BNZ Weekly Overview

BNZ Weekly Overview

Mission Statement: To help Kiwi businesspeople and householders make informed financial decisions by discussing the economy and its implications in a language they can understand.

In this week’s issue….

Retailing 1 Housing Market Update 13 Economic Developments 3 FX - Foreign Economies 15 Interest Rates 9

The Weekly Overview is written by Tony Alexander. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night email me at tony.alexander@bnz.co.nz with ‘Subscribe” in the Subject line.

Monthly Survey This is the first Thursday of the month so we are once again running our monthly survey. If you have not already done so from the email then please click on the URL below and tick whether you believe the economy will get better or worse over the coming year. Then, if you feel like it, pen a sentence or two letting us know how things are at the moment in your industry specifying what that industry is. The results will be released early next week.

http://survey.usuite.com/survey/7f801dd05f3742619b046cc119c15106.sur

A Quick Look At Retailing

Because we haven’t done this for a while, lets take a run-through of the things which will influence the strength of household spending over the coming year, starting with an assessment of how that spending has been going recently. About 60% of household spending is accounted for by expenditure on retail items and the data there show such spending hit a wall in the June quarter of 2007 as householders were struck by rising mortgage rates. Since then no upturn in spending as such has appeared and we take as our gauge for this the three month annualised rate of spending excluding fuel and motor vehicles.

In the three months to April nominal seasonally adjusted spending was ahead only 0.5% at an annual rate. Given that this rate of growth averaged 6.3% in the five years ending mid-2007 the result shows consumers continuing to keep their wallets closed. 2 July 2009 BNZ WEEKLY OVERVIEW Page 2 -10 -5 0 5 10 15 5 6 7 8 9 Ex-auto All RETAIL SPENDING GROWTH - THREE MONTHS ANNUALISED Source: Statistics NZ This spending restraint is occurring even though the other big area of household spending – housing – is showing some signs of life. Real estate turnover in the three months to May was 37% ahead of a year earlier, the average number of days taken to sell a dwelling in May was only 3 days above average versus 18 in February, and prices have at worst been stable since January. -40 -30 -20 -10 0 10 20 30 40 3 4 5 6 7 8 9 Source:REINZ THREE MONTH SALES CHANGES % seasonally adjusted 100 150 200 250 300 350 400 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 MEDIAN DWELLING PRICES Source: REINZ $ 000s One might expect an improving housing market to be associated with improving retail spending. However the real estate gains are to a large extent a simple matter of the market clearing after many months of buyers and sellers not being willing to agree on a price in the middle of their expectations. Having said that we expect the worsening shortage of dwellings will eventually produce a price response and therefore a positive wealth effect probably before the end of the year.

But at the same time as this factor appears to marginally help underpin retail spending there will be other worries. Most notably rising unemployment will dent the ability of the average household to spend. In addition the dairy sector is undergoing a downward correction brought on by a combination of excessive debt and now downwardly correcting land prices, last year’s fall in the payout, plus this year’s further projected decline with risks coming from the NZD’s unusual strength at this point in the cycle against the greenback.

But on the other hand as each month goes by more and more people will have their old fixed rate roll off at an average rate close to 8% and they will float near 6% or refix also near 6% or maybe up to 7%. This freed up cash flow will tend to underpin some spending. There will also be support from accelerating population growth as net migration becomes increasingly large. The net gain – courtesy largely of fewer people leaving so far – has improved from 3,500 in the year to November 2008 to just over 11,000 in May. A total near 20,000 seems quite likely late this year.

There will also be some spending support from increasing residential construction. This is not happening yet to any great degree, but there is a well established relationship between an upturn in dwelling sales and an upturn in dwelling construction. So the 37% rise in dwelling sales in the three months to May from a year earlier suggests improving residential construction soon. In fact, seasonally adjusted dwelling consent numbers have actually risen 11.5% over the past three months – though if we take apartments out there was still a decline of 1%.

