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With many eyes having been fixed on the events in the European theatre, developments in the Asian hemisphere (in particular, in China) have not escaped scrutiny. This is of course of particular interest to New Zealand, with China being one of our largest trading partners.
China’s annual GDP growth has been on the gradual decline since September 2013. Annual GDP growth was then recorded 7.8 percent. But, it currently stands at 7 percent; representing the weakest rate of growth for some six years.
Chinese manufacturing activity has eased somewhat, with manufacturing employment falling quite significantly over the same period.
Australia has already experienced first-hand some of the effects of this easing with sluggish Chinese demand for their iron ore. Further, unsettling events in Europe may yet cast more shadows on China’s export outlook.
The short-to-medium term may see some domestic improvement in China following four interest rate cuts by the Chinese central bank since November, and the easing of capital reserve requirements for certain banks to encourage corporate borrowing.
However, recent volatility in share prices on the Shanghai bourse reflects underlying financial stability concerns. The surge in prices over the three months to June accompanied the easing in central bank’s moves to ease monetary conditions. However, the close to 30% fall in share values over the past month heralds a period further uncertainty for Chinese economic growth prospects.
In contrast, India has been showing strong signs of improving GDP growth, which was recorded at an annual 7.5 percent in the year to March.
As far as the European/Greece situation is concerned, the prospect of a managed resolution remains possible (although growing increasingly slim by the day). Any consequences for New Zealand would primarily flow through uncertainty impacting on global demand for our exports and accompanying impacts on commodity prices.
Conceptually, these impacts on New Zealand could be minimal, should the situation be successfully quarantined to impact on Europe alone. However, noting the possibility of potential turmoil on currency markets, such an outcome would require skilful manoeuvring by global authorities.
Allied with the situation in China, prospects for our three largest commodity exports – dairy products, sheep meat and wood (logs) – are shaky at best.
Auckland’s real estate market continues its astonishing surge, with house prices now averaging approximately $749,000. The national median price as at May was just over $460,000.
Over the 3 months to May, it took an average 34 days for sale nationally, compared to 38 days in February. This measure hasn’t quite reached the shortest period seen in November 2013, which was 31 days.
In the three months to April, the number of new house consents surged in Auckland to 2,196, out of a total of 6,141 across the country. This was 27.5 percent higher than the number of consents during the same period in 2014. Conversely, Canterbury saw a dip in the 3 months to April with 1,532 new houses consented compared to 1,688 for the same period a year earlier. The same trend holds looking back a bit further, with annualised totals steadily decreasing for Canterbury since December 2014.
Around the rest of the country there was a fairly mixed bag of activity with the Tasman and Hawke’s Bay regions experiencing increases in residential building consents of 29 percent and 19 percent respectively for the 3 months to April. Meanwhile Taranaki and Gisborne saw the reverse with the latter seeing a decrease of 37.5 percent.
With total residential building consents standing at just over 25,000 in the 12 months to April, this figure looks set to continue to increase over the medium term, largely influenced by Auckland. However, the rate of growth is likely to be tempered somewhat by the slowdown occurring in Christchurch activity.
The slump in dairy prices over the past year has left many dairy farmers facing increasing cash flow concerns. A partial reflection can be seen in the growth of credit to the agriculture sector. Over the past year this has risen by nearly 7 percent; or the equivalent of $3.5 billion.
With global dairy prices continuing to fall, the outlook is unlikely to change soon. Easier and accommodating monetary conditions are set to feature over coming months in response to this situation.
As for other sectors, there has also been growth in credit to the non-agricultural sector of 6.5 percent over the past year, to now total $85.7 billion.
Credit to the household sector also increased, up just over 5 percent to settle at just under $216 billion. This element remains by far the largest source of debt in the country, with 93 percent of this coming from housing credit (i.e. our collective mortgages). Consumer credit (e.g. personal loans and credit card debt) of $15 billion constituted the remaining 7 percent.
The need for easier monetary conditions for business sectors facing constrained demand conditions conflicts with the need to restrain the growth in housing prices and credit.
Nevertheless, the recent cut in the OCR to 3.25 percent is almost certainly not the last. Clearly, the relationship between recent accelerating house price inflation and household sector credit will be watched closely. The success, or otherwise, of recently announced measures around housing loans and taxation may well influence just how much leeway the Reserve Bank has to further reduce the OCR.
Recent surveys indicate a fall in business confidence – with one survey showing net optimism almost half that recorded in April. Sentiment for the small business sector in particular was more cautious; impacted no doubt by the outlook for the agricultural sector and the slowing in growth the Christchurch construction sector.
This downbeat confidence and weaker building intentions in Canterbury have been reflected in lower annual average growth rates in both business and housing investment activity.
Housing investment continues to be propped up by building activity in Auckland, but that Auckland growth has been offset by an earlier than expected decline in housing investment in Canterbury. For the year to March, housing investment was 12 percent up on the previous year. This growth rate was a noticeable easing on the 18.1 percent growth reported experienced during mid-2014.
Similarly growth in business investment activity has declined. The year to March saw growth of 4.5 percent, down from the 8.5 percent experience during mid- 2014.
Manufacturing too has shown signs reflected in the dampened business mood. Aside from the dairy woes, growth in manufacturing sales volumes has also dipped, albeit at a smaller rate than that in the dairy and meat sub-sector.
While dairy and meat volumes fell nearly 2 percent in the year to March, all other manufacturing sales volumes grew 1.7 percent during the same period. However, this rate of growth in the other manufacturing sub-sectors was well down on the close to 5 percent rate of expansion being recorded in early 2014.
This slowing appears consistent with growth in Christchurch activity coming off earlier highs. This is reflected in reduced growth in wood, ceramics and the furniture sub-sectors.
While every effort is made to ensure that the information, opinions and forecasts included in this publication are accurate and reliable, BERL and all contributors do not accept responsibility for any errors or omissions, or for any loss or damage resulting from reliance on or the use of information, forecasts or opinions it contains.
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