18 December 2020: Unprecedented recession sets the tone for key themes in 2021 (PDF 432KB)
How has the view changed? Economic activity bounced back sharply in Q3, adding to the recent broader picture of resilience in the economy, supported by fiscal and monetary stimulus. It has been an unprecedented – and very uneven – downturn and subsequent rebound. Some industries are likely to see a pull-back in activity as we end the year. But overall, the recent data flow has been more positive, supporting a stronger fiscal outlook and suggesting further monetary stimulus may not be needed. A number of key themes will set the tone for the year ahead (See What are we watching?), with some longer-term challenges increasingly in the public eye. Worsening housing affordability, in particular, needs urgent attention. Bold action to achieve an orderly stabilisation or decline in house prices is fundamentally necessary.
11 December 2020: Double dip expected from a better starting point (PDF 408KB)
How has the view changed? It now looks like GDP has seen even more volatility than previously expected, though overall the level of activity has been a touch stronger than previously assumed. We expect that GDP bounced 14% q/q in Q3 – a more vigorous recoil than previously forecast. However, the data does appear to be affected by significant volatility, with a retracement in GDP now expected though the end of the year. That means we are now forecasting a technical double-dip recession. It’s best to think about that as a matter of timing rather than substance, though, with the story very little changed overall, especially over the medium term. For policy settings, a slightly better Q3 bounce is really neither here nor there, though relative to earlier in the year, the outlook has undoubtedly improved. That will be reflected in a better set of economic forecasts at the Half-Year Economic and Fiscal Update next week, along with a small downgrade to the bond programme. Eventually, this is expected to see the RBNZ adjust the LSAP, given there will be fewer bonds to buy, potentially with an extension of the purchase timeframe at the February MPS.
4 December 2020: NZD to push higher, another headwind to recovery in 2021 (PDF 408KB)
How has the view changed? We have upgraded our NZD/USD forecast and now expect the Kiwi to drift higher towards 0.74 over 2021. That’s largely a story of USD weakness, fuelled by improving global growth and easy monetary conditions in an environment where central banks will not want to be too hasty with policy normalisation. We see the NZD and AUD both higher, with the AUD getting a bit more oomph given the already high level of the NZD, seeing the NZD/AUD drift lower. In trade-weighted terms, the NZD is expected to move about 1% higher by end 2021 (see Market Forecasts table). The NZD will remain a headwind to inflation and a headache to exporting and import competing firms that the RBNZ may need to work against if the economic recovery does not maintain sufficient momentum. It’s difficult to swim against the global FX tide, but stemming further gains may be necessary, and monetary policy can help with that. The RBNZ estimates that the NZD would be another 7% higher were it not for stimulus seen to date.
27 November 2020: Housing could tip the OCR outlook as policy debate heats up (PDF 428KB)
How has the view changed? Our expectations for the OCR outlook haven’t changed, but the odds are increasing that a negative OCR won’t be required – and that’s a great thing. Much will depend on developments though. We are not ready to take a negative OCR off the table just yet – and we don’t think the RBNZ is either. There are genuine reasons to be optimistic, given the success of our health response, vaccine news, resilience of business and consumer confidence and the effectiveness of policy. But the loss of international visitors through summer will make a meaningful dent at a time when temporary fiscal support has ended, meaning economic momentum may wane. That said, housing could tip the balance to less monetary support being needed if momentum continues (check out our latest ANZ Property Focus), and the policy debate around housing affordability is heating up. For markets, the recent positive vibe now appears to be “in the price” – markets have repriced OCR expectations significantly. However, it may take time to get clarity on developments, which could leave the market in wait-and-see mode for a while. Meanwhile, the NZD has continued to march higher, altogether leading to a tightening in financial conditions that the RBNZ may need to offset down the track.
20 November 2020: Clarity on the outlook will take time (PDF 502KB)
After a period of very effective damage control from the COVID-19 crisis, the time for a more nuanced policy response appears to be upon us. Direct fiscal support from the likes of the wage subsidy have now effectively worn off. Assuming no further community outbreaks of COVID-19 in New Zealand, the Government must now turn to the challenging task of supporting the recovery and evening out the unequal impacts of this crisis across industries and society more generally. The outlook for monetary policy has now become a more delicate balance too. Unfortunately, we probably won’t get much clarity on the path ahead until the New Year. This could leave markets struggling to find direction.
13 November 2020: Negative OCR a close call, but market pricing is overdone (PDF 424KB)
We are now expecting a more gradual path lower for the OCR, and whether a negative OCR will be deployed at all is much more of a line-ball call. At the November MPS the RBNZ provided more stimulus via the Funding for Lending Programme (FLP), but acknowledged more recent positive domestic news. The RBNZ's forecast for the unconstrained OCR - the level of stimulus needed to achieve the RBNZ's objectives, achieved through the Bank's suite of alternative policy tools - is now significantly higher. From a current level of -0.65% to -0.8%, it now reaches a low of -1.5% versus -2.4% previously - an upward revision of almost 100bps. The market took this as a strong signal that a negative OCR would no longer be required (see Markets Overview for more), but this move appears overdone to us. It is entirely possible that a negative OCR will not be needed, but on balance, the outlook is still consistent with a bit more stimulus in time, especially since the FLP is not expected to go the whole hog (see What are we watching?).
