Sunday, March 22, 2009

Australian & New Zealand Weekly : Westpac-ACCI Survey Highlights Downside Risks

Week beginning 23 March 2009

  • Australia: Westpac-ACCI survey highlights downside risks.
  • Australia: no major data due but RBA speech schedule very full.
  • Australia: Treasurer Swan also speaking.
  • Australia: RBA's FSR: checking the pulse of the financial sector.
  • New Zealand: stronger NZ$ strengthens rate cut case.
  • US data: housing, orders and inflation in focus.
  • US: Federal Reserve officials speaking throughout the week.
  • Key economic & financial forecasts.

The latest release of our Westpac-ACCI Survey of Industrial Trends for 2009Q1 has highlighted some downside risks to our already below-consensus forecasts for Australian growth in 2009. This long running survey provides unique insights into Australia's business cycle. With a history dating back to the early 1960s, it has tracked each of the three recessions Australia has experienced since then.

The 190th survey was conducted from 4th February to 13th March, amidst a bleak backdrop of rapidly deteriorating global growth and trade, weakness in domestic demand, further falls in survey respondents' actual trading conditions and constrained finance. The results are best summarised by the Actual Composite Index, which is an equivalent of other economies' manufacturing ISM/ PMI indexes, combining responses on output, new orders, the order backlog, employment and overtime. They are consistent with a rapid contraction in manufacturing activity in early 2009, a sharp further slowing in overall private final demand growth, a more pronounced labour market deterioration through 2009, and outright contractions in business investment spending.

The Actual Composite Index fell 6.5pts to 34.0 in Q1 after a 10.3pt fall previously. 50 is the index level that separates manufacturing expansion from contraction. The Actual Composite Index is now at a level not seen since the 1990/91 recession, its lowest since 1991Q2. With the index further below the 50 break-even level in Q1, it is consistent with an even sharper contraction in manufacturing activity in Q1 than seen in Q4. Recall that the 2008Q4 National Accounts showed a sharp contraction in the production measure of real GDP for manufacturing's gross value added of -4.7%qtr, the weakest result since 1982Q4.

While the Westpac-ACCI survey is only of manufacturers, the Actual Composite Index also has a solid track record of predicting near-term economy-wide private final demand growth. The fall in Q1 is consistent with a steep deterioration in annual private final demand growth in early 2009, well below that already seen in Q4. Recall that the 2008Q4 National Accounts showed a disappointing 0.1%qtr rise in private final demand (despite significant monetary and fiscal policy stimulus efforts), slowing annual growth to 2.4% from 3.6%, and 6.0% in the year to 2007Q4. Historically, sub-37 readings on the Actual Composite Index have been consistent with annual contractions in private final demand, and at 34.0, the latest read is consistent with annual growth falling to around -1%yr - our current 2009Q1 forecast is for a 1.4%qtr fall in private final demand, slowing annual growth to -0.1%yr, so downside risks prevail.

The survey results also point to a more rapid deterioration in the labour market through 2009. The Labour Market Composite net balance (combines actuals and expectations for employment and overtime) plunged 17pts to -33%, its lowest since 1991Q1, although moderately above the lows of the 1990/91 (-40%) and 1982/83 (-45%) recessions. The survey also showed a further sharp decline in concerns over the extent of tightness in the labour market. The net balance reporting labour as “harder to get” than three months ago fell to -37% from -20% previously, the lowest since 1992Q1, to a level historically consistent with an unemployment rate beyond 8%. However, it remains well above its troughs during the height of the 1990/91 (-66%) and 1982/83 (-61%) recessions, when unemployment rose towards 11%.

The survey's Labour Market Composite net balance provides a close six month lead for annual employment growth, and its latest -33% read is historically consistent with a sharp deterioration in jobs growth through 2009H2 to around -2½%yr from the current (Feb) trend of +0.8%yr. However, this survey is a reflection of private sector conditions and expectations, and we find that the longer-run employment outlook is more closely linked to the total domestic demand outlook, which takes into account public spending support. With our forecasts assuming significant public spending support this cycle, with real new public demand forecast to rise almost 7% through 2009, more so than in the last two recessions, for now we retain our less-pessimistic prognosis for employment. We expect jobs growth to fall to -1½%yr around end-2009, lifting the unemployment rate to 6.8% at end-2009 and beyond 7% in early 2010, but the risks of a more severe deterioration are readily apparent from this survey.

