Leading indicators give a mixed picture of NZ’s economy

Economists traditionally watch leading and lagging indicators to analyse where the economy is heading. Leading indicators are used to predict future growth or contraction in the economy. Lagging indicators confirm underlying patterns than are already in play.

An economy moving into recession may be heralded by declining business and consumer confidence (leading indicators) which are generally regarded as a good guide to the future of the economy. However, unemployment (lagging indicator) may still be low as it takes time for this to flow through into economic figures.

A review of New Zealand’s leading indicator activity indicates things are slowing down, but the picture is still mixed with some indicators performing relatively well compared to historic averages.

Consumer and business confidence

The results of consumer and business confidence surveys are keenly watched — though widely debated — as leading indicators of the future performance of the economy.

In New Zealand, both business and consumer confidence are currently declining. Consumer confidence fell 0.3 points in June, leaving confidence well below historic averages.

The latest NZIER Quarterly Survey of Business Opinion (QSBO) had business confidence at its lowest level in ten years, with a net 31 percent of businesses expecting a deterioration in general economic conditions over the coming months.

Stock market

Share markets are a very visible early reflection of the state of the economy. Because stock markets are partly based on what companies are expected to earn it can be an indication of the future direction of the economy.

The New Zealand share market continues to climb, with the NZX 50 reaching a historic high in July 2019.

Manufacturing activity

Increased manufacturing activity suggests a higher demand for consumer goods (particularly if retail sales are also increasing) and may also indicate there will be a future boost to employment.

The Performance of Manufacturing Index (PMI) in New Zealand picked up slightly in June. Readings above 50 indicate the manufacturing sector is growing; below 50 it is contracting. However, at 51.3 the index is below its long term average.

Inventory levels

High inventory levels can indicate demand for inventory is likely to increase (and businesses are preparing by bulking up) or current demand is unexpectedly low (and businesses have over-ordered).

Stock levels are rising in New Zealand based on the latest PMI. According to figures from Stats NZ unadjusted volume of total manufacturing finished goods stocks rose 1.0 percent to March 2019, compared with the March 2018 quarter.

Retail sales

Retail sales measure the sales and stock of businesses that provide household and personal goods and services. They are important as they directly affect GDP. Slow retail sales suggest companies will hire fewer employees which means in turn they can sell and manufacture less product.

Retail sales have shown a modest 3.30 percent growth in the first quarter of 2019 over the same quarter in the previous year — in line with their 10-year average. By way of comparison, retail sales reached a peak of 9.3 percent in the first quarter of 2014 and an all-time low of negative 8 percent in the first quarter of 2009.

Building consents

An increase in the number of building consents issued indicates that construction activity will increase.

In New Zealand building consents nationally fell 3.9 percent in June 2019, following a 14 percent rise in May. This was the third decline in building consents in the last four months. Auckland showed the biggest growth according to the latest figures from Stats NZ Auckland with a 13% year on year growth.

House prices

Declining house prices can indicate that house prices exceed demand or that existing house prices are too unaffordable. House prices have a big effect on the economy as they impact on homeowners’ wealth and consumption habits.

House prices in New Zealand are split between falling (Auckland) and rising (the rest of the country). Auckland’s house prices are down 5% from their peak despite a widely accepted chronic supply shortage.

Overall, the leading indicators in New Zealand show tepid growth or even decline which is consistent with what we are seeing at GDPLive. Normally a lagging indicator, GDPLive predicts GDP in realtime. Our forecasts currently indicate the economy is flat-lining rather than in freefall. However, it is worth noting that indicators are not foolproof — for instance, they didn’t help in forecasting the US economic recession in 2001. While a few leading indicators at that time predicted that growth would slow, none predicted the sharp economic slowdown that unfolded.

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