Monday, March 23, 2015

Brian Gaynor: Confidence helping our economy power ahead

The December quarter 2014 gross domestic product statistics, released this week, show the economy was a top performer last year. New Zealand may not have achieved the rock star status that was predicted 12 months ago but it certainly had a higher economic growth rate than most other countries.

GDP, which is a measure of overall economic activity, grew by 3.5 per cent in the December 2014 quarter compared with the same quarter in the previous year.

The 3.5 per cent annual growth rate, which compared with market expectations of 3.4 per cent, was the highest annual increase since 2007.

Our 2014 economic growth rate of 3.5 per cent compared with 2.5 per cent for Australia, 2.4 per cent for the United States and just 1.3 per cent for the European Union.

Only three of the world’s largest economies – members of the Group of Twenty (G20) – had higher 2014 economic growth than us. These were India, which reported 7.5 per cent GDP growth, China 7.3 per cent and Indonesia 4.9 per cent.

The European Union, the world’s largest economic region comprising 23.4 per cent of global GDP, continues to be relatively depressed. Only two of the 28 countries in the union had higher GDP growth than New Zealand last year. These were Ireland, with growth of 4.1 per cent, and Malta, 4 per cent.

The four largest EU countries – Germany, France, United Kingdom and Italy – reported 2014 GDP growth rates of 1.5, 0.2, 2.7 and a negative 0.5 per cent respectively.

The United States, which represents 22.4 per cent of global economic activity, also underperformed New Zealand.

Our economy has performed exceptionally well for a number of reasons including low unemployment, high consumer confidence, a strong net migration inflow and a large increase in tourist numbers.

The latest unemployment rate is just 5.7 per cent compared with 7 per cent during the height of the GFC. Our unemployment rate has fallen from 6.7 per cent to 5.7 per cent over the past two years while Australia’s rate has increased from 5.5 per cent to 6.3 per cent.

As a result there has been a dramatic reduction in the net migration outflow from here to Australia.

We are in a far better position than the EU, which has an unemployment rate of 9.8 per cent. Among the EU member countries Greece has 25.8 per cent of its workforce unemployed, Spain 23.4 per cent and Portugal 13.3 per cent.

New Zealand has a skilled labour shortage problem rather than an unemployment problem. The unemployment rate for individuals under 25 years of age is 14.6 per cent while the unemployment rate for those aged 50 to 64 is just 2.8 per cent. The latter indicates a shortage of experienced skilled workers.

The 2.8 per cent unemployment rate for those aged 50 to 64 compares with 19.9 per cent for the same age group in Spain, 17.5 per cent in Greece and 12.7 per cent in Portugal.

One of the main features of our economy is the very high level of consumer confidence. This is measured by an index with a base of 100 and any figure above 100 indicates positive confidence.

The ANZ-Roy Morgan Consumer Confidence Index now stands at 124.6 whereas consumer confidence indices in Australia, EU and the US are at 111.2, 105.1 and 96.1 respectively. The EU figure includes business as well as consumer confidence.

New Zealand’s March consumer confidence report, released yesterday, showed a slight increase from 124 to 124.6 since February.

The underlying message remains one of optimism. It is not outright euphoria but a healthy glow is evident.

Households perceive themselves to be better off in terms of their own finances and still consider it a great time to buy big household items.

New car sales reflect this high level of consumer confidence. Last year 90,632 new cars were sold, the highest level since 1984. Sales have remained strong this year and were up 8 per cent in January and February compared with the same two months in 2014.

Another positive contribution to last year’s economic growth was the large increase in inbound tourist numbers, particularly in the December 2014 quarter.

There were 883,520 visitors during this three-month period – a 55,600 increase over the same period in the previous year.

The largest increases were Australians, Americans and Chinese, three nationalities with a relatively high level of expenditure when they travel overseas.

One of the most remarkable economic characteristics of recent years is the very low level of inflation throughout most of the world.

Our inflation rate is just 0.8 per cent, Australia is 1.7 per cent, the EU 0.6 per cent and United States has a negative 0.1 per cent movement in its Consumer Price Index.

Twenty of the 28 countries in the EU had a fall in consumer prices in the past 12 months and the highest annual inflation rate among these countries belongs to Sweden with a 0.7 per cent rise in consumer prices.

Low consumer price inflation, and below-trend economic growth, has encouraged central banks to keep their interest rates extremely low.

The European Central Bank’s official interest rate is only 0.05 per cent and the United States Federal Reserve Board continues to maintain a 0 to 0.25 per cent target range for the federal fund rate.

Low interest rates have encouraged people to borrow, particularly to invest in residential property. These low rates have also enticed investors to allocate more funds to sharemarkets, notably to high dividend yield companies.

As a consequence the NZX 50 Gross Index has appreciated 23.7 per cent since the end of 2013. The Australian, EU and US markets have risen 14.6 per cent, 27.2 per cent and 17.5 per cent respectively over the same period.

However, in New Zealand dollar terms, the sharemarket returns for Australia, EU and the US are very different.

The ASX 200 Accumulation Index has appreciated 9.4 per cent in NZ dollars since the end of 2013, the United States S&P 500 Total Return Index has increased 28.9 per cent and the STOXX Europe 600 Gross Return Index has risen 9.5 per cent.

The good news is that the outlook for our economy remains encouraging.

The latest Reserve Bank monetary policy statement, which was finalised on March 11, predicts GDP growth of 3.2 per cent for the March 2015 year and 3.5 per cent for the March 2016 year.

The central bank is predicting annual GDP growth of between 3 per cent and 4 per cent over the next two years based on these assumptions:

  • Continuing strong construction activity in Auckland and Canterbury.
  • Strength in the housing market, in part related to strong net migration.
  • The elevated terms of trade, in part through low oil prices.
  • Inflation will remain subdued and interest rates are expected to remain low for an extended period.
It is a long, long time since our economic growth rate has been higher than most other developed countries. Based on Reserve Bank projections this trend should continue for another year or two.

Economic growth; NZ one of the best performers

New ZealandAustraliaEUUSA
% of World GDP0.2%2.0%23.4%22.4%
2014 GDP growth3.5%2.5%1.3%2.4%
Unemployment rate5.7%6.4%9.8%5.7%
Consumer confidence124.0111.2105.196.4
Central Bank interest rates3.5%2.25%0.05%0-0.25%

*Gross sharemarket returns since December 31, 2013

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management. 

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