The survey also highlighted growing downside risks for the business investment outlook. The net balance for twelve-month plant and equipment spending plans fell to -32% from -30%, the lowest since 1983Q1, while for building plans, the balance fell to -41% from -32%, the lowest since 1982Q4. The deterioration in surveyed investment fundamentals was readily apparent in a sharp fall in the net capacity utilisation measure to -36% from -18%, the lowest since 2001Q2. Indeed, after nearly a decade of relative stability, capacity utilisation has seen almost its fastest two-quarter fall (down 33ppts) since 1990H1. The Actual Composite Index also has a leading relationship with economy-wide business investment spending on plant and equipment, and has now fallen to a level associated with falling plant and equipment investment on an annual basis. We expect new plant and equipment investment to decline right through 2009, with growth in 2009Q4 at -20% through-year.

Australia: Data Wrap

Mar RBA meeting minutes

  • The final paragraph of the RBA minutes sets out that members could see reasonable cases for both a rate cut and for a pause in the easing cycle. (There was no explicit mention of the staff recommendation to the Board.) The ultimate decision to leave rates unchanged at 3.25% reflected a recognition that there had been a major change in policy over preceding meetings in anticipation of weak economic conditions.
  • The Minutes do not give a strong case one way or the other for the likely policy decision at the April meeting, rather the final sentence keeps the options open. "Members believed this would leave adequate flexibility for policy at future meetings."
  • We would note the words "adequate flexibility". It is no longer a case of "ample flexibility", as was the case when the Bank first started cutting rates from the high of 7.25%. As discussed previously, we see 'only' a further 1.25% reduction in the cash rate to a low of 2.0%. This implies, the Bank will give tactical consideration to the timing of future rate cuts.

Jan Westpac-MI Leading Index

  • The annualised growth rate of the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was -3.1% in January, a long way below its long term trend of 3.2%. The annualised growth rate of the Coincident Index was 1.8%, down half a per cent on its December read of 2.3% and also well below its long term trend of 3.5%, although still comfortably above zero.

Q1 WBC-ACCI Survey of Industrial Trends

  • The 190th Westpac-ACCI Survey of Industrial Trends was closed in the week ending 13 March, amidst a backdrop of rapidly deteriorating global growth and trade, weaker domestic demand, weakness in respondents' actual conditions, and constrained finance.
  • The Actual Composite Index fell further below its decade average (52.7) to 34.0 from 40.4, a level consistent with a sharper manufacturing contraction in 2009Q1. The index is at a level not seen since the 1990/91 recession (lowest since 1991Q2) and was close to predictions in the prior survey's Expected Composite Index.
  • In contrast with the previous survey, there was no further collapse in expectations, with the Expected Composite Index edging 0.2pts higher to 34.0. Accordingly, there is no evidence at this stage that conditions are worsening beyond those of the last recession. General business sentiment was also unchanged (albeit at its lowest level in more than 18 years).
  • Labour demand is deteriorating rapidly, with the Labour Market Composite net balance plunging 17pts to -33, the lowest since 1991Q1, historically consistent with a rapid fall in jobs growth towards -2½%yr through 2009H2. Perceptions of labour market tightness fell to a level consistent with a rise in the unemployment rate beyond 8%, although this measure remains well above its trough of the 1990/91 recession.
  • See Anthony Thompson's report on p2 for more detail.

Feb new vehicle sales

  • The official ABS estimates showed renewed weakness in vehicle sales in Feb, with a 3.5%mth decline following a 1.1% dip in Jan and a 1.5% rise in Dec. The result was broadly in line with the raw industry data from the FCAI, which pointed to a 3%+ fall. It leaves monthly sales down 18.6%yr.

Q4 dwelling commencements

  • Preliminary data on dwelling commencements showed another big drop, falling 9.9% in Q4 after a sizeable 8.9%qtr drop in Q3. Although large, the fall was foreshadowed by a sharp slide in approvals (down 8.2% in Q3 and 15.5% in Q4) and in line with our expectation of a 10% drop.
  • The Q4 decline means starts are now 19.5% below their 2007Q4 level and are running at an annual pace of 130.5k. Both starts and approvals are now running substantially below estimated underlying demand estimated to be rising at over 170k a year. The implication is that Australia's housing shortage - already acute in many areas - is set to worsen dramatically over the course of 2009.

Feb merchandise imports

  • Australian merchandise imports fell 3.5% unadjusted in February to $16.577bn, following a 14.8% slump previously.
  • The Statistician advised that after seasonal adjustment the data is consistent with a slight fall in goods imports on a BoP basis of $18mn or 0.1%mth. While appearing resilient on the surface, recall that goods imports slumped 8.4% sa in January, and with no rebound in February suggested by today's data, trend growth will weaken further from January's -1.6%mth pace.