6 November 2020: Negative OCR odds reduce but plenty for markets ahead (PDF 412KB)
The unemployment rate for Q3 was as expected, at 5.3%. This is a much better picture than many had feared as the crisis was unfolding and better than the RBNZ forecast at the August MPS. Nonetheless, job losses are rising (especially amongst women), while an increasing number of workers would like to work more but can’t. Slack in the labour market is expected to worsen as the economy enters the challenging period ahead. Certain pockets remain vulnerable, but the impact is also expected to broaden in time. We remain of the view that the unemployment rate will peak at 7.5% late next year. This week’s data adds to a recent string of more positive domestic news, including the buoyant housing market, where a speculative dynamic appears to be emerging. Next week the RBNZ is expected to announce a Funding for Lending Programme (FLP) to provide more stimulus. But the MPS will need to acknowledge that conditions are better than they feared. Over time the outlook for policy will become more nuanced, with the case for more support becoming less obvious. Recent developments reduce the odds that we’ll see a negative OCR, though at this stage on balance we still think it will occur.
30 October 2020: Unemployment to rise, but offshore events will dominate the week ahead (PDF 428KB)
The outlook remains highly uncertain, and risks abound. But, as we outlined in our Quarterly Economic Outlook for October, we think there are a number of key themes that look set to shape the outlook ahead. The difficulty for policymakers is that there are a number of ways this could play out, and by the time we know what state the world is in, the opportunity to respond with timely policy will be behind us. On the fiscal side, policy must also balance the need to support the recovery, with the longer-term financial implications. For monetary policy, the case for more stimulus remains clear for now, with a Funding for Lending Programme (FLP) expected in November, followed by a negative OCR in April. But stimulus to infinity doesn't make sense, and the time is approaching when the RBNZ will need to weigh up its decisions and the optimal combination of tools more carefully. Look out for our November MPS Preview next week for more details. Labour market data are also out next week, with a wide range of outcomes possible. With the wage subsidy still supporting businesses through Q3, the impact of this crisis has been muted, and we expect to see that in the data. That said, we remain squarely focused on the medium-term outlook, with further deterioration expected as policy supports wane and the recovery stagnates.
23 October 2020: Housing hot, inflation weak, and an FLP on the way (PDF 424KB)
How has the view changed? The NZ General Election results landed pretty close to where the polls suggested they would. Labour’s clear majority has kept a lid on uncertainty that has in the past to lingered weeks after election night as political parties negotiate to form a Government. Markets seem to have taken the results in their stride – and for good reason. From a macroeconomic perspective, overall fiscal policy settings look set to be little changed from those presented at the Pre-election Update. While there will be a slightly different mix of policies going forward (as prior coalition policy intentions are reprioritised to implement Labour’s Election Manifesto), the outlook for deficits and debt should be little changed. In fact, it’s possible that changes to the Treasury’s economic outlook in the upcoming Half-year Economic and Fiscal Update (likely to be released mid-December) have more bearing on the fiscal forecasts than discretionary fiscal policy changes do. We’ll have more to say about fiscal policy in our ANZ Quarterly Economic Outlook next week. Q3 CPI saw annual inflation decelerate further. Near-term price movements aren’t exactly in the driver’s seat right now when it comes to monetary policy settings, but the weak starting point will be of concern to the RBNZ as it could further suppress inflation expectations. And while the data is expected to remain noisy for a little while yet, the weak global inflation pulse and waning underlying economic momentum are both pointing to softness over the medium term. The RBNZ has more work to do, and we think the next cab off the rank will be the announcement of an FLP at the November MPS. This will take pressure off the LSAP, but certainly not replace it, and provide the RBNZ more time to weigh the outlook for the OCR.
16 October 2020: Forecasts upgraded but serious test for the economy ahead (PDF 420KB)
How has the view changed? We have upgraded our forecasts for GDP, the labour market and inflation on the back of a stronger housing market and improvement in business sentiment. While we still expect that the economy will face challenges in coming quarters, a buoyant housing market and less pessimistic firms will have a cushioning effect on employment and spending, partially offsetting some of the headwinds ahead. We now see GDP bouncing back a little bit more strongly through the second half of this year. The unemployment rate is expected to rise a bit more slowly than previously assumed, with activity a little stronger, the wage subsidy delaying job losses, and effects of the closed border not evident just yet. A serious test for the economy lies ahead though, with a softer growth pulse expected to be evident from the first half of 2021 onwards. The unemployment rate is expected to rise to 7½% by the end of 2021. We continue to expect a deceleration in inflation as we enter next year, though in the short term inflation is expected to remain bumpy. For the RBNZ, the outlook is looking a little more positive than was included in their August MPS forecasts, but downside risks remain. We expect that the RBNZ will drop the OCR 50bps in April next year, but risks around this outlook are looking more balanced, rather than firmly to the downside.
