MIL OSI Analysis – Source: Tony Alexander – Bank of New Zealand Economist – Economic Analysis:
July 23 2015
In this issue of Sporadic I take a look at
• the easing of monetary policy this morning,
• how dairying is suffering but the woe is good for many other sectors and this means NZ growth is likely to continue,
• review some of the recent data releases,
• look at why legislation banning foreign house buying could be useful,
• look at why Chinese are buying property off their mainland,
• and reproduce part of the official 2002 NZ government apology to Chinese for discriminatory policies of the nineteenth and early twentieth centuries.
This morning the Reserve Bank met market expectations by cutting the official cash rate another 0.25% to 3%. We expect that by the end of the year the rate will be all the way back to the 2.5% it was at before the 1% tightening happened last year.
Whether it goes lower than 2.5% depends upon factors which clearly we cannot predict and neither can the RB. After all, if they had expected the economy and inflation to be this weak currently they would not have raised rates last year.
This serves to remind us that predictability of your operating environment post-GFC remains very, very low and you should not develop plans highly vulnerable to things turning out different from the assumptions which you have adopted about what the future will bring. Go ask a dairy farmer. Or a gold miner. Or an iron ore producer. Or an oil explorer. But taking that warning into account, do recent events warrant you being more or less optimistic about the coming year? Well that depends substantially upon what sector you are in. If you will benefit from Auckland house prices rising or you export pipfruit, wine, Kiwifruit or tourism services things are better for you. If you have a job and a mortgage rate review coming up the future is bright. If you have been struggling to find staff things are looking up.
I say this because the currency has moved lower and interest rates keep falling as dairy prices decline further, but world growth prospects haven’t really changed. So when we talk of some economic pain we are really talking about the dairy sector and its offshoots undergoing a massive correction in expectations rather than the whole economy suffering as happened over 2008 under the combined effects of high interest rates and a high exchange rate – then global recession. This situation is quite different. Specifically…
Exports of dairy products from New Zealand brought in about $14bn of revenue in the past year but with that total already well down from around $17bn a year ago a further substantial decline looks likely in the coming year as a result of the continuing falls in dairy prices. The most recent Global Dairy Trade auction on July 15 saw an average price fall of 10.7%. This followed a 5.9% fall in the previous auction, was the ninth fall in a row, and means prices are now down 41% since the start of March and 64% from the multiyear peak of about two years ago.
The continuing fall in dairy receipts and therefore incomes for dairy farmers means we should anticipate extra weakness in dairying regions and the companies which service dairy farmers. Some highly indebted farmers will find themselves in trouble but we have all been here before and all parties know the key thing is to maximise communication and early on start ways of addressing cash flows and debt servicing.
The cost of living for the average NZ family (Consumers Price Index) rose by 0.4% during the June quarter and by 0.3% in the past year. So if you got a wage rise above 0.3% this past year you are ahead of the game. If however you have had no pay rise for, lets say, eight years, then you’ll need a 17.5% pay boost to catch up.
Excluding petrol price rises inflation was actually 0% in the quarter and core inflation using the method commonly used offshore of stripping out food and energy was just 0.9% for the past year from 1.4% one year ago, 1% two years ago, and 1.2% three years ago. Core inflation is very low in New Zealand though some items such as local authority rates keep rising at a high rate. The Reserve Bank is well away from doing its job of keeping inflation between 1% and 3% over the business cycle. The consistent pattern of under-shooting means thinking at the RB is highly likely to be turning more and more toward keeping interest rates low for a long time when the new base is reached, and when they think rates need raising not doing so until a lot more inflation is obvious than was the case for the rate rise periods in 2010 and 2014.
Can we see any signs suggesting that underlying inflationary pressures are building? Hardly, not with dairy prices tumbling. In fact in the QSBO from NZIER the net proportion of businesses expecting to raise their selling prices was only 7% in the June quarter from 33% a year earlier and a ten year average of 27%.
The REINZ’s monthly data dump told us that sales nationwide in June were a strong 29% ahead of a year earlier, taking the annual sales total to 81,564 which is the highest since early-2008 and 8% up from a year ago. Sales growth has recently been quite strong in Northland and Waikato with Canterbury sales almost flat. Average sales prices rose 1.3% in the month and have gained 4.6% for the June quarter with Auckland ahead 7.6% and rises elsewhere much less. The data suggest housing market strength is starting to move out of Auckland to other places – as has happened in previous cycles. But price gains in Auckland have yet to decidedly slow.
It is falling. Various measures have shown this recently and one we track is the ANZ Roy Morgan NZ Consumer Confidence Index which fell to 113.9 in July from 119.9 in June and 128.8 in April. The average reading the past decade has been 117 so sentiment is below average but not by much and still above the 100 level where optimists match pessimists. This suggests to us that retailers outside of dairying locations should not be too fearful of consumers closing their wallets to a great degree in the near future. But an early-year surge in retail spending may well be over according to the Statistics NZ data on transactions using debit and credit cards.
Migration Boom Continues
Data released on Tuesday tell us that in the year to June there was a net gain to our population from migration flows of 58,259 people. This is a record number well ahead of 38,338 a year ago, a loss of 3,191 three years ago, and an average gain for the past 20 years of over 13,000 people. There are some signs that the boom is peaking however with June only 437 stronger than June 2014 whereas May was ahead 1,009. More accurately, in seasonally adjusted terms the net gain at an annualised pace in the past three months was 58,600 which is down from 61,280 three months ago.
The question then becomes how quickly will the annual total turn? Well I may have picked late in 2012 that the turning of our migration cycle with Australia would see the losses over 2012 turn into big gains, but I anticipated maybe 30,000 and definitely not twice that. So don’t get optimistic thinking that we have models which allow us to pick magnitudes of ups and downs. But the cycle is looking due to start easing off, especially with Australia.
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