BNZ WEEKLY OVERVIEW Page 3 Taking all these various factors into account along with restraint on wages growth from rising unemployment, weak tourism, and perhaps an increased willingness of Kiwis to save rather than spend (yeah right!) we think the retailing sector has passed the worst in terms of sales. But there is no big upturn in the offing. No big surge in consumer spending on durables like cars and furniture is imminent. And this means not only are the good discounts likely to continue, but “rationalisation” in the retailing sector is likely to continue. This means further store closures and increasing issues for retail property owners.

NZ ECONOMIC DEVELOPMENTS

Thursday 25 Our Dependence On Foreign Money Keeps Growing We Kiwis spend more overseas than we earn from exports and this is a problem which eventually is going to generate a shock to the economy through a sharply lower exchange rate, higher interest rates, and eventual strong shift of resources from the domestically focussed sectors to exports. But some economists have been forecasting such a shock ever since the NZ dollar was floated in March 1985 and it has yet to happen. It is impossible to know when this currency adjustment will occur because it will be driven by something causing a sharp change in offshore investor sentiment.

Since the currency float foreign investors have generally been pleased with what they see here in terms first of massive economic deregulation during the 1980s, then a strong fiscal position up until recently along with things like improving trade links with other countries and low inflation. That has meant they have been quite willing to supply the funds we need to pay for our lovely imports by either lending it to us, buying our assets, or leaving in NZ the profits they make on their operations here. In other words – each year they give us more rope which one day will hang us. But not now – and not if there are solid signs of a strong shift in NZ resource allocation towards the export sector. Is such a resource shift underway? Unfortunately there is no evidence of such.

EXPORTS AS A % GDP Source:Statistics NZ In the rest of the world this ratio has soared. This is NZ's failure. The quarterly balance of payments release from Statistics NZ showed that in the year to March our current account deficit stood at $15.2b. This was an improvement from $16.1b in the calendar 2008 year but worse than $14.2bn a year ago. The more common way to measure the relevance of the current account deficit is to look at it as a proportion of gross domestic product. This proportion is now 8.5% from 9% in December and 8% a year ago.

BALANCE ON CURRENT ACCOUNT % of GDP yearly Source:Statistics NZ

There is an improvement underway and one can best see this by looking at the quarterly seasonally adjusted current account deficit which was $2.7bn for the March quarter from $3.7bn in the December quarter and $4bn for the September quarter. But at 8.5% of GDP the deficit remains huge by OECD standards and is well above our average deficit since 1985 equal to 5.2% of GDP. The large deficit of course means a large financing requirement and the cost of this financing through borrowing someone else’s money and selling our stuff to foreigners is a continuing deterioration in what is called the International Investment Position. This stood at -$177b at the end of the March quarter from -$154b a year ago. This means that if we wanted to square our account with the rest of the world we would need to win $177b in some huge global lottery.

BALANCE ON INTERNATIONAL INVESTMENT INCOME % of GDP Source:Statistics NZ The bad net indebted position (a private sector thing as the government’s accounts in NZ have been good for many years) is made up as follows. We have $125b of investments offshore, foreigners have $301b worth of investments here. Foreigners have lent us about $89b and bought $80b of debt securities, hold about $10b of equities, while the rest is largely direct ownership of NZ businesses. The servicing of this huge net negative position is what now causes our continuing large current account deficit. Of the $15.2b current account deficit in the year to March $13.4b directly reflects the net difference between what we earn on our investments offshore and what foreigners earn from their loans to us and their assets here. The actual goods and services balance showing the extent to which imports match exports was a deficit of just $2.6b. But it is the accumulation of such smallish deficits over decades which has generated the current net indebted position (which is equal to about 98% of GDP). The current account numbers rarely affect NZ interest rates or the exchange rate. But one day investors offshore will become concerned about something here and demand a higher risk premium for continuing to fund our unsustainable way of life. When that happens – and it is 100% impossible to forecast when – the NZD will plunge and finally export profitability will soar. This might happen sometime before 2050, or maybe 2100.