9 October 2020: RBNZ dovishness unwavering, details on FLP in November (PDF 412KB)
How has the view changed? The RBNZ has confirmed that more details about a possible Funding for Lending Programme (FLP) will be released with the November MPS. These details will determine take-up of the funds by banks and ultimately the scheme’s effectiveness. Another key determinant of the scheme’s impact will be credit demand, which may be constrained as the impact of the current downturn becomes clearer in coming months. Prior to the November MPS, CPI data will be released for Q3 (October 23). We see upside risk forming to our current pick of 0.8% q/q. See ‘What are we watching?’ for more details. Overall, we expect to see a solid bounce, but that follows a super-weak Q2 outturn, and the RBNZ will remain focused on the subdued medium-term outlook and low inflation expectations. In comments to the press this week, the RBNZ reinforced its dovish, least-regrets approach, which has not wavered in the face of a resilient housing market and an encouraging improvement in business sentiment and activity indicators). We remain of the view that while an FLP would be stimulatory, the RBNZ will still deem it necessary to take the OCR negative in April next year – particularly with the economy expected to enter a more challenging period ahead.
2 October 2020: Test for economy fast approaching, it’s no wonder households are cautious (PDF 424KB)
How has the view changed? Through the winter months housing demand has been strong, while new listings have been low, making the market very tight (see our ANZ Property Focus for more details). This week, data showed that the usual spring flurry of listings has begun, which may see tightness start to dissipate, though no catch up is evident. Heat through winter has been on the back of fast-acting supports. But dampening factors – like rising unemployment and weaker net migration – are expected to weigh more gradually, and a summer chill could emerge in time, though the outlook remains highly uncertain. We have long said that the test for the economy is coming as we enter the summer months, and that time is fast approaching, with fiscal supports now starting to dissipate. The labour market has been resilient on account of the wage subsidy, but we expect that job losses will rise in time – it is simply a question of how much. Our ANZ Consumer Confidence Survey out this morning showed that households are worried – and that’s understandable, with firms intending to reduce headcount. Our ANZ Business Outlook shows that firms intend to shed workers overall, though less so than in previous months, with particular weakness in retail and services industries.
25 September 2020: More stimulus to come but investment outlook weak (PDF 416KB)
How has the view changed? The Monetary Policy Review this week yielded few surprises: the RBNZ left policy unchanged, reiterated their OCR forward guidance, and will continue tactical purchases under the Large-Scale Asset Purchase (LSAP) programme. They reiterated that they favour a negative OCR and Funding for Lending Programme (FLP) combo for providing more stimulus if required. But they indicated that they may choose to deploy an FLP by year end, and could do so quite separately from the decision to implement a lower or negative OCR. The idea of an FLP is to reduce bank funding costs and encourage lending (for more, check out our recent FAQ). To us, this speaks to the RBNZ maintaining optionality. While the RBNZ was dovish, a negative OCR is not guaranteed, and the RBNZ will be influenced by developments as they unfold, with a front-loaded, least regrets approach. To be clear, we do think that the OCR will go negative, with a cut of 50bps in April next year true to the RBNZ's forward guidance. In our view, risks are skewed towards more cuts eventually, but a successful FLP is more likely to push out the next cut than bring it forward. But there's water to flow under the bridge yet, and the November MPS marks an important milestone. At that time, we think the RBNZ may signal a negative OCR is likely with a downward slope in the OCR projection conditional on their baseline view and strategic response. Implementation of an FLP at that time is also possible.
18 September 2020: ANZ Data Wrap (PDF 512KB)
How has the view changed? While it was an action-packed week, it threw up little in the way of surprises. The sharp drop we saw in Q2 GDP was in line with our expectations (‑12% q/q) but will prove to be volatile and subject to revisions. In any case, it’s the medium-term story that matters and we remain circumspect about that, especially with the closed border expected to deliver a blow to tourism as we enter the usually busy summer months. This is a recession like no other and there is a long road ahead. Likewise, Treasury’s economic and fiscal projections ahead of the election were as expected and in line with our own view of the outlook: not flash. Of interest to markets was a reduction in projected bond issuance. Less supply means a higher price, so that saw markets get a wriggle on, pushing yields a little lower. Still, long-end bond yields remain above recent lows and we see scope for them to go even lower in time.
11 September 2020: ANZ Data Wrap (PDF 416KB)
How has the view changed? We have updated our expectations for Q2 GDP out next week and now expect a fall of -12% q/q, rather than -17.5%. That's a big change, but it largely reflects a paucity of reliable data, rather than a change in our fundamental view. With the data noisy, policymakers are expected to largely look through it. Our medium-term view remains broadly unchanged, with the lesser forecast fall in Q2 meaning the rebound in Q3 will be smaller too. For Q3, we are now pencilling in a bounce of 8.5%, rather than 16%. This includes an expectation that renewed restrictions will weigh on activity. Further out, we continue to believe that the economy will undergo a serious test as we enter the summer months, with the impacts of a closed border becoming more evident and the economy coming off fiscal life support. The housing market remains resilient - and that's a good thing. House price falls often happen in downturns and their implications can be severe. However, we still expect to see a wobble into next year.
