Economic Week - January 29

by Nick Clark

Stronger than expected inflation and what does it mean for monetary policy? 

Inflationary pressures appear to be building with Statistics NZ’s December quarter Consumer Price Index recording a 0.5% increase, stronger than most economists were expecting.  

This took annual inflation for the year to December 2020 to 1.4%, the same rate as for the year to September 2020 but again higher than most economists were expecting.  The strong bounce back in economic activity since the middle of the year and supply chain disruptions will be having an effect.

On a quarterly basis, comparing December 2020 with September 2020, the CPI All Groups rose 0.5%, with:
  • Transport up 2.3%, driven by higher prices for purchase of vehicles (up 3.0%) and passenger transport services (up 7.9%).
  • Recreation and culture up 2.6%, driven by higher prices for accommodation services (up 11.2%).
  • Household contents and services up 1.4%, driven by higher prices for furniture, furnishings, and floor coverings (up 5.6%).
  • Clothing and footwear up 1.4%.
  • Housing and household utilities up 0.5%, driven by higher prices for purchase of housing (up 1.3%).  Property rates and services was unchanged.
  • Food down 1.7%, driven by lower prices for fruit and vegetables (down 11.8%).

On an annual basis, for the year to December 2020, the CPI All Groups rose 1.4%, with:
  • Housing and household utilities up 2.6%, with rentals for housing up 2.9% and property rates and services up 3.0%.
  • Household contents and services up 2.5%.
  • Food prices up 2.5%, with fruit and vegetables up 8.6%.
  • Alcoholic beverages and tobacco up 6.0%, with cigarettes and tobacco up 11.3%.
  • Transport down 3.7% with private transport supplies and services down 8.1%, reflecting lower fuel prices.
Tradables inflation (prices for goods and services imported or in competition with foreign goods and services) was 0.2% for the quarter and -0.3% for the year, while non-tradables inflation was 0.7% for the quarter and 2.8% for the year.  Tradables inflation weakened and non-tradables inflation strengthened compared to the September quarter.  

Statistics NZ also noted that its trimmed-mean measures – which exclude extreme price movements – ranged from 1.7% to 2.1% for the year. This indicates that underlying inflation is higher than the 1.4% overall increase in CPI.  It is not clear though whether this is a temporary blip or something more sustained.

An important question is what a stronger inflation outcome means for monetary policy.  The Reserve Bank’s price stability objective is a range for the CPI of 1-3% with a 2% mid-point target and underlying inflation is now not so far from this target.  However, the Reserve Bank also has to be mindful of its other objective of maximum sustainable employment and while it will be encouraged by better than expected performance of the economy and lower than expected unemployment, there are still plenty of downside risks.  

In the light of all this the Reserve Bank will probably stay cautious and want to maintain monetary policy support, but it may not need to cut the OCR much further – unless there is a further shock which in today’s world is very possible.  We’ll find out more on 24 February when the Reserve Bank next reviews with OCR.

Imports up, exports down in December

Exports fell and imports rose in December, according to Statistics NZ’s Overseas Merchandise Trade statistics. 

Goods exports were worth $5.35 billion in December 2020, down 2.7% compared to December 2019 and the fourth monthly drop in a row.  Lower dairy and meat exports were the main influences on the overall movement, but it was better news for the other major export commodities:
  • Milk powder, butter, and cheese down 19.0% to $1.61 billion;
  • Meat and edible offal down 6.3% to $737 million;
  • Logs, wood and wood articles up 9.4% to $416 million;
  • Fruit up 106.9% to $67 million;
  • Preparations of milk, cereals, flour, and starch up 13.4% to $214 million; and 
  • Wine up 12.6% to $175 million.
In addition, live animal exports were up 63.8% to $51 million; eggs, honey, and other edible animal products up 42.3% to $53 million; and wool was up 5.2% to $49 million.

Meanwhile, after falling eight months in a row, goods imports rose 4.2% to $5.33 billion in December 2020 compared to December 2019.  Although petroleum imports continued to fall (down 36.6%), most of the major import commodities had increases.  

The net result was a monthly goods trade surplus of $17 million, which was down from a $380 million surplus for December 2019.

For the year ended December 2020, goods exports were worth $59.92 billion, virtually unchanged compared to the year ended December 2019.  Looking at the key export commodities:
  • Milk powder, butter, and cheese up 0.4% to $15.83 billion;
  • Meat and edible offal up 0.8% to $8.11 billion;
  • Logs, wood and wood articles down 10.0% to $4.51 billion;
  • Fruit up 15.4% to $3.94 billion;
  • Preparations of milk, cereals, flour, and starch up 8.9% to $2.50 billion; and 
  • Wine up 8.1% to $2.01 billion.
In addition, live animal exports were up 59.5% to $484 million; eggs, honey, and other edible animal products up 46.7% to $541 million; but wool was down 28.4% to $372 million.

Goods imports for the year ended December 2020 were worth $56.99 billion, down 11.5% compared to the year ended December 2019.  The biggest drop was for petroleum products, down 32.9%, while vehicles was down 24.9%.  

On an annual basis, the net result was a goods trade surplus of $2.94 billion. This was down from $3.26 billion for the year ended November 2020, but it is still quite a turnaround from the $4.47 billion deficit for the ended December 2019.

Manufacturing softens, services remain weak

New Zealand's manufacturing sector experienced contraction for the last month of 2020, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for December was 48.7 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining).  This was down 6.0 points from November, and the lowest level of activity since May.

Meanwhile, the BNZ-BusinessNZ Performance of Services Index (PSI) for December came in at 49.2, up 2.5 points from November but still a contraction.

Economic activity up in December

The December 2020 update of the Treasury's New Zealand Activity Index (NZAC) showed economic activity in December was up around 1.5% compared to December 2019.  The ANZ Activity Outlook was also at its highest level since March 2018. 

Of particular note to Treasury was the number of jobs advertised on SEEK recovered to the previous year’s levels for the first time since the emergence of COVID-19.

Next week

Of interest next week is the latest quarterly Labour Market Statistics, where we’ll get a picture of employment and unemployment in the December quarter, and there’s a GDT auction and data on building consents.  

The biggest event though will be the release on Sunday of the Climate Change Commission’s first draft advice, which will include pathways to reach net zero emissions by 2050, the first three carbon emission budgets, and guidance on policy direction.  This work will have profound long-term economic implications for the entire economy and Federated Farmers will be giving it our full attention.

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 28 January) show the effect of the week’s warm and dry weather.  In particular, most of the North Island’s soils are now dryer than usual for this time of year.   Areas that are wetter than usual are the Grey district of the West Coast and much of Otago and Southland.


Exchange Rates

The NZ Dollar was little changed this week, weakening 0.2% against the TWI.  It was down against all our major trading partners, except the Australian Dollar.

Wholesale Interest Rates

Over the course of the week the yield for the 90 Day Bank Bill was up 1 basis point and the yield for 10 year Government Bonds was up 3 basis points.  The Reserve Bank will next review monetary policy settings (including the OCR) on 24 February.