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The latest World Economic Outlook (WEO) from the IMF indicates that, in general, financial conditions are expected to remain stable or improve throughout 2011.
Economic activity in advanced economies such as the United States, Japan, Canada, the Euro area, and the United Kingdom is expected to remain moderate throughout the year. This is due to high unemployment and household debt continuing to weigh heavily on budgets and so dampen consumer demand.
For this group, economic activity is projected to expand by 2.5 percent during 2011/12. This is an increase of 0.25 percent compared to the WEO released in October 2010.
The upwards revision in their projected economic activity is mostly due to the fiscal packages passed in the United States and Japan late in 2010.
Financial turbulence in the last quarter of 2010 in Ireland, Greece, Portugal and Spain highlighted the vulnerabilities that exist in the periphery of the Euro area. The IMF argues policy action is needed to overcome sovereign (government) financial troubles, to redress fiscal imbalances, and to repair and reform financial systems in these advanced economies.
In emerging economies such as China, India and Mexico, economic activity is expected to remain buoyant. But the main concern here is the emergence of growing inflationary pressures due to high commodity and food prices.
For this group, economic activity is projected to expand by 6.5 percent during 2011/12. Asia (excluding Japan) is expected to grow by 8.5 percent.
This is a modest slowdown from the seven percent growth experienced in 2010 and the projections remain broadly unchanged from the IMF’s earlier forecasts.
Consumer prices in these economies are projected to rise six percent this year, higher than the IMF’s earlier expectations. Signs of overheating are also becoming apparent in some countries via rapid credit growth or rising asset prices.
Increased inflationary pressures are expected to continue due to strong demand conditions in these countries and a sluggish supply response. Weather-related crop damage was greater than expected in late 2010, and price effects are expected to unwind only after the 2011 crop season. In addition to food prices, inflation in these countries is also being driven by rising energy prices.
The Managing Director of the IMF noted last month that while a global recovery is underway it is not the recovery that was most wanted. This recovery is one of tensions and strains and is unbalanced across and within countries.
Across countries, economic growth remains below potential in the advanced economies while in emerging and developing economies activity is growing much faster. Within countries, unemployment is high and income inequality is adding to social strains. “Without jobs and income security, there can be no rebound in domestic demand, and ultimately, no sustainable recovery.”
The IMF is emphasising the need for repairing and reforming the financial sectors in advanced economies to ensure the ‘right kind’ of recovery. Such a recovery would also prevent overheating in developing countries through moderating capital inflows and therefore reduce inflationary pressures.
Mortgage foreclosures and static job prospects continue to dominate the minds of US consumers. Rising energy and food prices are now also a factor in restraining their spending.
Mortgage foreclosures are set to continue in the US, which will maintain downward pressure on house prices. Many former and would-be homeowners have moved to renting, and at the end of 2010 the home ownership rate was 66.5 percent. This is reportedly the lowest level of home ownership in the US since 1998.
US employment figures for January 2011 indicate that employment rose in manufacturing and retail trade, but was down in construction, transportation and warehousing.
The severe winter weather over the December-January period has reportedly influenced the job numbers for construction, transportation and warehousing. This would have exacerbated some of the short-term seasonal influences normally expected over the Christmas period.
Employment in most other major industries changed little during the month.
The overall total showed a marginal 36,000 rise in job numbers over the month. The chart illustrates, however, that there has been little recovery of the 7.5 million jobs lost since December 2007.
The US Performance of Manufacturing Index (PMI) was at an 80-month high in January while its counterpart in the Eurozone hit a nine-month high. This is a clear signal that manufacturing is now on the road to recovery. However, we must note that there remains much lost ground to recover.
Figures indicate that US retail trade in December 2010 was 8.2 percent up on those of December 2009. This growth was predominantly due to large increases in auto and other motor vehicle sales and people purchasing online. Again, though, this growth reflects just how far sales had slumped at the end of 2009.
The Australian economic train slowed surprisingly in the September 2010 quarter. The 0.2 percent expansion in that quarter was held back by a noticeable decline in activity in the construction sector. This result may go some way to helping explain the recent reluctance of the Reserve Bank of Australia to increase interest rates despite concerns about overheating.
More recently, bad weather and associated flooding could further subdue economic activity across the Tasman. The Reserve Bank of Australia is now expecting growth in the December 2010 and March 2011 quarters to be lower than previously expected. However, from the June 2011 quarter, growth is expected to pick up again as rebuilding gets underway and coal production also returns to normal levels.
A survey of non-farm businesses completed in January by the National Australia Bank indicates that one in five businesses are expected to operate below pre-flood capacity for at least a month. The economic impacts of the flood and cyclone Yasi were concentrated in Queensland, but flooding in other parts of Australia will also disrupt economic activity and growth prospects to some degree.
More than 2.5 million international visitors arrived here in 2010. This was a 2.7 percent increase from the previous year, and quite an increase from 1.8 million visitor arrivals in 2000.
As the chart illustrates, the past year has been relatively good in visitor number terms. The recovery from the slump in 2009 has been promising and has been primarily driven by a resurgence in Australian visitors, along with renewed interest from several Asian markets.