4 September 2020: ANZ Data Wrap (PDF 444KB)
How has the view changed? RBNZ Governor Orr’s speech was as expected, reiterating previous messaging. However, we consider two aspects worth emphasising, as they underscore key elements of our view. The first was Orr’s reference to wanting to see interest rates lower than they are now. That reinforces our expectation that monetary conditions will keep easing; a negative OCR and Funding for Lending Scheme are expected next year but the RBNZ will not be complacent in the meantime. We think the MPC will flex its tactical approach to the LSAP in September, directing staff to ramp up purchases with an LSAP expansion in November to $120bn. The second key element was Orr reinforcing the RBNZ’s forward guidance that the OCR would be on hold at 0.25% “for at least a year”, following its commitment in March. Some have speculated that the RBNZ might drop this guidance, with this risk currently reflected in market pricing. But we see the RBNZ as very committed to its guidance and, as such, we do not expect an OCR cut until April, though the RBNZ may choose to foreshadow or commit to it sooner than that. Why not go sooner if more stimulus is needed? The RBNZ is playing the long game. If they renege on their guidance now, who’s to say they won’t do the same again? Reneging could jeopardise the RBNZ’s future ability to provide trusted guidance that shapes market pricing and inflation expectations down the track (eg to stem an increase in yields). February or April might seem neither here nor there, but in terms of credibility it is paramount.
28 August 2020: ANZ Data Wrap (PDF 428KB)
How has the view changed? We have updated our inflation forecasts following updates to GDP and the labour market. With more QE on the way and the OCR expected to go negative next year, we now see a stronger economic recovery through 2022, supporting a better outlook for non-tradable inflation. Stronger world import prices also contribute to a better outlook for tradable inflation. Near-term data flow has also seen us revise up our inflation pick for Q3 2020 from 0.5% q/q to 0.8%, which would see annual inflation stable at 1.5%. However, there is more data to come that will shape this pick. In an absolute sense the inflation outlook is still very weak, even with more stimulus on the way. Inflation is expected to start creeping higher as recovery eventually takes hold, but slack in the economy is expected for some time and the elevated TWI will weigh. We see CPI reaching 1.4% y/y by end-2022, still well below the 1-3% target midpoint. We see risks to the inflation outlook in both directions: downside risks to the activity outlook could weigh, but if the RBNZ can generate a sharp depreciation in the TWI with further policy action, that would see a welcome stronger pick-up in inflation from here. But for now, the exchange rate remains resilient. World prices for our imports will also be important.
21 August 2020: ANZ Data Wrap (PDF 408KB)
How has the view changed? We now expect the RBNZ to take the OCR negative next year, with a 50bp cut to -0.25% expected in April, alongside the introduction of a bank ‘funding for lending’ programme (FLP). Between now and then, the RBNZ will signal a steadfast intent to support the economy, with another increase in the LSAP expected in November, potentially to $120bn over two years. The economic outlook is simply too dire and the downside risks are too great for the RBNZ to sit back and wait. We’ve updated our GDP and labour market forecasts to incorporate recent developments. These include a stronger starting point, the negative impacts of renewed lockdown and weakening in underlying momentum, and the supportive impacts of increased fiscal and monetary stimulus. For markets, RBNZ words and actions should cap the NZD and pave the way for yields to go lower and geographic spreads to narrow. We’ve updated our Market Forecasts to reflect these changes to the outlook.
14 August 2020: ANZ Data Wrap (PDF 408KB)
How has the view changed? Downside risks to our forecasts are manifesting with the detection of community transmission of COVID-19 on our shores. It’s too soon to say what the impact of this will be; uncertainty is immense. But data will be volatile for longer and there will be clear output losses. The RBNZ expanded the LSAP programme (QE) to $100bn, exceeding our top-of-market expectation of $90bn. They also expressed a preference for a negative OCR and funding for lending programme as the next cabs off the rank after the LSAP, with the odds of more being needed rapidly increasing. The RBNZ’s dovishness will weigh on the yield curve and NZD in coming weeks, helping to support the economy through the uncertain time ahead.
7 August 2020: ANZ Data Wrap (PDF 416KB)
What are we watching? The key focus is the MPS next week, which should provide clarity in a number of areas. There is some uncertainty about where the RBNZ will land on QE, but the greatest room for surprise is likely to be what the RBNZ says on other unconventional monetary policy tools. We expect that the RBNZ will keep its options open, with a negative OCR and foreign asset purchases on the table, reaffirming market expectations that a negative OCR next year is a non-trivial possibility (with 25bps priced in by mid-2021), and keeping a lid on the elevated exchange rate. A move to a tactical approach to weekly purchases, while not expected, would also be helpful to get the most impact out of the current QE programme, and could shake up the bond market. The RBNZ's decision and commentary will inform our thinking about the policy outlook should downside risks materialise, and it is hard to know exactly what criteria they will settle on for deployment. We await the Statement with an open mind.
