Economic Week - May 31

by Nick Clark

The Budget

The first Wellbeing Budget has been delivered.  ‘Wellbeing’ was heavily hyped in the lead-up to the Budget as a radical departure from the traditional focus on economic and fiscal matters.  The documents certainly looked and felt very different from previous budgets but when it comes down to it budgets are about spending taxpayers’ money on things governments want to do.  This particular government wants more action on social and environmental issues and ‘Wellbeing’ is simply a way to justify its big spending in these areas.  

For 2019/20 Core Crown expenses will be $93.3 billion, up from the December 2018 forecast of $90.9 billion and up $6 billion on 2018/19’s $87.3 billion.  That’s a $2.4 additional boost in spending compared to what had been forecast only six months ago.  As a result the forecast operating surplus for 2019/20 is slashed from $4.1 billion to $1.3 billion.

Furthermore the Minister announced that the annual operating allowance for new spending will increase from $2.4 billion to $3.8 billion, giving it plenty to play with next year too – an election year.

Although staying within 30% of GDP, the Government’s operating spending is forecast to grow rapidly over the next few years and the operating surpluses will be smaller compared to previous forecasts.  These key elements of the Budget Responsibility Rules will only be met if the economy grows strongly.

Although net debt is forecast to continue to track down as a percent of GDP, the Government has indicated that it will widen the range for debt to a 15-25% of GDP.   If surpluses become deficits debt will rise.

Treasury’s economic forecasts are important for the Budget’s fiscal forecasts.  Its forecasts are very optimistic – perhaps too optimistic.  The economy has been losing momentum since 2017 yet GDP growth for the coming 2019/20 year is forecast to accelerate to 3.2% (up from 3.0% forecast in December 2018).  This is crucial as tax revenue generated by economic growth is needed for the credibility of the Government’s budget responsibility.  

If actual growth undershoots forecast growth GDP will be smaller and tax revenue lower.  The 2020s could well become a decade of deficits.

Financial Stability

The Reserve Bank this week released its six-monthly Financial Stability Report.  It found the New Zealand financial system continuing to be resilient to a broad range of economic risks but warned that those risks remain elevated.  The three main risks are unchanged – the global economy, the household debt and dairy debt.

On dairy debt the Reserve Bank said the risk from an indebted dairy sector remained high with a number of farms carrying too much debt, despite improved milk prices.  About 20% of dairy farmers hold about a third of the farm debt and the report said they are the most vulnerable.

The report observed that the most indebted farms have struggled to repay debt yet farms may need to invest more, and may face higher costs, as they respond to biosecurity threats, such as the Mycoplasma bovis outbreak, and it also noted the costs of countering greenhouse gas emissions would also add to the burden of the dairy sector.

The report warned that “options for addressing problems at financially stressed farms appear constrained at the moment, as demand for dairy farm land is low."

On the subject of farm debt, next week Federated Farmers will be releasing the results of its latest Banking Survey.  Keep an eye out for it.

Exports up

Exports were up in April according to Statistics NZ’s monthly Merchandise Trade Statistics.

In April 2019, goods exports were worth $5.5 billion, up 11.7% on April 2018.  Exports of milk powder, butter and cheese were up 10.6% to $1.3 billion.  Meat and edible offal was up 7.2% to $769 million but wool exports were down 3.2% to $39 million.

Goods imports were also up 7.3% to $5.1 billion, resulting in a monthly goods trade surplus of $433 million.  Monthly surpluses are common at this time of the year.

For the year to April 2019, goods exports were worth $59.0 billion, up 7.5% on the year to April 2018.  Exports of milk powder, butter and cheese were up 4.8% to $14.9 billion.  Meat and edible offal was up 11.6% to $7.7 billion, while wool exports were up 2.2% to $542 million.  It was also a good 12 months for exports of forest products (up 13.3% to $5.5 billion) and fruit (up 20.3% to $3.4 billion).

Goods imports grew even faster than exports, up 9.8% to $64.4 billion, resulting in an annual goods trade deficit of $5.5 billion.

China was by far our biggest trading partner, with $15.0 billion in exports and $12.9 billion in imports, followed by Australia with $9.0 billion in exports and $7.4 billion in imports.

Business confidence edges up

Business confidence recovered a little in May but remains in the doldrums, according ANZ’s monthly Business Outlook Survey.

Overall, a net 32.0% of businesses expect general economic conditions to worsen, a 5.5 point improvement on April’s result.  The improvement was not felt by agricultural respondents where sentiment slipped 1 point to a net 63.9% expecting conditions to worsen.  It is by far the most pessimistic sector about the economy.

Own activity is a better forecaster for GDP. Overall, a net 8.5% of businesses expect activity to increase, up 1.4 points on April.  Agricultural respondents predictions for own activity slipped 0.6 points to a net 19.4% expecting it to increase.  They are still relatively optimistic compared to most other sectors though.

The Government’s decision to abandon a capital gains tax, the OCR cut, and good commodity prices should have seen a bigger bump in confidence but on the other side of the ledger are worries about global economic risks, tight profit margins, labour shortages and the impacts of government policies in the employment and climate change spaces.

House consents fall

Statistics NZ’s monthly Building Consents Issued statistics show the number of new homes consented in April 2019 fell a seasonally adjusted 7.9% following a similar fall in March, after a strong start to the year. However, for the year ended April 2019, the actual number of new homes consented was 34,392, up 7.4% from the April 2018 year.

The same stats showed that in April 2019 $23 million worth of farm buildings were consented, down 11.1% on April 2018.  For the year ended April 2019, farm buildings consents were worth $318 million, down 10.9% on the year to April 2018.

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 30 May) continue to show much dryer conditions than normal across most of the North Island and also in patches of the east coast of the South Island.


Exchange Rates

Over the course of the week the NZ Dollar was up a little against the Trade Weighted Index and it was up against the currencies of all our major trading partners, except the Australian Dollar and the Japanese Yen.


Wholesale Interest Rates

Over the course of the week both the 90 Day Bank Bill rate and the 10 Year Government Bond Rate edged downwards.  The Official Cash Rate will next be reviewed on 26 June.