Economic Week - June 22

by Nick Clark

GDP slowing

The economy is showing signs of slowing down, according to Statistics NZ’s March quarter Gross Domestic Product.

GDP grew 0.5% in the March quarter, around market expectations but short of the Reserve Bank’s 0.7% forecast. It was slower than the December 2017 quarter’s 0.6% increase and the quarterly average since 2014 of 0.9%. And when adjusted for population growth, GDP per capita was flat.

Most industries (13 out of 16) grew, with services leading the way. Construction was a drag on growth, dropping 1.0%.

After slumping 3.3% in the December quarter, the agriculture, forestry and fishing industry partially recovered, increasing 0.8%. This was mainly on the back of increased milk production.

Net exports were a drag on growth, with exports down 0.1% while imports were up 1.2%. Despite the strong imports, household spending was flat during the quarter, which probably reflects a more cautious sentiment.

The annual rate of GDP growth was 2.7%, also a slowing from December 2017’s 2.9%. GDP per capita was up just 0.6% for the year.

Dairy prices down again

The Global Dairy Trade auction slipped 1.2% in this week’s auction. Most of the commodities on offer declined in price, with whole milk powder down 1.0% and skim milk powder down 1.1%. The exceptions were butter (up 0.8%) and lactose (up 8.2%).

This was the seventh decline out of the last nine events since mid-February. The GDT Price Index is also down 4.4% on the same time last year.

The average winning price was $US3,481 and 21,634 tonnes were sold.

Favourable autumn weather resulted in strong growth in milk supply, with May a record month. 2017/18 season milk production was down only 0.6% on 2016/17, a much better outcome than seemed likely only a few months ago. This probably influenced the recent easing of the GDT.

Farm sales down

There were 443 farm sales in the three months ended May 2018, down 13.8% on the same period last year, according to the Real Estate Institute of NZ’s Rural Market Statistics. 1,453 farms were sold in the year to May 2018, 18.8% fewer than were sold in the year to May 2017. There was a 4.0% increase for finishing farms, but declines for dairy farms (down 1.7%), grazing farms (down 36.3%), and arable farms (down 34.3%).

The median price per hectare for all farms sold in the three months to May 2018 was $26,219, down 3.6% on the same period last year. However, the REINZ All Farm Price Index rose 5.8%. The REINZ All Farm Price Index adjusts for differences in farm size, location and farming type, unlike the median price per hectare, which does not adjust for these factors.

Despite the annualised decline in sales, REINZ described the market as ‘steady’, with the season ‘ending on a good note’, notwithstanding ongoing concern about the impact of Mycoplasma bovis.

Deficit rises

Softer exports and stronger imports combined to widen the annual current account deficit. 2018 Statistics NZ’s Balance of Payments & International Investment Position showed a deficit for the year to March 2018 of $7.9 billion, or 2.8% of GDP. This up from 2.6% for the year to March 2017.

The deficit appears to be widening but has a long way to go before it threatens its most recent peak of 7.8% hit in 2008, prior to the Global Financial Crisis.

Meanwhile, the external balance sheet continues to look solid. Net international liabilities shrunk $0.8bn from the December 2017 quarter to $156 billion, or 54.5% of GDP. It was over 80% a decade ago.

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 21 June) continue to show virtually the entire country either around average or wetter than usual at this time of year.

Exchange Rates

NZ Dollar versus	This Week (21/6/18)	Last Week (14/6/18)	Last Month (21/5/18)	Last Year (14/6/17)
US Dollar	0.6844	0.7023	0.6904	0.7230
Australian Dollar	0.9286	0.9282	0.9177	0.9547
Euro	0.5917	0.5953	0.5872	0.6493
UK Pound	0.5199	0.5250	0.5132	0.5725
Japanese Yen	75.70	77.45	76.62	80.50
Chinese Renmimbi	4.4368	4.4917	4.4025	4.9401
Trade Weighted Index	73.01	73.86	72.70	78.19

Source: Reserve Bank of NZ

Wholesale Interest Rates

	This Week (21/6/18)	Last Week (14/6/18)	Last Month (21/5/18)	Last Year (21/6/17)
OCR	1.75%	1.75%	1.75%	1.75%
90 Day Bank Bill	2.02%	1.99%	1.98%	1.94%
10 Year Government Bond	2.91%	3.00%	2.84%	2.79%