31 July 2020: ANZ Data Wrap (PDF 412KB)
How has the view changed? Overall, we continue to see risks to our GDP forecasts as balanced – but timing matters a lot. There is a little upside risk to Q2/Q3 GDP, reflecting the recent bounce in activity. But this is being affected by volatility and timing effects, with the impact of this recession likely to be felt most acutely as we enter the summer months, when the trend is expected to become clear. Once the noise subsides, we expect that GDP will enter 2021 at 5% below pre crisis levels. This view has not changed (with GDP in the 2020 year forecast to be 8% below 2019 levels). As the full brunt of the recession becomes more obvious in Q4, a double-dip recession is a non-trivial risk. Downside risks could see additional monetary policy tools deployed eventually, including a negative OCR next year, though QE remains the main game in town. The August MPS is shaping up to be a big event, with key decisions about the current QE programme expected, and more details on how the RBNZ is thinking about other tools should they be needed in time.
24 July 2020: ANZ Data Wrap (PDF 508KB)
The post-lockdown bounce in high-frequency indicators continues, including a strong pick-up in the PMI and PSI data. In isolation, these point to a vigorous bounce in near-term GDP, but there are some conflicting messages when the full suite of economic indicators is considered together. The housing market has also seen a bounce as lockdown has ended, due partly to low mortgage rates and temporary supports. We expect that house prices will fall 5-10%, with a sharper correction now looking more avoidable. Commodity prices remain resilient and dairy returns are in a stronger position as new-season milk starts to flow, though we expect dairy prices to ease later in the season. We have upgraded our farmgate milk price forecast for the 2020-21 season to 6.50/kg/MS. The solid near-term bounce in activity, resilient commodity prices and a better housing outlook are helping to temper some of the downside risk we see to our forecasts. We now see risks to the GDP outlook as balanced, though the bands of uncertainty remain wide.
17 July 2020: ANZ Data Wrap (PDF 432KB)
How has the view changed? The housing market has been supported by a post-lockdown bounce, at a time that would usually be seasonally weak, adding to the potential for noise. Lower mortgage rates, wage subsidies and mortgage deferment schemes have supported prices, potentially delaying any weakening in the market as unemployment rises, and possibly muting the impact to some degree. The outlook is highly uncertain. We will have more to say in our ANZ Property Focus next week. CPI inflation was weak (-0.5% q/q), as expected. But that data was clouded by noise and measurement issues. The RBNZ will look through some of that, but the underlying pulse is no-doubt weak, with the exchange rate acting as a potent headwind and inflation expectations low. We continue to expect that CPI will fall below the RBNZ's 1-3% target range later this year, with the RBNZ still putting its foot firmly on the stimulus accelerator.
10 July 2020: ANZ Data Wrap (PDF 404KB)
How has the view changed? The post-lockdown rebound continues, with our ANZ Business Outlook Flash seeing confidence continue to improve. Our enviable position, global liquidity and resilient commodity prices continue to put the wind up the NZD. The outlook remains uncertain; we see a range of scenarios as possible, subtracting 5-12% from GDP this year. With risks skewed to the downside, implications for policy are clear: make it count. For fiscal policy, that means a targeted and considered response. Initiatives to support investment and hiring would be welcome, like cutting red tape or labour market reform. For monetary policy, that means going hard and going early. If downside risks materialise, the RBNZ may take a kitchen-sink approach. That’s why it pays to be prepared for a negative OCR, even though we don’t think it’s probable. We will get more guidance form the RBNZ on the outlook in August. But until then, rates markets will continue to ebb and flow.
3 July 2020: ANZ Data Wrap (PDF 396KB)
How has the view changed? Globally, recent intensification in the spread of COVID-19 in certain regions (especially the US) are concerning and threaten the fragile economic recovery. For New Zealand, a deep recession is inevitable and we will not be immune to global economic developments, even if we remain COVID-free. For central banks, supporting the recovery and managing risks mean that the path of least regrets is a front-loaded and aggressive approach. We see the RBNZ expanding QE to a $90bn limit in August, with a widening in eligible assets and other tools put on the table for if and when required. We see a case for more front-loading of weekly LSAP purchases, but these have settled into a steady pace. That leaves August as the next opportunity for the RBNZ to generate market impact, with supply developments influencing bond markets in the meantime (see Markets Outlook for more).
26 June 2020: ANZ Data Wrap (PDF 404KB)
How has the view changed? The RBNZ was dovish, reaffirming our view that the LSAP (“QE”) will increase to $90bn in August. The RBNZ emphasised that the outlook is uncertain and bleak, and that they have no intention to muck around. Any change in the LSAP will be intended to make a meaningful difference. The RBNZ is keeping its options open and we think the RBNZ’s LSAP indemnity will be widened in August. Foreign asset purchases will be included as an addition, and we expect they will be the first cab off the rank. In the meantime, we see scope for the RBNZ to increase the pace of weekly purchases under the existing $60bn cap, especially at the long end. The introduction of a new long (2041) NZGB is hanging over the market. But even without that, upward pressure on yields has emerged that we see the RBNZ leaning against if it intends to keep monetary conditions easy. See Markets Outlook for what this might mean for markets from here.
