ANZ Data Wrap

ANZ Data Wrap is a weekly report containing reviews and previews of the latest economic indicators and financial market developments.

2024 editions

24 May 2024

As expected, the RBNZ left the Official Cash Rate (OCR) unchanged at 5.50% this week. However, in a shock to markets, the forecast peak OCR was raised from 5.60% to 5.65%, and the Summary Record of Meeting noted that a hike was discussed (though in the end a hold was a consensus decision). The RBNZ’s OCR projection shows that cuts are now pencilled in for August next year, 3-4 months later than in the February MPS. 

Our OCR forecast remains unchanged. We expect the RBNZ to remain on hold until May next year. However, despite the hawkish MPS this week, we still see the risks tilted towards cuts coming earlier rather than later, given the increasingly broad-based weakness in the economy. 

On Thursday next week, the Government will unveil its first Budget and Fiscal Strategy Report, and the Treasury will open up the Government’s books. The macroeconomic and fiscal backdrop for Budget 2024 is very challenging: the economy is anaemic and the labour market is loosening, but pro-cyclical fiscal policy in recent years means fiscal consolidation is now desperately overdue.

17 May 2024

April’s Selected Price Indexes were overall stronger than our expectations. Given the volatility in these data, and the risk of reversal across the coming months, we initially left our forecast unchanged. However, a closer look at the details prompted us to revise up our Q2 CPI forecast 0.1%pts to 0.6% q/q (3.5% y/y) in our Quarterly Economic Outlook, owing to expectations of a stronger non-tradables pulse. That’s not enough to materially alter our outlook, but it does speak to the persistence of non-tradables that is challenging the RBNZ.

Our Quarterly Economic Outlook discusses the question of timing vs traction that is front of mind for policymakers currently. While there has been clear evidence of a deterioration in economic activity over the past year and the labour market is now firmly in disinflationary territory, that is yet to flow through to domestic inflation to the degree anticipated, suggesting that monetary policy lags this cycle are lengthier and/or tightening hasn’t quite gotten as much inflation fighting traction as previously assumed. 

Looking ahead to next week’s May Monetary Policy Statement, we expect the RBNZ to leave the OCR at 5.5%, reiterating that they remain in watch-worry-wait mode. The Q1 forecast miss on non-tradable inflation was the fourth in a row, and at 5.8% y/y, it’s a full 1.4%pts higher than the RBNZ thought it would be by now when they declared they were done hiking a year ago. But recent activity and labour market data have tilted to the softer side of expectations, and risks are growing that the economy could have a harder landing than anticipated. We expect that will keep the RBNZ’s tone balanced.

10 May 2024

This week the New Zealand Treasury published interim Financial Statements of the Government for the 9 months ended 31 March. The details were a little mixed, but we remain comfortable with our previous back-of-the-envelope estimate that the bond programme could be lifted by $10-$12bn over the next four years come Budget on 30 May.

Turning to global events this week, the Reserve Bank of Australia delivered a hawkish pivot, but less so than we anticipated. That’s despite meaningful upwards revisions to the RBA’s inflation forecasts. We continue to favour November for the start of the easing cycle in Australia, although risks remain skewed toward that being delayed into 2025.

We’re often asked about how the New Zealand economy is tracking against Australia – not so much from a rivalry perspective, but more from the perspective of what’s different, and why. International observers often view both countries through the same lens, but right now, there are more differences than there are similarities!

3 May 2024

The Q1 labour market data were slightly weaker than our and the RBNZ’s expectation, but not enough to shift the dial for the RBNZ. The unemployment rate lifted from 4.0% to 4.3%, while other measures of spare capacity reinforced our expectation that a moderation in wage growth and domestic inflation lies ahead.

With the Q1 labour market release not far from our expectation, our updated labour market outlook is largely unchanged. We continue to expect further deterioration, with labour demand weakening while labour supply growth continues. The unemployment rate is expected to breach 5% by year end, and rise to a peak of 5.5% across most of 2025.

In other news this week, the RBNZ’s Financial Stability Report (FSR) came and went with little fanfare. There was a possibility the RBNZ might have announced decisions relating to the easing of LVR restrictions and implementation of DTI limits, though this did not eventuate.

26 April 2024

Farmers are currently struggling as incomes drop due to weak global markets while costs remain very high. Farmers in some regions have also had drought to deal with which is an added financial and mental burden. 

Global market conditions for our primary sector exports vary considerably between products and countries. In general, demand from western nations remains relatively robust, but demand from developing nations tends to be weak. 

Turning to next week, the Q1 labour market statistics are released on Wednesday. Broadly, we expect to see a further increase in spare capacity and a moderation in wage growth that will reinforce expectations that further disinflation lies ahead.

