Economic Week - June 19

by Nick Clark

GDP slumps

A hard reality check for the economy, with activity measured by Statistics NZ’s Gross Domestic Product, suffering its biggest quarterly fall in almost 30 years.

March 2020 quarter GDP was down 1.6%, the largest quarterly decline since a 2.4% decline for the March 1991 quarter.  The fall was even bigger when expressed in per capita terms – a 2.2% drop. 

Our 1.6% GDP drop was bigger than the equivalent drops in Australia (down 0.3%), Japan (down 0.6%), and the United States (down 1.3%), but smaller than those in Canada (down 2.1%) and the United Kingdom (down 2.0%).

The borders were closed on 19 March and the Level 4 lockdown started on 25 March.  Both significantly impacted on economic activity, but even so our hit to GDP was large considering 85% of the quarter took place prior to the borders closing and 93% prior to Level 4.

Agriculture was not immune, with its GDP down 0.3% in the quarter following a 1.6% drop in the December quarter. Despite being able to continue as an essential service, farming was hit by worsening drought conditions across the North Island and parts of the South Island – the first large-scale drought event since 2013.

On an annual basis, GDP still grew by 1.5% over the year to March 2020. Annual growth in GDP has been generally slowing since December 2016 when it was 3.9%.

As bad as the March quarter was, the current June quarter will be far worse, but we will not know for sure how bad until 17 September when the official results are published.

 

COVID-19 and primary industry exports

The Ministry for Primary Industries this week released an Economic Update focusing on how COVID-19 has disrupted New Zealand's primary industry exports.  The picture is mixed depending on the sector.

There were few immediate impacts on the dairy industry due to lockdowns in New Zealand and overseas and dairy exports over the period of 25 March to 3 June 2020 were $519 million higher than for the same period last year. However, looking ahead the deteriorating supply and demand outlook caused by a weaker global economy is pushing down dairy’s price outlook for the coming season, with flow-on effects for farm profitability.  Drought conditions have affected some key dairy regions and contributed to feed shortages.  This has been compounded by limited processing capacity at meat works.

While meat exports to China dropped significantly in February due to its lockdown, these reductions were largely offset by increasing exports to other countries and the Chinese market has since recovered, with overall meat exports tracking at similar levels to last year.  However, looking ahead red meat prices have an uncertain outlook as a global recession would impact adversely on the demand for food service-grade cuts.

Social distancing measures to control the spread of COVID-19 in New Zealand during Alert Levels 3 and 4 allowed meat processors to stay open and operate safety, but they caused a significant decrease in meat processing throughput at a time of high seasonal demand made worse by drought conditions.  Stock remaining on farm for longer than desired put a further strain on limited feed supplies.

China's lockdown caused a 23% drop in total forestry exports in February, with further drops in March and April. Once New Zealand moved to Alert Level 3 in late April 2020, exports were able to start again and by May they were at similar levels to May 2019.  Seafood was also hit hard by China’s lockdown with a 27% drop in seafood export revenue in February, mainly due to less demand for rock lobster, and exports fell further by April as effects spread to other fish species.

In contrast, horticulture exports flourished during global responses to COVID-19.  Apple and kiwifruit exports increased by 28% from the start of March, while wine exports increased by 11%.

 

Red Meat’s beefy contribution

As COVID-19 ravages the economy, dairy has overtaken tourism and travel to be our biggest export earner, but what of red meat?

This week Beef + Lamb New Zealand and the Meat Industry Association released research on the Economic and Social Contribution of the Red Meat Sector to New Zealand.

The independent research shows the meat processing and exporting sector and sheep and beef farmers collectively generate the following benefits for New Zealand:

  • $12 billion in income annually.
  • More than 92,000 jobs, almost 5% of the full-time workforce.
  • $4.6 billion in household income (on average about $3,300 for every household).
  • Representing around a fifth of New Zealand’s productive sector.

The two organisations also released a joint general election manifesto, covering all areas of policy, with key issues being trade and market access, the environment, people and capability, and immigration.

 

Dairy prices lift

The Global Dairy Trade auction was up 1.9% at this week’s event.

Whole milk powder lifted 2.2% and skim milk powder was up 3.1%.  There were more modest gains for cheddar (up 1.4%), anhydrous milk fat (up 0.8%), and lactose (up 0.4%), while butter posted the only decline, down 1.0%.

Overall, the average selling price was $US2,979 while 21,410 tonnes were sold.

Prices have stabilised and recovered a little from a run of falls from the start of February to the start of May, but the GDT Price Index is still down 7.8% compared to the same time last year.

 

Current account deficit narrows

Statistics NZ’s Balance of Payments and International Investment Position showed a $1.6 billion current account deficit for the March 2020 quarter, down from a $1.9 billion deficit for the December 2019 quarter. Exports held up while imports fell.

The current account deficit for the year ended March 2020 was $8.5 billion (2.7% of GDP), down from the year to December 2019’s deficit of $9.3 billion (3.0% of GDP).

Meanwhile, New Zealand’s net international liability position at 31 March 2020 was $182.0 billion (58.0% of DGP), up from $171.9 billion at 31 December 2019 (55.2% of GDP). Volatility in world financial markets, sparked by COVID-19, was to blame for the large increase.