19 June 2020: ANZ Data Wrap (PDF 416KB)
How has the view changed? Q1 GDP out this week didn't change our view, with a 20-21% drop estimated over the first half of the year, but noise in the quarterly numbers. The emergence of new COVID-19 cases this week remind us that while New Zealand is extremely fortunate to have eliminated community transmission of the virus, we can't be complacent. Downside risks are very real. We expect that more QE will be needed from the RBNZ, but with the outlook a little brighter and more good news in the near term, we think the RBNZ will wait until August to scale up. Next week's OCR Review is likely to offer no surprises in the meantime, but a challenging outlook will be emphasised. Market sentiment has been weighed down by new virus outbreaks in China, a lack of progress in the US and new cases here. Soft GDP data underscores the need for lower and flatter yield curves, especially with the high TWI tightening financial conditions. See markets outlook for more details.
12 June 2020: ANZ Data Wrap (PDF 392KB)
How has the view changed? The move to Alert Level 1 has occurred a bit earlier than previously expected and the tone of the data has also been a little more positive. We have upgraded our forecasts, but only slightly. The outlook is still very dire. A second wave of bad economic news is expected in time, at which point the reality of the long, painful recovery ahead will settle in. We see GDP 7-9% lower this year (previously 8-10%). With unemployment rising rapidly and inflation well away from target, the RBNZ has its work cut out and will need to stay the course with monetary policy. We continue to expect QE to be expanded to $90bn in August. Global yield curves have resumed flattening in the wake of the US Fed's dovish FOMC statement. But the Fed's tone has weighed on risk appetite and the NZD. See markets outlook for more details.
8 June 2020: Great job, but... (PDF 636KB)
New Zealand is nailing it when it comes to getting COVID-19 on the run - touch wood. That's certainly going to be a factor supporting the economic recovery. So too - at least in the near term - will be a faster phasing through Alert levels than we have previously assumed. However, despite these positive developments the medium term outlook remains grim. We think the nature of this shock will weigh particularly heavily on the labour market - and therefore households. Some of the hardest-hit sectors are very labour intensive, and there isn't an obvious outperformer lying in wait to pick up the slack. A second wave of lay-offs is likely once the wage subsidy expires. However, fiscal policy was never going to be able to save every job. Now, policy needs to focus on the recovery. On that front, there's certainly more the Government could be doing, but there are no easy choices here. Trade-offs are significant. But without further action, risks to the employment outlook will remain skewed to the downside.
25 May 2020: Flightless kiwis (PDF 800KB)
Tourism is significant for the New Zealand economy, accounting for 10% of GDP if one takes into account its impact on other industries. We are particularly exposed relative to other countries, and the outlook for the industry is bleak, even as we make great progress in eliminating COVID-19. Domestic tourism is getting underway again, but international tourism will be MIA for a long time and is set for a slow recovery. This will weigh on incomes, spending and house prices, with some regions particularly affected. The Government is providing assistance, but pressure for more may increase, with firm closures and job losses inevitable, especially since tourism is very labour intensive. We estimate that tourism receipts could fall by half this year. However, this could reduce to a quarter if a trans-Tasman bubble were introduced. Overall, the blow to tourism could subtract 2.4% to 4.7% from GDP this year. Over the long term, the industry will reshape. But there's no denying that it is going to be a challenging time ahead for many.
18 May 2020: What a week (PDF 656KB)
Last week saw three big developments. The country took an enormous step towards normality by moving into Alert Level 2; the RBNZ at its Monetary Policy Statement scaled up QE to $60bn and left all other tools on the table; and the Government delivered a truly massive Budget, featuring a big public housing build, a targeted extension of the wage subsidy program, and a big ramp-up in health spending - and more to come, with a lot of funding as yet unallocated. We are now forecasting a further scaling-up of QE at the August MPS to a $90bn limit. This will help to absorb the bigger-than-expected program of Government bond issuance to fund all that spending. The RBNZ has received an indemnity from the Government to increase QE as outstanding bonds grow, so the hurdle has been lowered, but an expansion will still need sign-off from the Monetary Policy Committee. We expect this will happen at the August MPS, if not earlier.
11 May 2020: Hang on to your hats (PDF 688KB)
This week brings a whirlwind of key events: today we will find out if we can move to Alert Level 2, the RBNZ MPS is on Wednesday, and the Budget is on Thursday. At the MPS, we expect QE to be roughly doubled, and there seems to be broad consensus in markets on that. But the risk is that the RBNZ needs to do more, with inflation expectations taking a massive hit last week. The market is looking for direction on where to next - and in particular, the likelihood of negative policy rates. In our view, there are plenty of options that are less risky and more straightforward. We see QE as the tool of choice, with plenty of scope to up the ante effectively. For the Government, it will be a "sobering" Budget to deliver and difficult choices are on the horizon. Clearly stimulus is required to cushion the blow, but it needs to be targeted to where the economic pain is being felt the most. An obvious area is tourism. Opening up the border with Australia would be helpful on that front, but not a panacea. We remain comfortable with our forecasts, with a sluggish recovery ahead, but much will depend on our progression out of lockdown and what the RBNZ and Government do. Hang on to your hats!
