We want to help Kiwi businesses succeed so we've teamed up with Dr. Granesh Nana, Chief Economist of Berl Economics to bring you this economic update.
If you’d like to receive future issues of Business Matters simply register
Figures for the August month confirm the continued strength of activity in the construction sector.
New consents for residential dwellings for the latest 12 months total just under 24,000 – about 23 percent up on the previous year. In a similar vein, the total for areas consented for new non-residential buildings is 9% up.
Within these sectors, the story is predominantly about the Christchurch rebuild, with the sub-text of Auckland infrastructure investment also apparent.
As illustrated, new house consents in the Canterbury area are now more than double that of the immediate post-quake period. Further, they are well above the levels of the pre-crisis 2006-2008 period. In contrast, while consents over the remainder of the country have picked up noticeably since the troughs around the 2009-2011 period, they remain well below their pre-crisis highs.
The picture for the non-residential building sector is less simple. However, the headline observation remains one of strong recent growth but with activity levels still below pre-crisis peaks.
The latest surge in activity is dominated by growth in office buildings. Consents in the office building category (in terms of square meter area consented) are running at 40 percent above those of the previous year. This, in turn, is led by the surge in Canterbury, which is now well above anything experienced over the past decade.
However, there is also a considerable surge in Auckland and Wellington office building activity with both regions well above levels of the past few years. The difference with Christchurch though is that in both Auckland and Wellington activity levels remain below earlier pre-crisis peaks.
Also noticeable are recent double-digit percentage increases in factory, hospital, education and farm building consents. Growth in factory building consents is concentrated in Canterbury, but current levels are noticeably not much higher than pre-2008 levels. Increased consents for farm buildings are recorded in the Waikato, Taranaki and Manawatu-Whanganui regions. The education category is driven by Auckland developments, while Auckland and Canterbury account for most of the growth in hospital buildings.
The global economy continues to struggle to shake off the impact of the 2008 financial upheaval. While growth has turned positive in most regions, with Asia leading the way, jobless figures remain stubbornly high in Europe. Further, US unemployment has declined, but these declines have to an extent hidden a rise in those exiting the labour force.
In addition, the stuttering European recovery has heightened concerns of deflation. This has led to the European Central Bank introducing negative interest rates and also considering its own form of quantitative easing.
Annual growth for the Euro zone in the year to June 2014 was reported at 0.8%. Latest forecasts are for 1.6% growth in 2014, rising to 2% in 2015. This signals a continued and lengthy period of sub-par growth.
Chinese economic growth has stabilised its gradual decline of the past few years, with GDP growth in the year to June 2014 now 7.5%.
This growth has been sustained in the short term by infrastructure investment and easier credit conditions for small businesses. Some observers remain sceptical as to short-term prospects, doubting if the pace of investment can be maintained along with ongoing concerns about financial system stability.
India’s annual economic growth for the year to June 2014 jumped to 5.7%, from 4.6% in March 2014. This post-election jump is welcome after a couple of years of growth below 5%. Future prospects remain uncertain, as the new Government begins to implement its plans for a more externally-focussed business sector.
Closer to home, the Australian economy is showing increasingly worrying signs with unemployment now well over 6%. This is reflected in the dramatic reduction in the number of New Zealanders emigrating across the Tasman. Forecasters continue to expect positive, albeit modest, growth in Australia over the near term.
Recent statements have reinforced the Reserve Bank’s (RBNZ) discomfort with the ongoing high level of the NZ$ exchange rate. With the Kiwi flying consistently at or above 80 US cents for the past 3 years, the RB’s impatience has been sorely tested.
The last straw may well have been the lack of any significant downward movement over the past six months in the face of plummeting commodity prices.
Consequently, following repeated warnings to the market of the currency’s overvaluation, the RBNZ intervened directly in August to the tune of more than NZ$500 million. This has had the immediate effect, as desired, of taking the NZ$ below 80 US cents and also below 90 Australian cents.
The irony is that these moves come not that long after the RBNZ was signalling a period of rising interest rates in efforts to rein in a growth spurt. But with growth stalling, along with the prospective negative impact of lower commodity prices, further interest rate increases been put on hold.
However, with concerted action to reduce the exchange rate, the RBNZ may need to shift focus. Of most interest now will be the RBNZ’s response to potential inflationary consequences of a depreciating exchange rate. Should the RBNZ see considerable risks to inflation, a re-start of the higher interest rate program may be on the cards. In such a case, the relief to exporters from a more favourable exchange rate may be short-lived.
The next few months will indeed be a challenging time for the RBNZ policy makers.
While export revenues from dairy and logs dominate the scene, promising performances across other areas of the export sector should not be overlooked.
For example, the last couple of seasons have seen a solid recovery in meat exports. Volumes are back above pre-crisis levels. Indeed growth over the latest 12 months averaged 3 percent, on top of the 14 percent recovery registered in the 2012/13 season. Coupled with a 5 percent increase this year in average prices, the 8 percent surge in meat export revenue is a welcome addition to the nation’s export earnings.
The latest outlook from Beef and Lamb New Zealand indicated little volume growth is expected in the coming season. Despite good climatic conditions, the long-term decrease in ewe numbers (associated with land-use switches to dairy) suggests little growth in the number of lambs tailed this season. Exchange rate uncertainty suggests the farm-gate lamb price for the 2014/15 season could lie in the $90 to $120 per head range. Consequently, at a mid-range 78 US cents exchange rate lamb export revenue is expected to increase a modest 2.6 percent.
Avocado growers are cautiously expecting another record season, as volumes for the first couple of months of the season are well above those of last year.
The previous 12 months saw revenues total a record $99 million, triple that of the year earlier. This increase was on the back of production volumes just under the record 2010/11 season, but favourable prices in Australia (where 70% of exports head) assisted higher revenues.
Short-term exchange rate movements (with the A$ in particular) will be closely watched as the peak months for Avocado production and sale (October-February) approach.
Last season was also productive for other fruits, with annual export revenue from cherries at $29 million (up 38%); blueberries up 9%; persimmons up 19%; and apricots, strawberries and lemons all recording double-digit percentage growth.
As for this season, kiwifruit is looking promising – with the first five months already recording volume and revenue at 15 percent up on a disappointing 2012/13 year. Annual revenues are set to top $1 billion, having dipped to $800 million last season.
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.
If there’s anything we can help you with call us on 0800 601 601, Monday to Friday, 8am – 6pm, or email firstname.lastname@example.org
Kiwibank Limited – All content is for information only, is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to entering any transaction. To the extent permitted by law the Bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.