 

Farm sales locked down

The Real Estate Institute of NZ’s latest Rural Market Statistics shows there were 258 farm sales in the three months to May 2020, down 32.1% on the same period last year.  For the full year to May 2020 there were 1,132 farm sales, down 19.5% on the previous year.  Sales of dairy farms were down 26.6%, grazing farms down 27.8%, finishing farms down 26.0%, and arable farms down 1.2%.

The median price per hectare for all farms sold in the three months to May 2020 was $23,221 up 4.4% on the same period last year. However, the REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type fell 5.1% in the three months to May 2020 compared to the same period last year.

COVID-19 lockdown will have been a major reason for the fall in sales volumes but also evident, according to REINZ, was restrictive bank lending policies.

 

House prices up on low volumes

Meanwhile, the number of house sales in May was just a little more than half the number in May 2019, according to the Real Estate Institute of NZ’s monthly Residential Market Statistics.

Overall, 3,990 houses were sold in May 2020, down 46.6% on May 2019’s 7,477 but triple the 1,371 sold in April 2020 at the height of the lock-down.

Despite the sharply lower volumes (or perhaps because of them), the median house price was up 6.9% from $580,000 in May 2019 to $620,000 in May 2020.  The Auckland median price was up 7.1% to $910,000.

All regions posted annual increases in median prices, except Gisborne where the median price was down 5.7%.  The biggest increases were for Southland (up 22.8%), Tasman (up 19.9%), and Manawatu-Whanganui (up 18.9%).

The median days to sell was 58 days, up significantly compared to May 2019’s 41 days.

 

Food prices slip

Food prices fell 0.8% in May but were still up 2.9% for the year, according to Statistics NZ’s monthly Food Price Index.

In May 2020 compared with April 2020, food prices were down 0.8% (and down 0.7% after seasonal adjustment), with:

  • Fruit and vegetable prices rose 1.7% (up 1.1% after seasonal adjustment), with fruit down 1.2% but vegetables up 3.6%.
  • Meat, poultry, and fish prices fell 2.0%, with beef & veal down 1.7% but mutton, lamb & hogget up 1.4%.
  • grocery food prices fell 1.1% (down 0.8% after seasonal adjustment), with bread & cereals down 0.4% and milk, cheese, & eggs down 1.0%.

 

In May 2020 compared with May 2019 food prices were up 2.9%, with:

  • Fruit and vegetable prices increased 3.6%, with fruit down 6.8% but vegetables up 11.7%.
  • Meat, poultry, and fish prices increased 2.9%, with beef & veal up 12.5% and mutton, lamb & hogget down 0.9%.
  • Grocery food prices increased 2.8%, with bread & cereal up 5.6% and milk, cheese & eggs up 2.7%.

 

Travel and Migration

The number of people crossing New Zealand’s border in April 2020 fell to levels last seen in the late 1960s, according to Statistics NZ’s monthly International Travel Statistics and International Migration Statistics.

There were 6,300 arrivals in April 2020, down from 550,700 in April 2020.  Most of the arrivals were short-term travellers, with only 700 migrant arrivals.  Meanwhile, there were 32,000 departures in April 2020, down from 588,900.  Most of the departures were overseas visitors leaving the country, with only 700 migrant departures.

Although net migration for the month of April 2020 was close to zero, provisional migration estimates for the year ended April 2020 show annual net migration very strong at 76,600. Migrant arrivals were 161,100 and migrant departures were 84,600.

 

Next week

The Reserve Bank will review the Official Cash Rate (OCR) on 24 June.  It will almost certainly remain on hold at 0.25% but of more interest is whether the Reserve Bank will signal any increase to its $60 billion programme of quantitative easing.

 

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 18 June) show that despite wetter, cooler weather, a number of area’ soils continuing to be significantly dryer than usual for this time of year.

 

Exchange Rates

The NZ Dollar weakened this week against the TWI and most of our major trading partners, the exceptions being the Australian Dollar and the UK Pound where it was up.

 

 

NZ Dollar versus

This Week

(18/6/20)

Last Week (11/6/20)

Last Month (18/5/20)

Last Year (18/6/19)

US Dollar

0.6434

0.6528

0.5952

0.6497

Australian Dollar

0.9387

0.9354

0.9238

0.9495

Euro

0.5727

0.5732

0.5499

0.5785

UK Pound

0.5133

0.5124

0.4915

0.5190

Japanese Yen

68.71

69.80

63.74

70.40

Chinese Renminbi

4.5623

4.6090

4.2281

4.4994

Trade Weighted Index

71.57

71.99

67.69

71.87

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was up 2 basis points but the rate for 10 Year Government Bonds was down 1 basis point. The OCR will be reviewed next week.

 

 

This Week

(18/6/20)

Last Week (11/6/20)

Last Month (18/5/20)

Last Year (18/6/19)

OCR

0.25%

0.25%

0.25%

1.50%

90 Day Bank Bill

0.28%

0.26%

0.25%

1.59%

10 Year Government Bond

0.85%

0.86%

0.64%

1.63%

Source: Reserve Bank of NZ