4 May 2020: Labouring the point (PDF 676KB)
The labour market is rapidly deteriorating. But the full brunt of the economic impact is yet to be seen. Some businesses have had to reduce headcount already, but more job losses are unfortunately coming even as the economy reopens. Firms have been able to use wage subsidies, cash reserves and loans to delay lay-offs, but for some this will not be sustainable. Even if trade can resume in some areas, activity restrictions will be with us for a while and a significant hole in demand has opened up. The policy outlook will be critical. The Government will now lend directly to SMEs and has expanded the Business Finance Guarantee Scheme. We expect yet more fiscal stimulus in the Budget, with keeping workers in jobs high on the priority list. But the Government cannot prop up the labour market forever and a sharp rise in unemployment is inevitable. The RBNZ will also continue to do what it can to cushion the blow and support the recovery out of this crisis, meaning enormous stimulus for a long time. We expect QE to be roughly doubled, but are sceptical that negative rates will be on the cards any time soon.
28 April 2020: Fallout (PDF 944KB)
New Zealand is ahead of the curve in terms of curbing the COVID-19 outbreak, and that progress puts us in a good position to open up our economy, albeit cautiously. This progress has not gone unnoticed by markets, with the NZD finding support. Yet even if New Zealand is in a relatively fortunate position, as an exporting and net borrowing nation we won't escape the global fallout of this crisis. The global outlook is grim - worse than markets are currently pricing in - and the recovery will be protracted. This weakness in demand will weigh on our export prices and the NZD. In addition, we expect to see some rise in global credit defaults, which tends to happen in downturns. This could cause a repricing of credit spreads and risk in general, weighing on the NZD. That said, positive factors are expected to stem the extent of depreciations relative to previous episodes. We are fortunate; the virus situation on our shores is enviable. But we still need to brace for economic impact.
20 April 2020: Level up (PDF 640KB)
Today we will find out if we can move to Alert Level 3 - and when. Our four-week lockdown has reaped clear benefits in terms of containing the spread of COVID-19. And it appears that New Zealand is ready to move forward cautiously and ease activity restrictions. However, the stakes are high. Moving to Alert Level 3 will have near-term benefits for economic activity and sentiment, but the economic damage will be far worse - and longer lasting - if we have to return to Alert Level 4. The details of Level 3 are consistent with our economic forecasts, which have GDP 8-10% lower this year, and QE roughly doubling. Our forecasts are also premised on more fiscal support measures coming - both now and during the recovery phase. We may see more announcements from the Government this week ahead of the Budget on May 14. CPI data out today will get less attention than usual, with the current deflationary impulse yet to emerge in the data.
14 April 2020: The long road to recovery (PDF 680KB)
As the economic landscape has shifted, so too has the Government's fiscal strategy. Government debt is expected to spike higher over the next couple of years, and some difficult decisions lie ahead for when we eventually need to rebuild buffers. For now, fiscal policy is still in the early stages of absorbing the initial blow, with more spending to come. Fiscal costs will depend on outbreak developments, the economic fallout, and policy decisions that are yet to be announced. But at this stage we expect bond issuance to increase to $45bn next fiscal year. While we are making significant progress in containing the COVID-19 outbreak, restrictions on activity are likely to be eased very cautiously. We now expect GDP to fall around 22% in the first half of the year and to be 8-10% lower over the year, with extra Government and RBNZ support. The unemployment rate is expected to lift to 11% this quarter. Consistent with a weaker economic outlook and the expected path of bond issuance, RBNZ QE is expected to roughly double to around $60bn in order to support market functioning and ease monetary conditions further.
3 April 2020: The battle rages (PDF 640KB)
The Government clarified this week that elimination of COVID-19, not just flattening the curve, is the goal of the current lockdown. It's an ambitious aim and we hope they succeed - everyone playing their part will be key. Eradication means greater disruption in the short term, and we are starting to see early signs of that in the economic data. But if successful, rigorous measures now increase the chances that we can get the economy going sooner, albeit in a more insulated fashion with tight border restrictions. More broadly, the economic landscape is likely to look quite different on the other side of this, and the recovery will be protracted. Some industries will benefit; some will suffer greatly. Government debt will need to be repaid; firms and households will be cautious and may look to deleverage; inflation will likely be low for some time. Expansionary monetary policy may need to be amped up more, and will be needed for a long time, even once the war is over
27 March 2020: What a year this week has been (PDF 652KB)
New Zealand is in Alert Level 4 lockdown for at least four weeks. This will save lives and benefit the economy in the longer term. We expect to see a very sharp drop in GDP in Q2, but overall a less painful economic hit than would be seen if we acted later. The path from here is enormously uncertain and there are risks of a greater economic impact if the outbreak is not contained. The RBNZ began its QE bond-buying programme on Wednesday, helping soothe markets, ease financial pressure, and provide more scope to up the fiscal response. Mortgage holiday and business finance support schemes were announced by the Government this week, and there will be more initiatives to come. But even with these responses, economic damage is inevitable. At some point down the track, focus will pivot from damage control to rebuilding - and much will need to be done. But for now, stay at home, stay safe. And for those out there working hard to provide essential services - thank you.