Round-up of local data released last week

Date Release Previous Latest Mkt f/c
Tue 17 Mar RBA meeting minutes - - -
Wed 18 Jan Westpac-MI Leading Index, 6 mth annualised -2.8% -3.1% -
Thu 19 Q1 WBC-ACCI Survey of Industrial Trends, Actual Composite 40.4 34.0 -
Feb new vehicle sales -1.1% -3.5% -
Q4 dwelling commencements -8.9% -9.9% -
Feb merchandise imports, AUDbn 17.2 16.6 -

New Zealand: The Week ahead & Economic Wrap

Murphy's Law

Last week we pointed out that the RBNZ's relatively optimistic growth forecasts were predicated on a much easier mix of financial conditions, with a lower New Zealand dollar doing most of the hard work. As if on cue, the NZD has soared since the Monetary Policy Statement: up more than 10% against the US dollar, and over 6% on the trade-weighted index. Combine this with the rise in wholesale interest rates since the MPS - which has been sustained despite a sharp drop in long-term rates overseas - and just about everything that could go wrong with monetary settings has gone wrong.

To be fair, the rise in the currency partly reflects a new-found optimism in global markets that the worst is behind us; and to the extent that that optimism is justified, a stronger NZD wouldn't be such a bad thing. But for the moment, we have to remain sceptical of short-term market movements and the reasons behind them - for instance, the positive impact of the Fed's move to buy over $1 trillion of public and private debt needs to be weighed against what drove them to such lengths in the first place.

The economic data calendar got off to a shaky start this week, with another massive downgrade to the global growth outlook. Consensus Forecasts for New Zealand's main trading partner growth in 2009 were revised down from -0.9% to -1.8% this month, the largest monthly revision yet. By coincidence, this is the same figure that the RBNZ factored into their March Monetary Policy Statement forecasts. Consensus forecasts for 2010 were also revised down to 2.0%, against the RBNZ's pick of 1.6%. So while these latest revisions won't sway the RBNZ towards further easing, beyond what has already been signalled, they may be worried that most of their buffer against further negative surprises on the world economy has already been used up.

Manufacturing sales fell 5.4% in the December quarter, led lower by dairy and meat processing and metals. This was the last major quarterly indicator for Q4 GDP (published next Friday), and as a result we have revised our forecast down to a 1.1% decline. This would mark the worst quarter yet in this recession, though New Zealand is hardly alone in this regard - Q4 growth figures worldwide have been horrendous, and a 1.1% drop would be at the milder end of the scale.

Private sector demand is expected to be weak across the board, with consumers spending less, businesses investing less, fewer homes being built, and fewer goods being exported. Manufacturing is expected to make the largest negative contribution, with weak demand, the lagged effect of a high New Zealand dollar, and intense foreign competition hitting base manufacturing sales hard. The bright spots for growth appear to be limited to government spending and agriculture, as the rebound from last summer's drought progresses.

The second major release next week is the current account deficit, which is expected to have widened to 8.7% of GDP. However, the ongoing recession is starting to force an improvement in the underlying trend. First, imports fell by more than exports, with vehicle imports exceptionally weak as sales were hammered by consumer caution and difficulty in accessing credit. Second, the investment income balance - by far the largest component of the deficit - improved markedly in Q3 and probably did so again in Q4 as the interest payments on overseas debt fell.

Unfortunately, both of these releases may come across as dated, as the economic landscape has shifted considerably since the end of last year. Moreover, the historical picture isn't central to our view that the RBNZ will need to ease further than suggested in last week's MPS. Rather, they will need to be persuaded that the New Zealand economy is not going to rebound strongly from the second half of this year, as they are forecasting. So we need to focus on more forward-looking indicators of domestic activity.

One of the first relevant indicators is the Westpac-McDermott Miller consumer confidence survey on Wednesday. Confidence was down in Q4 last year, as consumers judged that lower interest rates, lower fuel prices and tax cuts wouldn't be enough to fill the hole left by a global economic slowdown, falling house prices and rising unemployment. This time, consumers will be weighing up the same factors and more.

The other key releases ahead of the next OCR review on 30 April are the Quarterly Survey of Business Opinion, monthly business confidence, retail spending, and consumer prices. On top of the domestic indicators, the RBA's stance over the next few meetings may also be crucial, given the RBNZ's expressed reluctance to take interest rates substantially below international (specifically Australian) levels. Our question remains about the RBNZ's ‘Plan B' if the currency fails to head lower; if they can't (or won't) cut interest rates further, the only alternative seems to be a tougher adjustment for the real economy - that is, a deeper and/or longer recession than otherwise.