The RBNZ’s Financial Stability Report is also out next Wednesday and may provide confirmation of proposed changes to macroprudential policy settings. Our base case is that when changes are made, they will be as previously signalled. 

19 April 2024

Annual inflation fell from 4.7% to 4.0% in Q1, in line with our forecast, but the details told a less convincing story of disinflation progress. Non-tradables inflation eased only marginally from 5.9% y/y to 5.8% y/y, above our forecast of 5.5% y/y and well above the RBNZ’s February forecast of 5.3% y/y. Domestic inflation pressures remain acute, particularly concentrated in services sectors.

All up, on their own the Q1 CPI data probably aren’t strong enough to demand a radical re-think by the RBNZ, but if they harbour fears that monetary policy settings aren’t tight enough, this data won’t give them any comfort. The domestic outlook does suggest disinflation lies ahead, but the Q1 data could test the RBNZ’s patience. We remain of the view that OCR cuts are not likely until 2025.

With the Q1 data in the bag, we’ve updated our inflation forecasts. Our outlook remains broadly similar, and we continue to expect that inflation will return to the RBNZ’s 1-3% target band in Q3 this year. Though the outlook is not without its risks.

12 April 2024

The RBNZ left the OCR unchanged at 5.5% this week and maintained a similar tone to the February MPS, with the Committee agreeing that “interest rates need to remain at a restrictive level for a sustained period”.

The NZIER’s Quarterly Survey of Business Opinion suggests the post-election honeymoon is over and that the reality of a weak economy is back in the driver’s seat. Importantly, the survey suggests there is further disinflation in the pipeline. In particular, a further decline in labour as a limiting factor suggests pipeline labour costs are very unlikely to drive a reacceleration in domestic (non-tradable) inflation. But we still wouldn’t say these data guarantee the sustained period of disinflation that the RBNZ requires. 

The Q1 CPI is out next Wednesday. We think annual CPI inflation slowed to 4.0% (above the RBNZ’s forecast of 3.8% y/y). However, further progress across the suite of core measures alongside the broader data flow suggesting further disinflation is in the pipeline means the Q1 CPI may not shift the dial meaningfully for the RBNZ. We continue to expect cuts won’t be on the table until 2025.

5 April 2024

In a quiet week for local data offshore developments took centre stage, with PMIs pointing to a rebound in the manufacturing sectors in China and hints of a re-emergence of commodity price inflation, starting to raise questions as to the sustainability of global disinflation.

Next Wednesday brings the RBNZ’s April Monetary Policy Review (MPR). We (along with everyone else) expect the OCR to be unchanged at 5.50%, with a reiteration of the key messages from the February MPS. Data since then has been mixed, but on net there has been nothing to move the dial. 

28 March 2024

This week we released our Consumer Confidence and Business Outlook surveys, which showed a deteriorating economic landscape. Weakness in the economy is of course the RBNZ’s plan. But the fact that the adjustment is necessary doesn’t make it any easier for businesses and consumers. 

The Government’s 2024 Budget Policy Statement also landed this week. While the policy mix has certainly changed (ie tax and spending cuts), the signal from the BPS suggests that discretionary fiscal policy settings will be about par or perhaps mildly less expansionary than implied at December’s Half-Year Update. But future operating allowances are yet to be confirmed. The Government also introduced its new fiscal strategy, which overall signalled a mild tightening from the previous Government’s strategy. For the full details, we’ll have to wait until the May 30 Budget. 

22 March 2024

The Q4 GDP release was a touch weaker than expected, but while there were a few overs and unders compared to our forecast, they certainly weren’t of a game-changing magnitude. In fact, a lot of the miss looks more like a timing story than a meaningful change in underlying economic conditions. Our updated outlook sees economic growth remain sub-par for a while yet. In calendar year terms, annual average growth came in at just 0.6% in 2023. Our forecast has this anaemic pace persisting over 2024 (+0.5%), before gradually accelerating in 2025 (1.5%) towards trend (2.5%) in 2026.

Meanwhile, the annual current account deficit narrowed 0.5%pts to 6.9% of GDP in Q4, narrower than our forecast of 7.1% of GDP, helped by historic revisions. While New Zealand’s external position is improving, it's still too far out of balance to call sustainable. Progress is expected to continue (we see narrowing to around 4.5% by mid-2026), but in the meantime, the economy will remain vulnerable to a wide range of possible shocks that could keep us in unsustainable territory for longer. Fiscal consolidation and restrictive monetary conditions still have a role to play in getting the economy back on to a more sustainable path.

Next week’s highlight will be the Government’s Budget Policy Statement. This will provide a signal on the Government’s proposed operating and capital allowances (for Budget 24), and the new Government’s fiscal strategy. The latter will give us a feel for the risks around fiscal policy going forward. We’re not expecting an update to bond issuance guidance nor to the fiscal outlook. We’re also not expecting the Government to back away from promised tax cuts, so in the face of a deteriorating economic outlook the Government may need to cut spending by more or let the forecast return to surplus get pushed out another year. But for a full update on all this, we’ll have to wait for May’s Budget.

