Growth needs productivity gains, IMF says

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

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

And today we lead with news the IMF is starting to worry that the US expansion could become unsustainable unless it is matched by national productivity gains.

But first we should note that it is a public holiday in Australia today.

However all eyes this week will be on Thursday (NZT) when the US Fed will opine on where they think inflation is going and their expected policy rate track. This will be in their dot-plot. Earlier in the same day, the US releases its May CPI data, a crucial piece of their puzzle. US PPI data comes on Friday.

But China also releases its CPI data this week, on Wednesday, followed on Thursday by their important new yuan loans data.

Then Japan will weigh in on Friday with its interest rate policy update.

But over the weekend in the US, markets were anticipating a 'good' rise in non-farm payroll jobs of +185,000. But in fact this headline number was up +272,000. Even more impressive, hourly pay was up +5.3% from a year ago, weekly wages up +5.6% on the same basis.

But as regular listeners know, we also look at the 'actual' data. There are now +917,000 more people on employer payrolls in May than in April. Overall there are now 161.3 mln people employed, although that is little-changed from April. So all the gain is a shift from the unincorporated self-employed on to employer payrolls. That may be why the pay gains are well above inflation.

Whatever way you slice it, it is a pretty good result, and markets are assuming the Fed will look at this and see pressures that are unlikely to quell inflation. The bond and FX markets reacted, but the equity market went quiet at unchanged levels (although they may argue this gain was already priced in).

The March rise in American consumer debt levels was a pretty modest +US$6.3 bln from the prior month and April was expected to catch-up with a +US$11 bln but still-modest rise. But in the event, April consumer debt levels only rose +US$6.4 bln again, up just +1.5% from a year ago. There is no evidence here that Americans are stretching themselves further with additional debt obligations.

Meanwhile American household net worth rose +3.3% or +US$5.1 tln to more than US$160 tln at the end of March 2024 from December 2023. The value of household equity holdings increased +US$3.8 tln, while the value of real estate held by households rose by +US$900 bln. In complete contrast, American household liabilities were up only +US$100 bln to US$20.6 tln. There is a huge amount of overall resilience here. (We are not suggesting this is evenly spread, because clearly it isn't.)

Canada also released labour market data over the weekend. Their payrolls rose +27,000 and more than the +22,000 expected. But it was all part-time jobs that rose and by +62,000, and full-time jobs shrank -36,000. Their jobless rate rose to 6.2%. They are probably not happy with this outcome but at least their central bank has cut its official interest rate and that may bring some relief to employment in the rest of 2024.

Perhaps proving important context to the zooming container freight rates, exports from China soared +7.6% year-on-year in May and beating market expectations of a +6% rise. It was also up from a +1.5% rise in the previous month. It's the steepest rise in outbound shipments since January, fueled by a lower base from last year and sustained overseas demand. The big export destinations were ASEAN countries (+9.7%) and South America, especially Brazil (+26%). Elsewhere little-change or decreases. China's imports were weak however, virtually unchanged from a weak May a year ago.

China's foreign exchange reserves rose to US$3.23 tln in May from US$3.2 tln in April and above market forecasts. Their gold reserves were unchanged at 72.8 mln troy ounces, an unusual pause because they had risen for 18 consecutive months. But the rise in the gold price saw the value of their holdings rose to almost US$171 bln.

In India, their central bank held its policy rate unchanged at 6.5% and said inflation's pressure at 4.85% is not changing much. Their policy target is a very generous 2%-6%. But food prices are rising and were up +8.7% in April from a year ago. Given their heat and water stress levels, food price pressure is an economic consequence they will struggle with.

In the EU, their GDP rose its most in Q1-2024 since Q3-2022, but to be fair the annual growth from a year ago was only +0.5% for the EU, slightly less for the Euro Area (+0.4%).

The IMF is pointing out that growth without sufficient productivity improvement is a problem for the world's financial stability, especially when the largest economies drag the chain on productivity. They seem to be pointing to the US on this, and that their expansions won't be sustainable without the commensurate improvements in productivity.

World food prices were up only marginally in May but are still running below the levels of each of the past three years. Global food security seems ok and at prices that are affordable (even if there are pockets of real stress and distress). Dairy prices are one area prices are rising and they have been for eight straight months. Meat prices are low and relatively stable.

The UST 10yr yield is now at 4.43% and down -1 bp from Saturday after the US non-farm payrolls surprise. 

The price of gold will start today down -US$10 from Saturday at US$2293/oz and down -US$83 from Friday.

Oil prices have been retreating slightly over the weekend and are now at just on US$75/bbl in the US while the international Brent price is just under US$79.50/bbl. A week ago these prices were +$2 higher back then.

The Kiwi dollar starts today at just on 61 USc and little changed from Saturday. Against the Aussie we are unchanged at 92.8 AUc. Against the euro we are marginally softer at 56.5 euro cents. That all means our TWI-5 starts today still at 70.6, and also little-changed from this time last week.

The bitcoin price starts today at US$69,632 and up +0.9% from this time Saturday. Volatility over the past 24 hours has also been very low at just on +/- 0.4%.

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

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

Kia ora. I'm David Chaston. And we will do this again  tomorrow.