.3 -0.4 1.0 1.2 ...
  ann % chg[1] 3.5 3.2 3.0 1.5 1.4 2.0 ...
Unemployment rate %[1] 5.8 5.8 5.9 6.0 5.4 5.7 ...
Participation rate %[1] 69.5 69.4 69.3 68.7 68.5 69.0 ...
LCI salary & wage rates - total (adjusted)[5] qtr % chg 0.5 0.3 0.5 0.4 0.4 0.4 ...
  ann % chg 1.7 1.7 1.6 1.6 1.5 1.6 ...
QES average hourly earnings - total[5] qtr % chg 0.5 0.0 0.8 1.0 0.3 0.3 ...
  ann % chg 2.6 2.1 2.8 2.3 2.1 2.4 ...
Labour productivity[6] ann ave % chg 0.1 0.5 0.7 0.8 0.6 0.8 ...

Retail Sales

               
Core retail sales volume qtr % chg[1] 1.8 2.1 0.2 1.1 1.3 1.0 ...
  ann % chg 6.0 7.2 5.8 5.2 5.2 4.7 ...
Total retail sales volume qtr % chg[1] 1.8 2.0 0.2 1.5 1.1 0.8 ...
  ann % chg 5.9 7.1 5.5 5.7 5.3 4.8 ...

Confidence Indicators/Surveys

               
WMM - consumer confidence[3] Index 115 117 113 106 111 110 106
QSBO - general business situation[4] net % 23.6 23.3 5.1 -14.5 14.7 1.7 ...
QSBO - own activity outlook[4] net % 26.7 25.0 9.3 21.7 21.6 3.8 ...

Monthly Indicators

Monthly Indicators
    2015M12 2016M01 2016M02 2016M03 2016M04 2016M05 2016M06

External Sector

               
Merchandise trade - exports mth % chg[1] -8.7 5.7 -6.1 -7.5 11.8 -1.3 ...
  ann % chg[1] 0.5 5.8 9.0 -14.3 4.1 5.1 ...
Merchandise trade - imports mth % chg[1] -2.7 11.7 -7.9 -17.2 23.7 -0.6 ...
  ann % chg[1] -3.0 7.0 1.8 -5.4 0.7 5.7 ...
Merchandise trade balance (12 month total) NZ$ million -3537 -3576 -3293 -3766 -3624 -3633 ...
Visitor arrivals number[1] 272,080 280,500 277,200 288,580 285,320 285,650 ...
Visitor departures number[1] 284,700 280,150 293,470 284,390 294,990 295,640 ...

Housing

               
Dwelling consents - residential mth % chg[1] 2.8 -8.3 10.5 -9.6 6.8 -0.9 ...
  ann % chg[1] 15.4 -0.5 35.3 1.9 11.8 16.1 ...
House sales - dwellings mth % chg[1] 7.5 -9.5 4.4 5.4 8.7 -2.8 ...
  ann % chg[1] 3.5 4.3 5.7 8.2 18.4 13.6 ...
REINZ - house price index mth % chg 0.8 0.2 1.9 2.3 2.3 2.1 ...
  ann % chg 12.6 10.7 11.9 13.3 14.5 14.7 ...

Private Consumption

               
Electronic card transactions - total retail mth % chg[1] 0.2 0.3 0.7 0.1 0.8 -0.3 ...
  ann % chg 6.6 5.2 9.2 6.2 7.8 3.3 ...
New car registrations mth % chg[1] 3.1 -2.8 5.8 -3.7 6.1 -3.1 ...
  ann % chg 2.4 -1.1 7.4 -0.2 8.7 4.2 ...

Migration

               
Permanent & long-term arrivals number[1] 10,050 10,740 10,590 9,900 10,430 10,210 ...
Permanent & long-term departures number[1] 4,520 4,650 4,590 4,560 4,910 4,710 ...
Net PLT migration (12 month total) number 64,930 65,911 67,391 67,619 68,110 68,432 ...

Commodity Prices

               
Brent oil price US$/Barrel 38.01 30.70 32.18 38.20 41.58 46.74 ...
WTI oil price US$/Barrel 37.19 31.67 30.50 37.80 40.76 46.76 ...
ANZ NZ commodity price index mth % chg -3.9 -0.4 0.0 -3.0 -2.8 2.5 ...
  ann % chg -1.1 -1.6 -10.3 -14.3 -8.5 -3.5 ...
ANZ world commodity price index mth % chg -1.8 -2.3 0.5 -1.3 -0.8 1.0 ...
  ann % chg -12.9 -14.7 -17.8 -22.4 -16.8 -11.7 ...

Financial Markets

               
NZD/USD $[2] 0.6737 0.6521 0.6634 0.6733 0.6892 0.6804 ...
NZD/AUD $[2] 0.9296 0.9313 0.9300 0.9001 0.8998 0.9290 ...
Trade weighted index (TWI) June 1979 = 100[2] 73.23 71.93 72.35 72.19 72.80 72.86 ...
Official cash rate (OCR) % 2.50 2.50 2.50 2.25 2.25 2.25 ...
90 day bank bill rate %[2] 2.79 2.73 2.62 2.43 2.34 2.38 ...
10 year govt bond rate %[2] 3.56 3.32 3.07 3.02 2.86 2.68 ...

Confidence Indicators/Surveys

               
ANZ Bank - business confidence net % 23.0 ... 7.1 3.2 6.2 11.3 3.2
ANZ Bank - activity outlook net % 34.4 ... 25.5 29.4 32.1 30.4 29.4
ANZ-Roy Morgan - consumer confidence net % 118.7 121.4 119.7 118.0 120.0 116.2 118.9
Performance of Manufacturing Index Index 57.0 57.8 55.9 54.7 56.6 57.1 ...
Performance of Services Index Index 58.5 55.4 56.9 55.1 57.8 56.9 ...

 

Abbreviations

qtr % chg
quarterly percent change
mth % chg
monthly percent change
ann % chg
annual percent change
ann ave % chg
annual average percent change

Notes

  • [1] Seasonally adjusted
  • [2] Average (11am)
  • [3] Westpac McDermott Miller
  • [4] Quarterly Survey of Business Opinion
  • [5] Ordinary time
  • [6] Production GDP divided by HLFS hours worked

Sources: Statistics New Zealand, Reserve Bank of New Zealand, NZIER, ANZ, Haver, Westpac McDermott Miller, ANZ-Roy Morgan, REINZ, BNZ-Business NZ