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Newsroom.co.nz

Business

Andrew Patterson

Tone of election to be revealed in big data week

Economy US Federal Reserve Barack Obama Eroad GDP China Chrysler Fonterra Stellantis UAW

Consumer confidence and credit card spending are expected to slump this week. Photo: Unsplash

A slowing economy expected out of GDP, trade and consumer confidence releases

Brace for a deluge of data this week that will reveal the true state of the economy for investors and voters ahead of next month’s general election.

Included in the lineup is the Q2 current account on Wednesday followed by Westpac’s latest Consumer Confidence Survey, credit card spending in August and the all-important GDP for the second quarter on Thursday.

Then on Friday, there’s the latest balance of trade for last month which is likely to show a continued deterioration in the country’s overall trade position due to slumping exports to China.

Following the release of last week’s Pre-Election Economic and Fiscal Update which revealed a government balance sheet under growing pressure with little fiscal headroom for spending increases, this week’s data is expected to signal a slowing economy and declining consumer confidence.

Elevated interest rates, rising food prices and now higher petrol prices continue to leave many household budgets increasingly cash-strapped.

Kiwibank senior economist Mary Jo Vergara is expecting Q2 GDP to come in at 0.6 percent, though she cautions that there are some one-off factors that may distort the actual figure.

“It’s largely a bounce-back story from the supply-constrained, cyclone-caused contraction over the previous two quarters. However, prior weakness evident in industries including retail and construction due to slowing demand are expected to persist”.

Overall, Vergara is expecting a mixed picture for the June quarter.

“We still expect a significant slowdown – this time driven by subdued domestic demand. A forecast recession – albeit shallow and short-lived – should therefore allow the RBNZ to sit on its hands for the remainder of this year”.

Meanwhile, New Zealand’s manufacturing sector continued to lose momentum in August, according to the latest BNZ – Business NZ Performance of Manufacturing Index (PMI) released on Friday.

The seasonally adjusted PMI for August was 46.1 (a PMI reading below 50.0 indicates a contraction) down from 46.6 in July, and the lowest level of activity for a non-Covid-affected month since June 2009. The August result also remains well below the long-term average activity rate of 52.9.

BusinessNZ’s Director, Advocacy Catherine Beard said the August result told the tale of another tough month for the sector.

“While the key sub-index components of New Orders (46.6) and Production (43.9) improved slightly from July, the trend since March has seen them all but entrenched in contraction. Any movement towards overall expansion in the sector needs to see a sustained lift above 50.0 for both of these key PMI components.

Manufacturers continued to note general market uncertainty (both domestic and offshore), rising costs, and weather affecting demand as the key negative influences on activity for August.

BNZ Senior Economist, Craig Ebert said that "while the PMI headline result has been far worse during past recessions, the August result also loses points for its latest composition as New Orders and Production were the biggest drags on the result".

The accompanying Performances of Services Index (PSI) result for August will be released later today.

Sharemarket investors remain on the sidelines ahead of Q2 GDP

The NZ sharemarket closed out the week barely changed as investors await the release of key economic data that will set the tone for the week.

Local investors were buoyed somewhat on Friday following news that China’s retail sales and industrial production grew faster than expected in August despite growing nervousness in recent months about the health of the world’s second-largest economy.

Consumer prices in China turned negative in July before edging back into positive territory in August, while exports and imports declined less sharply than in July.

But in a telling sign of sliding investor confidence, shares in several leading stocks all finished the week at their lows for the year including Port of Tauranga (3.5-year low), Mainfreight (2.5-year low), Spark (1-year low), F&P Healthcare (10-month low) and Auckland International Airport (9-month low).

The NZX50 hit a 10-month low of 11,265 during the week, while September is living up to its reputation for being the worst month of the year for investors - with the index falling on 9 of the 11 trading days so far this month.

Dual-listed electronic truck fleet monitoring provider ERoad was the big talking point of the week after the company surprised the market with the announcement of a deeply discounted rights offer.

Having earlier snubbed a takeover attempt by Canadian investor Constellation Software in July after it had acquired an almost 20 percent stake in the company, ERoad announced the new shares would be priced at 70 cents each, a 50 percent discount to the previous day’s closing price of $1.39.

The company said the net proceeds from the equity raise would be used to repay debt, providing funding headroom to allow ERoad to further underpin its growth strategy, especially in the key North American market.

In a statement, Constellation/Volaris said it would not be participating in the offer while also implying the intention of the raise was to dilute its 18.8 percent stake.

Having earlier raised capital to buy NZ software firm Coretex for $177m as part of its strategy to further expand in the key US market, ERoad’s share price had sunk from an all-time high of $6.77 in July 2021 to trade at 64 cps by the time it announced its results for the year to March 31 this year.

