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The political brinkmanship exhibited in the United States in October was not welcomed by many. The potential for a US default on its debt obligations was sufficient for Fitch Ratings to put the US on a negative ratings watch. The uncertainty, accompanied by the partial shutdown of government services, will no doubt show through in fourth quarter activity numbers.
However, a moderately satisfactory conclusion that averted potential global financial paralysis was reached. The concern, though, is that the world may see a repeat screening over the January/February period next year. This uncertainty remains a thorn in the global recovery. Within this context, the IMF’s recent downward revisions of its global growth forecasts were not surprising.
Nevertheless, the US growth is continuing to accumulate, with employment levels nearly returning to pre-crisis levels. Similar progress on jobless rate sees unemployment now standing at 7.3%, but still above the 6.5% the Federal Reserve wishes to achieve before it considers an interest rate response.
By source country, the latest surge is led by a continuation of the shift to the Asian market. Visitor numbers from Asia are currently up about 10% on year earlier. Tourists from China (our 2nd largest market) are up 27%, while there is also double-digit percentage growth in numbers from Taiwan and Thailand. The Japanese market is now also showing signs of recovery, with numbers up 8%, while visitor numbers from Hong Kong is showing similar growth rates.
Meanwhile visitor numbers from our biggest market, Australia, remain solid with the latest months up about 5% on year-earlier levels. Further, visitor numbers from Europe are starting to grow again, as their economies gradually exit from their prolonged recession. Latest months sees numbers from Europe up 13%; with those from our 3rd biggest market, the UK, up more than 20%.
The promising tourism recovery is reflected in accommodation data showing international guest nights over the past year back above year-earlier totals.
Consequently, the next news from the US that most are waiting for is the timing of the tapering of the QE3 programme of quantitative easing. Earlier thought to begin in the coming weeks, potential effects from the debt ceiling and shutdown debacle could well postpone the tapering till early next year.
In other parts of the globe, the Euro area continues to struggle. Activity over the year to June remained noticeably below year-earlier levels. This has been the case for more the past 18 months. Latest reports confirm that European economies are growing again, with activity in the June quarter being 0.3% above that of the March quarter. Japan and US GDP figures also show a resurgence in activity over the latest quarters.
The recovery in house building activity continues, with increases gathering increasing momentum. The year to August saw just under 19,400 consents issued, well above the 15,400 of a year earlier. Indeed, this current annual rate has accelerated considerably from just over the 17,000 mark early this year.
Growth in consents is set to continue well into 2014 and beyond, with an annual rate of well over 25,000 required to be sustained for some time in order to restore some semblance of supply-demand equilibrium.
Consents issued over the latest three months are now at an average 20% higher than a year earlier, with growth in Auckland and Canterbury noticeably above the national average. However, as the chart illustrates, the picture for the rest of the country remains muted, and at similar levels to the past four years.
The contrast between Auckland and Canterbury activity, which is now well above pre-crisis levels, and that in the remainder of the country underpin some concerns about the imbalance in the overall recovery.
In the non-residential building sector, there is also a concerted upturn. The volume of building work consented, as measured by square meter area, is now also close to 20% up on year-earlier levels. This sector is also recovering from a large post-crisis slump, but the chart illustrates a strong recovery is now well underway.
Again, though, the recovery is not sector wide. In particular, the non-residential building recovery is heavily concentrated in the storage buildings category (warehousing and the like). Consents in this category are now running close to double what they were last year, with those in Christchurch considerably higher.
In contrast, new factory consents are still well down on year earlier, with shops & accommodation, social, and office building consents approximately similar levels as 12 months ago. Farm building consents are at the average 20% up on year earlier.
A remarkably rapid turnaround in migration has been driven almost solely by changes in flows across the Tasman. From a net migration outflow of 3,300 in the previous year, the year to September saw a net inflow of over 15,000.
Equally, remarkable though, is the long-term stability of net flows from Asia as well as those from Europe. Annual net inflows from these regions have remained relatively stable at around 20,000 for the past six or so years. This reinforces the conclusion that, despite global and NZ economic uncertainties, in the eyes of others New Zealand remains an attractive place to settle.
In contrast, the net annual flow to Australia has swung between -10,000 and -40,000 over the past six years. Consequently, almost all of the approximately 18,000 turnaround in net migration over the past year can be explained by the reduction in net flows to Australia. In particular, in the last 12 months the net outflow to Australia totalled 25,300, down from the 39,500 of a year ago.
Delving further into the detail, the chart indicates the relative stability of migrant arrivals from Australia – at around an annual 15,000 – although there is an admittedly noticeable increase of late.
More profound though, is the swings in migrant departure numbers to Australia. In turn, it is clear that the majority of the changes in migration over the past few years are explained by increases in the number of Kiwis departing west across the ditch.
The picture of migrants to Australia follows closely the relative fortunes of that economy. The pre-crises surge mirrored the mining boom. The immediate post-crisis reduction was replaced by further increases as their economy weathered the storm better than NZ, while the recent slump reflects the latest slowing in the Australian economy.
Consequently, the migration inflow to New Zealand is expected to continue over the next couple of years, as our recovery becomes more established.
The latest GDP and external current account balance data confirm the investment activity and construction concentration of our recovery.
In line with housing consent numbers, housing investment activity as measured by GDP numbers is averaging about 20% up on the previous year. It is noticeable, though that this recovery has only recently surged.
In comparison, business investment recovered earlier in the cycle, but peaked lower. Also noticeable is that growth in business investment activity has begun to ease. This easing is consistent with capacity constraints in the building sector, as the house construction surge takes hold. It is also in line with a positive, but cautious, business environment.
At the same time, the nation’s external balance figures reflect the nature of the recovery. In particular, the balance of trade in services (including tourism, education, film, and other services) has deteriorated into further deficit, while the surplus on goods trade has diminished. These results reflect the difficulties facing the tradable sector, given an uncertain global environment and an unhelpful NZ$ exchange rate.
As a result the combined goods and services balance, which was in surplus to the tune of $3.5 billion three years ago, is now close to zero.
In contrast, the deterioration in the investment income balance has recently turned towards a gradual improvement. This balance captures the net flow overseas of (primarily) interest, profits, and dividends. Three years ago this balance was in deficit to the tune of an annual $8.7 billion. It initially worsened to be over $10 billion last year, but has since recovered to be back to $8.7 billion now.
The latest recovery in this balance reflects lower interest payments on reduced borrowing, as well as a recovery in returns on overseas equities held.
This picture of robust investment-based economic activity, but a difficult external trading environment, remains the basis of most commentators’ forecasts for New Zealand. Consequently, a marked improvement in the nation’s external balance is unlikely in the short term.
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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