Australia remains our dominant source country for visitors, followed by the United Kingdom, the United States, and China. However, German and Japanese visitors still enjoy visiting New Zealand, followed by Canadians. The number of visitors from Australia in 2010 reached 1.1 million, which was up 3.0 percent on the previous year. Visitors from Europe and Asia totalled around the 450,000 mark.
The total number of visitors from Asia in 2010 was 15.2 percent up on that of 2009.
The largest growth amongst this category was in visitors from China, which increased by 21 percent over the 2010 calendar year. The second largest growth was in visitors from India (up 15.5 percent), followed by Malaysia (up 13.5 percent).
However, visitor numbers from the United Kingdom and the United States were down 9.1 and 8.3 percent respectively, while Japanese and German tourist numbers were down 6.6 and 5.8 percent.
The overall growth in visitors from the Asia-Pacific region reflected favourable economic conditions in this region, compared to those in the Americas and Europe. Further, movements in the NZ$ exchange rate continue to act against tourists from Europe and the US, in favour of those from Australia in particular.
Despite 2010 being a good year in terms of visitor numbers, there was little improvement in terms of guest nights. Last year there was a total of 32.2 million guest nights spent in short-term commercial accommodation in New Zealand. This figure is 0.7 percent above the total for the 2009 calendar year.
There are two reasons for this discrepancy. Firstly, while international guests numbers are on the rise, the domestic tourism sector remains subdued. This is in line with the cautious nature of household spending noting modest employment and income prospects over the near term. Secondly, the Australian visitor market, which has dominated the surge in visitors, is skewed towards short-stay visitors and/or visitors who would be staying with friends and family.
Guest nights comprise about 57 percent from the domestic sector and 43 percent from international visitors. Consequently, the impact of rising international visitor numbers on guest nights is muted.
The chart further illustrates, that the rate of growth appears again to be on a downward slide.
Looking at the main tourist regions, 2010 saw 2.5 million guest nights spent in Queenstown, and 1.7 million guest nights spent in Rotorua. Comparing annual total figures, the number of guests staying in Queenstown, Rotorua and Auckland have all increased, while other regions have experienced flat or declining activity.
The sombre picture for guest nights outside of the main tourist destinations is consistent with the reduction in, primarily European, independent travellers that are keen to explore beyond the package tours destinations. This is also consistent with the relatively subdued domestic visitor market.
Across the four accommodation types, the largest decrease in guest nights was motels, down 4.8 percent, with holiday parks and backpackers also experiencing lower guest night numbers. On the other hand, hotels recorded a noticeable 2.9 percent increase in guest nights. Again, these figures are consistent with relatively fewer domestic visitors and a skew away from independent travellers.
However, according to the latest Tourism Industry Monitor, business confidence is up among operators as they expect demand to rise in the first quarter of 2011 relative to the same period last year. This optimism varies among operators – with small businesses expecting little change in demand, while large businesses (greater than $2m turnover) are expecting an increase in demand and profitability.
As the third largest sporting event in the world in terms of cumulative television audience and attendance, Rugby World Cup (RWC) 2011 provides New Zealand with an opportunity to promote itself globally and to encourage a large number of international visitors.
Doubtless, meeting capacity issues (transport and accommodation, in particular) was always going to be a challenge. The aftermath of the Canterbury earthquakes will test this further.
Hopefully, though, recent events will not deter fans traveling across the ditch for the RWC 2011, as Australia remains our dominant source country for visitors. And the NZ$ exchange rate with the AU$ is set to remain favourably attractive for Australians to venture eastward.
Indeed, Australian visitors are likely to focus on the weekend games during the tournament and treat New Zealand like a domestic destination.
The Ministry of Economic Development (MED) has established preliminary visitor forecasts that indicate 85,000 international visitors are expected to come to New Zealand specifically for this tournament. This number includes 74,800 supporters and 10,200 visitors with an official event affiliation, such as being a team member or part of the media.
A large number of RWC 2011 visitors will leave New Zealand in the days following the final but some will stay in New Zealand and visit other regions or areas. An analysis of the Lions Tour of New Zealand in 2005 completed by MED showed that visitors could stay anywhere up to 10 extra days after the event. This is indeed welcome news for accommodation providers, the hospitality sector, and tourism operators.
Employment in December 2010 was 28,000 higher than in December 2009. This was the untold story in the latest release of labour market statistics. Rather, headline numbers preferred to focus on the rise in the unemployment rate and its closeness to the peak reached during the recession.
Of course, seasonal factors are a strong influence in actual unemployment numbers rising in the December quarters. In particular, a lot of young people have just completed study at school and/or tertiary education and training institutions and have not yet got a job.
So, unsurprisingly, the actual number unemployed in December was 155,600, which was more than the 144,500 unemployed in September 2010 – but 3,300 less when compared with December 2009.