Farmers will be on edge this week awaiting the results of the latest Global Dairy Trade auction and the release of Fonterra’s full year result. After prices lifted in the last auction following a dramatic slump in previous auctions that saw Fonterra cut its payout twice in a matter of weeks, farmers will be hoping the previous result wasn’t a blip.

Synlait Milk, which looks set to be one of the local market’s worst-performing shares this year with a fall of 65 percent, is scheduled to release its full-year result on 25 September.

US Fed likely to stay on hold this week despite uptick in August data

Having raised its benchmark interest rate over 5 percentage points since March 2022, Fed policymakers are poised to hold the federal funds rate steady at a 22-year high of between 5.25 percent to 5.5 percent at their meeting this Wednesday (US time) while still keeping an additional increase on the table for now.

However, fresh signs of stubbornly high inflation in corners of the world’s largest economy are raising fears that the retreat in consumer price increases many economists expected later this year will be bumpier than anticipated.

New data showed annual inflation in the US, as measured by the consumer price index, accelerated to 3.7 per cent in August, following a continued jump in petrol prices as the oil price continues to push towards US$100 a barrel. While “core” inflation, which strips out volatile items such as food and energy, in August registered its lowest annualised level in almost two years, it too recorded a larger-than-expected monthly gain of 0.3 per cent.

The August numbers leave economists and Federal Reserve officials facing a lingering question: were the months of slowing price increases earlier this year, which prompted hopes that the central bank was winning its battle to tame inflation, just a blip?

It is the choppiness of monthly data that economists say will keep the Fed on edge as it charts out the final stages of its historic monetary tightening campaign — while also weighing the risks of squeezing the economy too much. In practice that is likely to mean Fed officials signal one more quarter-point interest rate increase before the end of the year when the central bank publishes its latest “dot plot” of individual projections following its rate decision this week.

But in a sign of growing activism by disgruntled employees facing surging cost of living price increases, unprecedented strike action by one of America’s most powerful unions is opening up a potentially troubling new front for the Fed: rapidly rising labour costs.

The United Autoworkers Union (UAW) has for the first time in its history launched simultaneous strike action against all three of Detroit’s big automakers: Ford, GM and Stellantis (formerly Chrysler).

The UAW is calling for an average 40 percent increase in payrates for its members. Stellantis had offered a 20 percent increase in the top wage scale, including an immediate 10 percent pay increase, an offer the union has rejected.

CEOs of all three companies say that, if implemented, the union’s demands would result in the businesses facing substantial bottom-line losses.

Former President Barack Obama weighed in on the strike over the weekend, calling on auto companies to do right by their workers.

“Fourteen years ago, when the big three automakers were struggling to stay afloat, my administration and the American people stepped in to support them,” Obama said in a statement. “So did the auto workers in the UAW who sacrificed pay and benefits to help get the companies back on their feet.

“Now that our carmakers are enjoying robust profits, it’s time to do right by those same workers so the industry can emerge more united and competitive than ever,” Obama said.

As part of the larger Troubled Asset Relief Program, more than US$62 billion in direct bailout bankruptcy assistance was given to General Motors and Chrysler.

China’s economy lifts in August despite worsening property crisis

In a rare boost after policymakers stepped up stimulus measures to support the world’s second-biggest economy, China’s retail sales and industrial production grew faster than expected in August according to new data.

However, the release also highlighted mounting challenges in the property sector, where new home prices in big cities continued to edge lower after a period of heightened investor concern over spillover effects from developer defaults.

Industrial production rose 4.5 percent year-on-year in August, while retail sales, a gauge of spending that had remained consistently weak, added 4.6 percent. Both measures exceeded analyst forecasts, as well as growth rates in July of 3.7 and 2.5 percent, respectively.

China’s economy has struggled to rebound after three years of strict anti-pandemic measures were lifted at the start of the year, as a property sector slowdown, collapsing trade and low consumer demand hit confidence.

Other aspects of Friday’s data release underscored the challenge for the country to reach its 5 percent annual growth target, the lowest target rate in decades.

New home prices in 70 major cities continued to ease, while property investment, a mainstay of China’s economy, has now fallen by almost 10 percent so far this year.

In response, policymakers have unveiled a series of stimulus measures in recent weeks to boost growth and prop up the ailing property market and currency. The People’s Bank of China last week cut the reserve requirement ratio for banks by 0.25 percentage points to 7.4 percent, in effect adding liquidity into the financial system.

But in a sign of the continued financial strains facing the property sector, Sino-Ocean has become the latest major developer to suspend repayments on all of its offshore borrowings in response to what it described as “mounting liquidity pressures”, including a rapid decline in contracted sales.

Coming up this week….

Monday