Economic Week - March 23

by Nick Clark

OCR unchanged

Acting Reserve Bank Governor Grant Spencer is about to hand over the reins to incoming Governor Adrian Orr and unsurprisingly he kept the Official Cash Rate unchanged at 1.75% where it has been since November 2016.
The language of Mr Spencer’s statement suggests that inflation will weaken over the coming months, thanks to softer food and energy prices and adjustments to government charges (e.g., ‘free’ tertiary education fees).  Inflation is likely to increase later in the year back towards the Reserve Banks 1-3% target mid-point of 2%.
Once again the concluding comment was “monetary policy will remain accommodative for a considerable period”, a refrain which has been used for about a year now.  The OCR will likely stay at 1.75% until well into 2019.  Contrast this to other central banks, most notably the US Fed, which are tightening monetary policy.
The next OCR review and Monetary Policy Statement, and Adrian Orr’s first of each, will be on 10 May.  In the meantime, he will sign a policy targets agreement with the Minister of Finance.  The new PTA will give a steer on how monetary policy will operate under the new Governor. It will presumably factor in the Government’s wish to include employment as an objective.

 Milk price up

Fonterra this week announced its Interim Results for the 2017/18 year.  The highlight for farmers was the lifting of its milk price forecast for 2017/18 to $6.55 per kg milk solid, up $0.15 on the previous forecast.  This as it will help underpin farm-gate earnings which will be welcome after what has been a difficult production year for many dairy farmers.
Not so positively, Fonterra marked down its dividend forecast by $0.10 per share and its investment in Beingmate has been slashed by a further by $405 million to $244 million.  The Beingmate impairment and $183 million Danone settlement (paid in December) resulted in a $348 million loss for the first six months of the 2017/18 financial year (down 183% on the same period last year).  However, it made a ‘normalised’ profit of $248 million (down 36%).
It was also announced that Fonterra CEO Theo Spierings would be stepping down this year after nearly seven years in the role.

GDT down again

This week the Global Dairy Trade auction had its third consecutive loss.  The GDT Price Index was down 1.2% on the previous auction a fortnight ago.
Whole milk powder managed a 0.1% gain but this was more than offset by losses for skim milk powder (down 8.6%), cheddar (down 3.9%) and rennet casein (down 2.9%).  Other commodities were unchanged or not offered.
18,635 tonnes of product were sold with an average selling price of US$3,632.
Despite the three most recent losses, the GDT Price Index is still up 10.8% since the start of 2018 and is 6.6% higher than the same time last year.

Rural market soft

Farm sales are down and prices seem to be following, according to the Real Estate Institute’s monthly Rural Market Statistics.
For the three months ended February 2018 there were 384 farm sales, down 11.9% on the three months ended February 2017.  For the full year to February 2018 there were 1,524 sales, down 13.5% on the previous year.
The median price per hectare for all farms sold in the three months to February 2018 was $27,523, up 0.5% on the three months to February 2017, but down 2.6% on the three months to January 2018.  It was a similar story for the REINZ Price Index, which adjusts for factors such as farm type, location and size.  It was up 0.2% compared to the three months to February 2017 but down 4.7% on the three months to January 2018.
Dairy prices have fallen more than those for the rural market overall, with the REINZ Dairy Price Index down 9.9% compared to the same time last year.  REINZ noted considerable caution with due diligence being tested by the Mycoplasma bovis cattle disease.

GDP growth broad-based

Statistics NZ has released its Regional GDP Statistics for the year to March 2017.  They showed GDP growth to have been broad-based with all 15 regions growing by at least 4.5%. 
Nationally, nominal GDP (that is, unadjusted for inflation), grew 6.2% for the year.  Bay of Plenty was the fastest growing region (9.0%), followed by Northland and Waikato (both 8.2%) and Southland (7.9%). Wellington region had the smallest increase (4.6%).
Taranaki was again the region with the highest GDP per capita ($70,863), followed by Wellington ($69,851) and Auckland ($61,924). Gisborne’s was the lowest ($39,896) just behind Northland ($40,269). The national average was $57,002. 

Migration slipping

Annual net migration is continuing to ease back, falling below 69,000 for the first time in nearly two years.  Statistics NZ’s International Travel & Migration Statistics showed that for the year ended February 2018 there were 131,000 migrant arrivals and 62,000 migrant departures.
New Zealand’s largest source of migrants were Australia (24,800), the United Kingdom (14,600, China (11,400), and India (9,200).  The most popular destinations for those leaving were Australia (24,600) and the United Kingdom (8,700).
Net migration peaked at 72,400 in July 2017 and has been falling since.  Most of the decline has been due to more New Zealanders leaving.
Meanwhile, the same statistics showed that the timing of Chinese New Year dramatically boosted February 2017 visitor numbers, with visitors from China doubling compared the same month last year. The record visitor arrivals for the month also contributed to a record number for the February 2018 year. Visitors numbered 3.78 million, a 7% increase on the previous year.

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 15 March) continue to show the impact of heavy rains.  Soils in many parts of the country are significantly wetter than usual.  As with last week, the East Cape and south-eastern Southland are the main exceptions.

Exchange Rates

Source: Reserve Bank of NZ

Wholesale Interest Rates

Source: Reserve Bank of NZ

Nick Clark

23 March 2018