Economic Review For The Month Ended August 2018

Global economic conditions remain firm despite growth becoming uneven for major economies. Growth is diverging between major advanced economies due to internal fundamentals and in emerging markets and developing economies
01 Sep 2018 10:00
Economic Review For The Month Ended August 2018

Global economic conditions remain firm despite growth becoming uneven for major economies.

Growth is diverging between major advanced economies due to internal fundamentals and in emerging markets and developing economies due to the upswing in oil prices over recent months, higher yields in the United States (US), dollar appreciation, trade and geopolitical tensions.

In July, world market prices for crude oil, gold, sugar and the FAO1 food price index fell from a month ago.

The lower oil price was due to the increase in US crude inventories and record production from Saudi Arabia while the strengthening of the US dollar kept gold prices down.

The oversupply of sugar led to a decline in sugar prices over the month and the lower FAO food price index was driven by the lower sugar prices and stabilisation in oil prices.

Domestically, performances of major sectors were generally positive. In the year to July, gold and electricity production increased whilst mahogany, pine, woodchip and sawn timber production more than doubled. Additionally, around 36.2 per cent of the Macroeconomic Committee’s sugar output forecast has been achieved by 27 August.2 Visitor arrivals increased by 3.5 percent in the year to July led by higher visitors from New Zealand (NZ), US and Japan.

Aggregate demand continues to expand supported by firm consumption activity. In the first seven months of this year, significant gains were noted for partial indicators of consumption such as new consumption lending (+21.4 per cent), new vehicle registrations (+14.3 per cent, excluding Government), second hand vehicle registrations (+9.7 per cent), and net VAT collections (+11.1 per cent). Similarly, significant spending by Government post Tropical Cyclone Josie and Keni should have stimulated consumption activity in the second and third quarters of the year.

Investment spending declined as noted by partial indicators. In the year to July, commercial banks’ new investment lending fell by 2.6 per cent led by the decline in credit to the building and  construction (-30.0 per cent) sector which offset the growth in lending to the real estate (+19.0 per cent) sector. Similarly, domestic cement sales (-23.7 per cent) declined in the same period.

The dip in investment expenditure is expected to be temporary and a turnaround is expected towards the latter part of the year as reflected by forward looking indicators such as the value of building permits issued (+26.9 per cent) up to the first quarter and the higher budgeted capital expenditure by Government for the fiscal year 2018-19.

Consistent with the favourable growth outlook, results from the Reserve Bank of Fiji (RBF) June 2018 Business Expectations Survey show that a net 80.0 per cent of respondents expect overall economic conditions to be positive in the next six to 12 months, the highest rating since December 2015.

Similarly, the RBF June Retail Sales Survey notes an 8.3 per cent expected increase in retail sales this year compared to the 5.1 per cent growth envisaged in the December 2017 Survey.

Recruitment intentions remain positive as the number of jobs advertised rose by an annual 6.3 per cent in the year to July.

Higher recruitment intentions were noted in the manufacturing, community, social and personal services, electricity and water, transport and storage, and mining and quarrying sectors.

In the year to May, the merchandise trade deficit (excluding aircraft) expanded by 16.6 per cent to $1,395.4 million, compared to a 24.4 per cent widening in the same period in 2017. Total exports (excluding aircraft) increased by 3.9 per cent compared to a decline of 1.5 per cent in 2017 which was mainly contributed by the increase in re-exports and domestic exports of woodchips, gold, chemicals, animal and  vegetables oils and  fats and miscellaneous manufactured articles which more than-offset the decline in exports of sugar, mineral water, cement, and machinery and  transport equipment.

Over the same period, total imports (excluding aircraft) rose by 11.7 per cent led by higher imports of machinery and  transport equipment, chemicals, mineral fuels, crude materials, manufactured goods, beverages and  tobacco, animal and  vegetable oils and  fats and other commodities which more-than-offset the decline in imports of miscellaneous manufactured articles and food and  live animals.

Private sector credit expanded by a lower 5.6 per cent on an annual basis in July, this was led by a slowdown in commercial banks’ lending to the private sector business entities. Over the month, commercial banks’ weighted outstanding lending rate and weighted average new lending rate both declined in July to 5.68 per cent and 5.80 per cent while the commercial banks’ new time deposits rate rose to 3.51 per cent.

The banking system liquidity as measured by Banks Demand Deposits remain adequate and rose over the month of July by 5.7 per cent to $496.9 million, led by an increase in foreign reserves (+$22.8m). As at 28 August, banking system liquidity remained adequate at $504.2 million.

Over the month of July, the Fiji dollar rose against the Japanese Yen, the US and the NZ dollars, but depreciated against the Euro and the Australian (AU) dollar. Compared to a year ago, the Fiji dollar has strengthened against the NZ and AU dollars, but weakened against the US dollar, the Euro and the Japanese Yen.

Consequently, the Nominal Effective Exchange Rate (NEER)3 rose over the year by 0.7 per cent. The Real Effective Exchange Rate (REER)4 rose by 3.6 per cent over the year largely due to higher domestic inflation relative to trading partners.

Annual inflation rose to 4.7 per cent in July from 4.6 per cent in June and was higher than the 2.0 per cent recorded in July last year.

The annual increase was led by higher prices of kava, fuel, alcohol, tobacco and vegetables.

Foreign reserves increased over the month of July to $2,161.9 million, sufficient to cover 5.0 months of retained imports of goods and non-factor services (MORI). As at 31 August, foreign reserves were $2,180.5 million, sufficient to cover 5.0 MORI and are forecast to remain at comfortable levels by year end.

In light of the latest global and domestic economic developments and given that there are no immediate risks to the monetary policy objectives outlook, the Reserve Bank Board agreed to maintain the Overnight Policy Rate at 0.5 per cent in August.


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