The exodus of students during the December quarters can also potentially cause a large increase in the number ‘staying at home’ and reporting themselves as Not in the Labour Force. This category can spike upwards considerably if job market options are perceived by job seekers as limited. This category increased by nearly 20,000 in the year to December, which is a lot less than the 46,000 increase in the number who ‘switched off’ from work during the December 2009 year.
The employment growth of 28,000 more people employed over the past year included surprisingly strong growth in full-time employment by 40,000 jobs, and a loss of 12,200 part-time jobs. These part-time job losses appear to reflect cutbacks in some of the social services as there were over 8,000 lost in areas of education and over 4,000 in health care services.
The really positive signal from the above chart is the increase in employment in the manufacturing sector. This increased by 17,500 in the year to December 2010. This is the largest increase in employment for this sector since the low exchange rate experienced after the recession of the early-1990s.
Employment growth was also quite widespread amongst the industries within the manufacturing sector. Noting that the manufacturing sector also includes the food processing industries, there was increased employment in food and beverage products, wood products and fabricated metal products.
Outside of manufacturing, other sectors with employment increases were parts of retail trade, professional services, and the arts, recreation and other services. There were substantial job losses in the social services and finance and insurance services sectors.
A telling statistic was the lack of significant job growth in the construction industry. Clearly, the Canterbury re-building effort post- September had yet to gain momentum. This reinforces the significant challenges facing the now much larger re-build required.
Net migration (i.e. arrivals less departures) remained positive in calendar 2010, with a net inflow of 10,450 people. This is well down on the 21,250 recorded in 2009, but is still a positive number that is providing some stimulus to the economy.
The gross total of departures of New Zealand citizens to Australia has bounced back from a low of 28,600 in 2009 to 32,200 in 2010. The other main increase in outflows was about 3,000 non-New Zealand citizens leaving for countries other than Australia.
The gross inflow has been declining also, with reductions in New Zealand citizens and other arrivals.
In net terms, the largest turnaround is in the increase in the overall net outflow heading to Australia and other parts of the Pacific (as illustrated in the chart).
In total, though, the arrivals are still great enough to exceed the departures, by 10,400 people. So, despite our difficulties in offering competitive salaries, New Zealand remains a relatively attractive place for many migrants and potential migrants.
In contrast to the positive tone of much commentary at beginning of 2010, the beginning of 2011 sees many commentators proclaiming a double-dip recession. Darkened moods and yet another inspection of the Government’s expenditure programmes are likely to dominate the Budget announcements in May.
Further, the consequences of the Canterbury earthquakes will add significantly to capital investment spending requirements. And the interim blow to economic production, jobs and incomes will inevitably impact on the Government’s tax take and also call for more support spending.
The latest Government’s Financial Statement suggested the books were under control, in the sense that the tax take was stabilising and the deficit was on track with longer-term forecasts.
Tax revenue for the six months to December 2010 was just over $25 billion, which was in line with the Treasury’s earlier forecast. Within this total, the tax take from individuals and corporates is running slightly above forecast, while GST revenue is slightly below Treasury’s earlier expectations. The Treasury comment is that it is too early to assess the cause of these variances from forecast.
Expenditure was similarly in line with earlier forecasts, leading to the overall operating balance excluding gains and losses (OBEGAL) in deficit of just under $6.0 billion.
After adjustments for timing and accruals, this translated to a cash deficit for the Crown of $13.2 billion over the first six months of the year.
For the full year (financial year ending June 2011), the Treasury was expecting the OBEGAL to reach $11.1 billion, translating to a cash deficit in the order of $15.6 billion. This latter figure equates to the widely quoted $300 million per week that the Government needs to fund through borrowing.
As the chart illustrates, the Treasury expected the Government accounts to return to balance in the financial year to June 2015. This was indeed a challenging forecast, assuming a rapid recovery from the recession.
While a Budget balance by 2015 would have been the aim for the May Budget announcements, the impact of the Canterbury earthquakes will certainly cause a re-think.
In terms of financial position, the Government’s gross debt as at 31 December stood at $62 billion, which represents just over 32.5% of annual GDP. Translating to net debt, the figure becomes $40 billion or nearly 21% of annual GDP.
It should be clear that, in proportionate terms, this level of debt is not large either historically or in comparison with other countries. For example, the level of Government debt was close to 40% of annual GDP during the early-1990s. And countries at the centre of the sovereign debt crisis in Europe (e.g. Greece) had debt levels well above 100% of their annual GDP.
However, the Government’s debt, in conjunction with the private sector’s much more precarious debt situation, highlights the nation’s vulnerability in the face of much tighter global credit lines.
Consequently, the Government’s Budget announcements will need to strike a careful balance between the very real and pressing need for nation-building and the very real constraints on financing.
The Budget Policy Statement released in December by the Minister of Finance outlined the broad strategic policies and priorities that were to guide the Government in preparing for the forthcoming budget.
The six key policy areas identified remain the same as before – the tax system; public sector performance; education and skills; science, innovation and trade; the regulatory environment; and productive infrastructure.
But now, we must, doubtless, add the need to re-build Christchurch and Canterbury.
This prospect – faced with ongoing constraints in accessing credit – will shape the New Zealand economy well into the medium-term.