15 March 2024

February’s Selected Price Indexes (SPI), despite some overs and unders, were overall in line with our expectation, with the balance of risks around our Q1 CPI forecast of 0.6% q/q (4.0% y/y) unchanged. Two of the big surprises were much stronger domestic airfares, and overseas accommodation costs, the latter likely reflecting Taylor Swift’s concerts across the ditch. The SPI are volatile month-to-month, and extracting signal from noise in these data has proven challenging. That said, it does strengthen our expectation that Q1 CPI inflation will surprise the RBNZ to the upside.

February’s REINZ housing data was directionless, with house prices eking out a 0.2% m/m gain after January’s 0.9% lift. We don’t see any implications for our housing market outlook from these data, and nor, we expect, will the RBNZ. We continue to expect the housing market will remain sluggish across the first half of the year but there are certainly a lot of moving parts.

Also out this week, net migration inflows dropped to 2,870 in January, as a surge in departures outweighed still very strong arrivals. However, December inflows were revised up over 3k. Short-term visitor arrivals (largely tourists) remain steady at about 80% of their pre-COVID level, with a muted recovery in visitors from China weighing. All up, while net migration and tourism are supporting economic activity, that is being offset by weak domestic demand, which next week’s GDP data expected is expected to confirm, particularly in per capita terms. We’ve pencilled in a 0.1% q/q lift in headline GDP, with the services sector expected to just keep growth positive.

8 March 2024

The Q4 goods terms of trade dropped like a stone in Q4 (-7.8% q/q), with ex-fuel import prices up 1.1%, suggesting there may be a little more global inflationary pressure in the pipeline than the RBNZ was anticipating. Meanwhile, trade volumes paint a very weak picture for domestic demand (imports were down 7% q/q), which alongside a 2.6% lift in exports suggests Q4 expenditure GDP will see a strong positive contribution from net exports – albeit one that’s likely to be at least partially offset by changes in inventories.

Other Q4 GDP partials have been soft. Building work put in place fell 0.1% q/q, and manufacturing volumes fell 0.6% q/q. Excluding food and petrol, manufacturing is very weak. Our GDP Preview will be published next week. 

Next week also brings the February Selected Price Indexes. We’ve pencilled in a 0.1% m/m fall in food prices and a 0.4% m/m increase in rents. Fuel prices rose last month, with MBIE’s weekly fuel price monitoring suggesting a rise of around 5% m/m. We’ve pencilled in further modest falls in airfares after January’s sharp declines. Given the volatility in this series, there is a large range of possible outcomes in both directions.

1 March 2024

The RBNZ left the Official Cash Rate (OCR) unchanged at its February meeting. We had anticipated a hike, and failing that, for the RBNZ to up the ante on hikes with a higher forecast OCR peak. But that was not the case. In fact, the RBNZ revised down its forecast OCR peak by 9bp to 5.60%. 

The RBNZ’s comfort that “risks to the outlook for inflation have become more balanced since the November 2023 Statement” clearly increase the threshold for the evidence required to recommence tightening, and accordingly we are no longer expecting hikes. That said, we continue to see OCR risks tilted to the upside and have pushed out the timing of easing to mid-2025, and a more gradual easing cycle is now expected.

23 February 2024

Household inflation expectations data this week were in the ‘concerning’ bucket for the RBNZ. Households now believe that inflation in five years’ time will still be outside the RBNZ’s 1-3% target band at 3.6%, above their well-anchored 2.1% expectations in last quarter’s survey.

We expect the RBNZ to hike the OCR to 5.75% next week, and to publish an OCR track that gives a decent hat-tip to the possibility of a follow-up hike in April (with a peak of perhaps 5.85%).

The OCR isn’t anywhere close to its 2008 peak (8.25%), unlike policy rates in the US, the UK, or the euro area. And that’s even though non-tradable inflation is still more than a percent higher than where it peaked in that business cycle, and household debt relative to income is lower than it peaked in 2008 (and falling). Even with our two extra hikes we forecast the household debt servicing burden will peak around 11% of income, compared to a peak of over 15% in 2008.

16 February 2024

This week brought an update on inflation in the form of Stats NZ’s January selected price indexes. Broadly, the release was weaker than we had anticipated and suggests downside risk to our Q1 CPI forecast of 0.7% q/q (RBNZ: 0.6% q/q). But downside risk stems from the tradables side of the basket. 

The RBNZ’s Q1 Survey of Expectations showed progress. Importantly, 5yr and 10yr ahead expectations both eased back toward 2% after a concerning tick up in Q4. However, survey respondents continue to expect a more gradual return of inflation to target than the RBNZ’s own forecasts.

