Economic rebound tough to sustain

Kia ora,

Welcome to Wednesday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news two of the four world's largest economies are back in recession, or are nearly.

But first up today, there was another dairy auction overnight and prices in US dollars were virtually unchanged (-0.2%). But in New Zealand dollars they dipped -1.7% as the NZ dollar has appreciated by +1.0% in the past two weeks. This is the fourth consecutive event where prices have stayed virtually unchanged, so in effect it embeds in the big rise we got at the beginning of March. Prices are now up +25% from the start of 2021, and up +42% from this time last year. It seems unlikely today's event will undermine any farmgate milk payout price forecast. Volumes sold were +26% higher than at the equivalent event a year ago. This is the season low for product offerings and they will rise from here. And today's auction offered the most at this low season point than at any time in the past eight years.

US housing starts fell quite sharply in April and more than expected, continuing an unusual volatile start to 2021. But building permit levels remained high so the building start miss is unlikely to be a trend. More likely, timber shortages and other supply-chain issues are behind this miss.

The latest weekly US retail sales indicators suggest firm activity. But that is only a full recovery rather than a material gain as levels are now only +3.5% above 2019 equivalent levels.

In China, the massive infrastructure push over the past ten years, one that was financed by more debt, finds that more than US$2 tln of that will fall due over the next 30 months. That wall of maturities is starting to unnerve the debt holders and those who are foreign are quietly trying to offload it. It isn't going to be pretty for global bond markets generally given how much is involved. China already has a big issue with its state-owned Huarong 'bad bank', one set up to manage a debt disaster from an earlier era.

Japan’s economy stalled in the March quarter, shrinking more than analysts expected. GDP shrank an annualised -5.1% from the prior quarter in the three months through March, ending a two-quarter streak of double-digit growth. Economists had forecast an overall contraction of -4.5%. Growing pandemic restrictions are hitting their economic life hard, raising the risk of a double-dip recession if the country cannot bring these lock downs to a swift end.

The EU also reported March quarter GDP data, and that also retreated, down by an annualised -1.8%. This is the second quarter of shrinkage so the EU is back in recession, a double-dip they just don't need but imposed because they can't get on top of the pandemic properly.

There are small shifts in the trade deal negotiations currently underway. China is making more efforts to join the TPP just as the UK is doing the same. Given that the TPP was set up to counter China, it seems unlikely that the Chinese charm offensive on this will move very quickly. The UK is trying to get bilateral deals going with New Zealand and Australia. But British farming groups are recoiling in horror at the prospect - and freer trade on agriculture is the only key attraction the British can offer Australia or New Zealand - so these ones are probably not likely any time soon either.

The UST 10yr yield starts today at 1.64% and little-changed from this time yesterday. 

The price of gold starts today virtually unchanged from this time yesterday at US$1868/oz.

Oil prices start today a little softer at just under US$65.50/bbl in the US, while the international Brent price is just under US$68.50/bbl. Both are slips of about -US50c/bbl.

The Kiwi dollar opens today at 72.5 USc and firmer overnight. Against the Australian dollar we are firm at 93 AUc. Against the euro we are little-changed at 59.3 euro cents. That means our TWI-5 starts today at 73.8.

The bitcoin price is now at US$43,190 and little-changed (+0.8%) from this time yesterday. Volatility in the past 24 hours has been very high at +/- 4.2%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.