Monthly Economic Review: New Zealand

Despite the prevalence of risk aversion during the recent forex trading week, Kiwi pairs didn’t suffer as much as the other higher-yielding currencies. Also, the Kiwi was able to quickly recover after the RBNZ announced a switch to a more dovish tone in their most recent rate decision and statement.

Are the underlying fundamentals supporting demand for the Kiwi perhaps? Well, let’s find out.

Growth

New Zealand’s Q3 2015 GDP grew by 0.9% while the expansion during the previous quarter was downgraded a bit from 0.4% to 0.3%. However, GDP growth continued to slow down on an annualized basis (2.3% vs. 2.4% previous).

The jump in quarter-on-quarter reading was mainly due to the 0.9% growth in the services sector, with 9 out of the 11 industries printing positive readings during the quarter. Capital investment was also up by 2.7% (1.2% previous) due to a large increase in air transport equipment, which is likely related to New Zealand’s booming tourism industry. The manufacturing sector also saw a 2.8% increase during the quarter, but Dairy manufacturing contracted during the quarter. However, exports of dairy products increased by 10.2% as the build-up of dairy inventories during the previous quarter was run down.

Employment

New Zealand’s Q4 2015 jobless rate suddenly dropped to 5.3% (6.0% previous), which is the lowest rate ever since Q1 2009. However, this was accompanied by a drop in the labor force participation rate from 68.6% to 68.4%. This marks the third consecutive quarter that the labor force participation rate has dropped after peaking at 69.5%, which is rather worrying since it implies that people are giving up on looking for jobs.

Nevertheless, the sudden drop in the jobless rate seems healthy overall since the number of employed people increased from 2,347K to 2,369K while the number of jobless persons shrank from 151K to 133K. Annualized wage growth was also a bit disappointing, though, since it eased a bit from +1.6% to +1.5%, which is the lowest annual increase since Q1 2010. But this downbeat reading was offset a bit by the fact that wage growth continues to outpace inflation. Also, “Wage inflation has now been higher or equal to the CPI for more than four years,” according to the jobs report.

Business Sentiment & Conditions

Business sentiment continued to improve in December since ANZ’s business confidence survey reported that 23% of the business surveyed (14.6% previous) were “optimistic about the general economy over the year ahead,” which also happens to be an 8-month high. Also, business confidence in all five sub-sectors were now in positive territory. The agricultural sector, which has been in the dumps for the past few months, had a reading of 7.5 (-12.5 previous) while the manufacturing sectors had an 8.3 reading (0.0 previous).

Moving on, Business New Zealand’s (BNZ) Performance of Manufacturing Index (PMI) climbed from 54.7 to 56.7, which is a 14-month high. Looking at the details of the report, the production sub-index advanced from 53.5 to 56.1 while the new orders sub-index increased from 57.8 to 59.7.

As for BNZ’s Performance of Services Index (PSI), it surged from 56.2 to 59.8 during the November period, which is the highest reading ever since November 2007. Of the key indicators, the activity/sales sub-index noticeably surged from 57.4 to 62.3 while the new orders/business sub-index shot up from 56.8 to 64.2.

Consumer Sentiment

Westpac: McDermott Miller New Zealand Consumer Confidence Index (CCI), consumer sentiment in New Zealand was able to recover a bit to 110.7 in Q4 2015 after tumbling hard to 106.0 during the previous quarter. According to the report, ““The lift in Consumer Confidence was largely driven by a return to positive sentiment about the short term prospects for the New Zealand economy,” with the most commonly cited reason being belief in “effective government economic policy” while only around 10% cited “better export prospects.”

Inflation

New Zealand’s inflation problems aren’t going away anytime soon since the quarter-on-quarter headline reading for Q4 2015 was pushed into negative territory (-0.5% vs. 0.3% previous). This translates to an annualized reading of 0.1% (0.4% previous), which is the smallest annual increase since Q3 1999.

On a quarter-on-quarter basis, the 7.0% decline in oil prices during the quarter was the main drag. If the petrol component is stripped from the CPI reading, then CPI only fell by 0.2%. On an annualized basis, the biggest downward contribution also came from lower petrol prices (down 8.1%). If the petrol component is excluded, then headline annualized CPI increased by 0.5%.

Summary & Conclusion

Overall, the available economic reports seem to be painting a rather upbeat picture for New Zealand, which is probably pumping up demand for the Kiwi. The only dismal economic report was CPI, but this has probably been priced-in by forex traders already. And while GDP growth has been slowing on an annualized basis, consumer sentiment points to potentially stronger consumer spending in Q4 2015, which would help prop up GDP growth. In addition, improvements in the PMI and the PSI readings for the Q4 months also hint at a potentially faster growth during Q4 2015. Moreover, New Zealand’s trade deficit has been shrinking in the Q4 months, which will likely contribute to faster GDP growth as well.