We’ve updated our labour market forecasts. The relatively resilient labour market picture presented in the Q4 data has caused us to reassess the near-term outlook, with a more gradual rise in the unemployment rate over 2024 expected. Our medium-term outlook remains unchanged: the labour market continues to loosen, largely driven by supply-side expansion, with the unemployment rate now expected to rise to a peak of 5.5% in 2025.

9 February 2024

We are now forecasting 25bp hikes in both February and April, taking the OCR to 6%. Inflation is looking sticky and we think the recent series of small, but meaningful upside surprises will be enough to push the RBNZ into taking further action, given how impatient the Committee sounded in November.

The Q4 labour market data came in stronger than we or the RBNZ were anticipating. The unemployment rate rose 0.1%pt to 4.0%, below our forecast of 4.3% and the RBNZ’s forecast of 4.2%.

The RBNZ warned in November that “If inflation pressures were to be stronger than anticipated, the OCR would likely need to increase further.” We don't think the RBNZ Committee will feel confident that they've done enough to meet their inflation mandate. The buck stops there.

2 February 2024

The January ANZ Business Outlook survey was mixed. Forward-looking activity indicators were little changed (with the exception of a sharp fall in expected residential building activity, but it’s volatile). On the inflation side, inflation expectations eased by 0.3%pts, but cost and price expectations are still holding up, including for retailers.

ANZ-Roy Morgan Consumer Confidence rose 1 point in January to 93.6, with perceptions of current conditions lifting 4 points, but confidence about the future falling 3 points. The wide gap between the current and forward-looking questions in the survey is starting to close. It’s early days, but such a pattern is typical as an economy recovers after a recession.

The Q4 labour market statistics are released next Wednesday, the last major piece of data before the February MPS. We’re anticipating that the labour market remained on a loosening trajectory in Q4, with the unemployment rate rising from 3.9% to 4.3%, a touch above the RBNZ’s November forecast of 4.2%.

26 January 2024

Annual CPI inflation decelerated from 5.6% to 4.7% y/y in Q4, in line with our forecast, but non-tradables inflation came in at 5.9% y/y, above our and the RBNZ’s forecast of 5.7% y/y. If seasonally adjusted headline inflation were to continue at its current rate over the next four quarters, inflation would be back in the RBNZ’s 1-3% band by year end – just, at 2.9%. 

The recessionary economy should take the remaining heat out of domestic inflation. In our updated forecasts we have revised down medium-term non-tradables to reflect the weakness in economic activity seen last year. We expect annual headline inflation to be back within the RBNZ’s 1-3% target band by Q3, putting the RBNZ in a position to cut the OCR from August.

In other news this week, the RBNZ proposed introducing debt-to-income (DTI) limits from the second half of this year. The accompanying slight easing in LVR restrictions may provide modest support to house prices, given the DTI limits are unlikely to be binding for some time.

19 January 2024

We now expect the RBNZ to deliver a steady sequence of 25bp OCR cuts starting in August, taking the OCR to 3.5% over 12 months. Over the next six months, a strong supply recovery, previous weakness in economic activity and a deteriorating labour market should result in rapid disinflation for domestically driven CPI components.

The RBNZ’s February Statement is still a long way away, but on 30 January Chief Economist Paul Conway will deliver a speech that will include “brief comments on domestic data developments” since the hawkish November MPS. The market is divided about what the message might be. Some seem to believe it will be a mea culpa smoothing the path to a much more dovish February MPS. We don't think that is at all likely.

Next Wednesday brings the release of the Q4 CPI data. We’re expecting some good news, with annual headline inflation expected to decelerate sharply from 5.6% to 4.7% y/y (0.6% q/q), below the RBNZ’s November forecast of 5.0% y/y (0.8% q/q). But all of the downside surprise to the RBNZ’s forecast is driven by weaker tradables inflation. We expect the all-important non-tradables inflation measure to print in line with the Reserve Bank’s forecast of 5.7% y/y, down from 6.3% y/y in Q3.

12 January 2024

2024 will bring winners and losers as the big forces buffeting the economy (monetary, fiscal, global and demographic) play out. We see the unemployment rate continuing to rise. While it may so far be a fairly soft landing in GDP terms, the per capita story is bruising.

The RBNZ won’t be able to let the economy off its short leash until inflation is looking more convincingly beaten than it is now. Progress thus far has been slower than they might’ve liked, but inch by inch the RBNZ is winning the war on inflation.

We are expecting more evidence of cooling activity, easing labour shortages and declining inflationary pressures in next week’s QSBO. The big story will likely be whether these indicators are falling quickly enough for the RBNZ to be comfortable endorsing OCR cuts this year.