Round-up of local data released last week

Date Release Previous Latest
Mon 16 Q4 real manufacturing sales -2.6% -5.4%
Fri 20 Feb external migration ann 4,538 6,160
Feb credit card transactions 1.8% 0.5%

Data Previews

NZ Q1 consumer confidence

Mar 25, Last: 101.3

  • Westpac McDermott Miller consumer confidence fell in the December 2008 quarter as concerns about New Zealand's short term economic outlook collapsed. At the time, consumers believed that not even lower fuel prices, falling interest rates, or the new government could rescue the New Zealand economy from the wrath of the global downturn.
  • Since December, consumers have faced a mountain of more bad news: global growth has deteriorated at a rapid pace, business confidence has collapsed, house prices continue to fall, unemployment is on the rise, and fuel prices are picking up again. On the positive side, monetary and fiscal policies are continuing to play their part with substantial stimulus still to come through. But consumers are more than aware that there is a very large gap for policy to fill.

NZ Q4 current account deficit NZDm s.a.

Mar 26, Last: -4,079, WBC f/c: -3,260

  • We estimate that the annual deficit widened slightly in Q4 to 8.7% of GDP. However, the underlying trend has started to improve, and we expect the deficit to narrow significantly over the next year.
  • Weaker import demand, especially for cars, helped to narrow the trade deficit, while falling interest rates reduced the interest payments on overseas debt.

NZ Q4 GDP

Mar 27, Last: -0.4%, WBC f/c: -1.1%, mkt f/c: -1.0%

  • GDP data is expected to confirm that the final quarter of 2008 was the worst quarter for growth in an awful year. Private sector demand is expected to be weak across the board with production following suit. Consumer spending, business investment and exports are all expected to show declines over the quarter. We anticipate the headline figures to be weaker than the RBNZ's -0.8% forecast.
  • Manufacturing is expected to make the largest negative contribution, despite more dairy and meat processing. The second largest negative contribution is expected to come from construction, driven by a large fall in house and apartment building. Government spending and a lift in agricultural production are likely to be the only positives of note.

NZ Feb merchandise trade NZDm

Mar 27, Last: -187, WBC f/c: 500

  • We expect exports to pick up from January's seasonal lows to $3.6bn, while imports will slow to $3.1bn. Car imports were exceptionally weak again in February, and with a higher weighting towards lower-value used cars.
  • Crude oil from the Tui field was shipped to a domestic refinery for the first time in January, which weighed on exports at the time but should now reduce the need for imports as well.
  • We expect the trade balance to improve over this year as the consumer retrenchment drags on.

NZ Feb merchandise trade NZDm

Mar 27, Last: -187, WBC f/c: 500

  • We expect exports to pick up from January's seasonal lows to $3.6bn, while imports will slow to $3.1bn. Car imports were exceptionally weak again in February, and with a higher weighting towards lower-value used cars.
  • Crude oil from the Tui field was shipped to a domestic refinery for the first time in January, which weighed on exports at the time but should now reduce the need for imports as well.
  • We expect the trade balance to improve over this year as the consumer retrenchment drags on.

US Feb durable goods orders to keep falling

Mar 25 , Last: -5.2%, WBC f/c: -2.0%

  • Durable orders posted their fourth consecutive fall in Dec, reflecting broad-based weakness across all categories including core capital goods orders, autos and defence. Only civilian aircraft orders rose, following the end of the strike at Boeing.
  • February saw renewed weakness in the orders components of business surveys, and renewed declines in confidence. We know that overall factory output was down a further 0.7%, although autos were up 10.2%.
  • On balance we expect a further 2% decline in durable orders, with core capital goods the weakest component and autos the least weak.

US Feb core PCE deflator

Mar 27, Last: 0.1%, WBC f/c: 0.1%

  • The core PCE deflator has edged back into positive territory in Jan, after three months at zero. Falling oil prices in late- 2009 probably helped to keep core inflation low, as well as the general disinflationary effect of such a weak economic environment. Since the start of the year oil prices have been more stable.
  • Core CPI edged up to 0.19% in Feb. Core PCE tends to be a little lower, registering 0.1% in Jan. We expect a repeat 0.1% for Feb. Deflation risks in 2009 are more real than they were earlier this decade.
  • Also in the release, we expect a decline in personal income following layoffs and hours reductions. Personal spending is expected flat after an increase in Jan, following the known pattern of retail sales.

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