Consumer Confidence Improves Further About two months ago we reported the results of our monthly BNZ Confidence Survey which showed a surge in sentiment about the economy over the coming year to a net 27% positive from 0% in April and -23% in March. We interpreted the jump in sentiment to an equal record level as indicating a huge sigh of relief that the Great Depression scenario had been avoided. The same interpretation appears warranted for the Westpac McDermott Miller Consumer Confidence survey which jumped to a reading of 106 in the June quarter from 96 in the March quarter and 82 a year ago. A reading of 100 is considered neutral and the average reading for the past decade has been Net % expecting the economy to be better in the next 12 months

BNZ CONFIDENCE SURVEY CONSUMER CONFIDENCE Westpac McDermott Miller The result implies some support appearing for household spending though because we think there is a sigh of relief factor at work we remain weary of the extent to which retail spending may improve over the coming 12 months. NZ Economy Shrinks Another 1% The NZ economy shrank for the fifth quarter in a row early this year falling 1% in the March quarter following shrinkage of 1% in the December quarter. The economy is now 2.7% smaller than a year ago and the official growth rate – which is calculated as the four quarters ending March 2009 on the four quarters ending March 2008 – has decreased to -1% from 3.1% a year ago and average growth for the past decade of 3.3% per annum.

NZ ECONOMIC GROWTH - GDP Source:Statistics NZ Household spending was very weak during the quarter recording a large 1.3% fall which is the greatest three monthly decline since June quarter 1991. Private consumption has decreased 0.7% over the past year. Residential building fell by only 0.3% in the quarter but has declined 23% for the past year while nonresidential construction weakened 4.9% in the quarter to be up 1% for the year. Reflecting the sharp pullback in business capital expenditure, spending on transport equipment fell 37% in the quarter! Monday 29 House Construction Stabilising In May there were 1,238 residential building consents issued around New Zealand. This was a 25.1% decline from a year ago which is the smallest such rate of decline in eight months. In seasonally adjusted terms numbers improved 3.5% in May following an 11.9% rise in April. However the improvement over the past two months is mainly because of more apartment consents and when these are stripped out we find BNZ WEEKLY OVERVIEW Page 6 housing-only consents retreated 3.2% in May after gaining 4.5% in April. There is as yet no clear upward trend in housing consents being issued, but the decline has ended. Growth is likely to commence soon however given the strong correlation between consent issuance and dwelling sales which have soared since March.

HOUSE CONSENTS ISSUED 3 mths on previous 3 mths using seasonally adjusted numbers Apartments excluded Source: Statistics NZ 14000 19000 24000 29000 34000 39000 44000 74 76 78 80 82 84 86 88 90 92 94 96 98 0 2 4 6 8 DWELLING CONSENTS ISSUED 12 month total Source: Statistics NZ This implies that those builders who have been able to keep their cash flows under control and can still do so for the remainder of the year are likely to benefit quite strongly from an upturn in house building. This upturn will not only be driven by below average interest rates, but also the existing shortage of accommodation plus the recent decline in the number of consents issued to the lowest annual number since 1981 – though as a proportion of population the decline now is far more substantial. Will house construction boom over the next three years with assistance from the acceleration in population growth caused by a migration boom? Probably not because of tighter lending criteria and the fact that as things improve here they will probably improve more so in Australia where the housing shortage is even worse. This will tend to encourage (eventually) NZ tradespeople to shift to Australia. The upshot then is that upward pressure on existing house prices is implied by this existing shortage, escalating demand, but potentially initially limited construction supply response. Non-Residential Building Holding Up Very Well The value of consents issued for the construction of non-residential buildings was 35% higher in May than a year earlier at $479m.

This strong gain means that over the past three months consent values were 13% up from a year ago and ahead 12.8% in the six months compared with a year ago. Non-residential construction is being supported by construction of stadiums, airport upgrades and some hotels. But there is weakness in areas of the economy experiencing pain, such as farming where consents were down 34% in the six months to May compared with a year earlier, factories 8%, and warehouses 42%.
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