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While headlines regarding the slump in dairy prices may be warranted, the story regarding services sector exports is equally significant.
Historically, New Zealand has been a commodity driven economy with the primary sector entrenched as our leading export earner. However, the structure of our economy has indeed progressed from the days when dairy, meat and wool exports accounted for over 85 per cent of the nation’s total export earnings. A component of this diversification has been the growing importance of services exports. Indeed, services now contribute approximately a quarter of all export receipts, including tourism, which is comfortably New Zealand’s second-largest export earner.
The latest year has seen the trend in earnings between the goods and the services components of our exports diverge. In particular, receipts from goods dipped below its peak of just over $49 billion in June 2014, to $46.6 billion in March this year. In contrast, receipts from services increased from $16.9 billion in June 2014, to $18.3 billion in March this year.
Further, much of the latest increase in services sector exports can be attributed to the recovery in tourism. Growth has been particularly strong over the last two years, with growth of nearly 18% in the year to March. This takes annual revenue from tourism to a peak of more than $9 billion. This recovery is consistent with data showing a significant increase in both international guest nights and international visitor arrivals.
Education is the second largest component of New Zealand’s services exports at 15%, totalling an estimated $2.7 billion in the year to March 2015. This makes the contribution from education similar in quantum to that from forestry. However, education export revenues have remained flat in recent years, with the latest 12 months to March registering a nearly 2 percent decline.
This reflects a decrease in international student numbers between 2010 and 2013, although there was a return to growth in numbers in 2014. The latest growth in student numbers came from India, with China and the Philippines making up most of the rest of the increase in the latest year. These increases offset the declines in numbers coming from mature markets such as Korea and Malaysia. In addition, numbers from emerging markets such as Colombia, Brazil, and France are also in growth mode, although they remain relatively small in total.
Meanwhile earnings from ‘other’ services (for example, financial services; telecommunications, computer and information services; and screen industry exports) have been gradually rising since the early 2000s.
Further, the recent decline in the NZ$ exchange now will allow many of these exporters to improve their earnings. In addition, investments in necessary infrastructure and training should also become more viable.
With the focus ever aimed at the Auckland housing market, the non-residential building sector is comparatively more subdued.
The total number of non-residential building consents has been trending down over the last 6 years, with totals dipping monthly during the first half of 2015. The year to June saw total non-residential consents sitting at just over 12,000, down from 12, 500 in February.
While the total number of consents has been falling, both the value and floor area of these consents has been increasing over the last 6 years. The two years between March 2013 and March 2015 saw particularly strong growth in total consented areas, from 2.5 million square metres to 3.2 million square metres.
Meanwhile the value of these consents increased from just under $4 to $5.3 billion over the same period.
Growth over the last 12 months to June in consents came mainly from storage facilities, which grew nearly 20 percent compared to 2014, and for factories. This was accompanied by similar increases in consented floor areas for these two categories.
In contrast, farm building consent numbers declined nearly 8 percent over the year to June, with a 2 percent fall in consented floor area. With another year of reduced milk payouts confirmed there will almost certainly be further falls in farm building activity over the coming 12 to 24 months. Certainly the remaining quarters of 2015 will be posting stronger decreases at the least.
It was a busy start to the month with several US macroeconomic data releases. Results were underwhelming, with data on employment, house prices, consumer confidence, and manufacturing all posting growth rates which either just met or were weaker than expected. The general mood was one of disappointment. Despite the response, it should be noted that GDP did register growth in the latest (June) quarter – albeit modest.
The manufacturing index slipped to 52.7 from 53.5 in June signalling a slight slowing in growth in factory activity in July. However an index reading above 50 still indicates growth in the manufacturing sector.
Wage and inflation pressures are subdued, with wage growth at only 0.2 percent in the latest quarter, well below expectation. This reading followed a 0.7 percent increase in the first quarter of the year. Further, the headline CPI rose by 0.3 percent in the latest month, but remained only 0.2 percent up on a year ago.
The muted inflation picture fits with declines in global commodity and fuel prices, as well as a relatively modest demand situation across the world economy.
Unemployment is now down to 5.3%, the lowest it has been since April 2008. However, this reduction has been helped by a decline in numbers in the labour force and a falling labour force participation rate.
House prices have been rising steadily over the last year, with the S&P Case-Shiller Home Price Index up 4.4 percent over the year to May.
In contrast, construction spending has been relatively weak recently, growing only 0.1 percent in June, although this was 12 percent up on a year ago.
Consumer confidence in July fell to its lowest level since September last year. This stalling in confidence is probably linked to labour market strength not being translated into income growth. Again, this reinforces the perspective that declining jobless numbers are hiding underlying weakness as shown in reduced participation rates.
In addition, the stronger US$ (reflecting in part the tapering of the US quantitative easing programme) and weakening global economic growth is set to constrain US export sector prospects. This is likely to particularly impact on the US mining, agriculture and energy sectors.
Within this context, the US Federal Reserve faces a fine balancing act in deciding when to increase interest rates. There are few inflationary pressures to justify such a move. However, a lengthy period of close to zero interest rates is seen in the bankers’ eyes as not a ‘normal’ situation
The decision on a return to ‘normality’, though, is likely to depend on the Fed’s reading of the true strength of the labour market. This, in turn, will signal to the Fed whether future demand is sufficiently strong to begin a gradual shift of interest rates towards what it views as more ‘normal’ levels.
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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