20 March 2020: Gravity calling (PDF 596KB)
The global and domestic slowdown is going to be severe. This realisation has seen financial markets all but capitulate and has galvanised policy makers. Central banks around the world have moved to large-scale stimulus and taken measures to ensure financial systems remain stable. Governments are doing what they can to cushion the blow. Here in New Zealand, the Government has announced a bold fiscal package, with more to come at May's Budget. The RBNZ has cut the OCR to 0.25%, committed to keeping it there for at least a year, freed up banking system capital, provided liquidity, and are active in the market - all positive steps. And yet more is needed. We expect quantitative easing in very short order. RBNZ bond purchases are urgently needed to ease market pressure, stimulate the economy, and reduce the risk that this large economic shock coincides with a financial one.
16 March 2020: Doing what has to be done (PDF 680KB)
In an encouragingly bold move, the RBNZ stepped up to the plate and delivered an emergency 75bp OCR cut this morning, committing to keep the OCR at 0.25% for at least the next 12 months. Next, we expect unconventional policy will be deployed as soon as is practicable, with large-scale asset purchases on the cards. To support credit creation, the RBNZ has also delayed increases in capital requirements. A significant fiscal package is expected tomorrow. We are looking at a rapid and widespread global demand shutdown that is putting financial markets under extreme pressure. Bold New Zealand border controls and other looming containment measures will frontload a massive economic blow in order to lessen the odds of a much worse one. It’s absolutely the right thing to do and the pain was inevitable, but businesses will be hit hard, and we have a widespread drought to boot. A domestic recession is guaranteed, and it won’t be shallow.
9 March 2020: The time is now (PDF 671KB)
The global policy response to COVID-19 has ratcheted up significantly this past week with central banks slashing interest rates and governments pledging funds to mitigate the fallout and facilitate the response. We expect the RBNZ will cut the OCR 50bps at, or possibly before, its next Review on 25 March. We see the OCR reaching 0.25% by May, but think the RBNZ should tread very cautiously from there, given the risk that credit availability is impaired when policy rates go super low or negative. This is important, as banks have a key role to play in helping firms and households get through. The risk that unconventional monetary policy will be required is lifting. And it’s time for the Government to up the ante on fiscal policy. The good news is that there is plenty of firepower to do this. Scrapping this year’s minimum wage rise seems like a no-brainer given pressure on businesses, and there are plenty of other short‑ and long-term policy options that could help.
2 March 2020: Escalating rapidly (PDF 724KB)
We now expect the RBNZ to cut the OCR 50bp in March and a further 25bp in May, taking the OCR to just 0.25%. The COVID-19 situation is evolving very rapidly, spreading fast outside China - including, now, in the US - and the virus is now present in New Zealand, although it appears to be isolated so far. A marked global slowdown is guaranteed, due to both demand and supply disruptions. Our forecasts assume New Zealand GDP stalls in the first half of the year, with a gradual recovery from there. But although New Zealand is better placed than many countries to weather this shock, we see clear risks of a larger slowdown or even recession. Fiscal policy will need to do the heavy lifting, but lowering the OCR will ease financial pressure, facilitate a lower NZD, aid confidence at the margin, and support the recovery.
24 February 2020: Near-term dip (PDF 680KB)
The outbreak of COVID-19 continues to upend both lives and economies. Here in New Zealand, exporters of goods and services have borne the brunt so far, but are well-placed to weather a short period of disruption. The longer the interruption to China's economy continues, however, the more we'll start to notice it on the import side - not just toys and electronics. China is also a key supplier of a range of intermediate and capital goods that are crucial for construction, manufacturing and farmers. For now, it's an air bubble in the supply pipeline, but it could become a bigger issue if it persists. It remains impossible to put a timeline on China returning to normality. We've updated our GDP forecasts to take into account the latest developments. We now expect -0.1% growth in Q1, and 0.5% growth in Q2. Key data this week are reads on both business and consumer confidence.
17 February 2020: Something’s got to give (PDF 632KB)
Low interest rates have spurred demand for credit, but bank deposit growth has been declining. The latter may reflect a search for higher returns, reduced foreign buying of assets, and/or increased cash use. It’s difficult to disentangle the drivers with any precision, but the slowdown in deposit growth matters. New Zealand banks need deposits to fund their lending, so the recent widening in the bank “funding gap” is something we are watching closely. In the current environment, generating deposit growth may be difficult – although banks can tap non-deposit funding, this has its limits. Closing the gap is likely to result in a tightening in credit conditions, at least to some degree, at a time when credit demand is strong. A significant economic headwind could be in the pipeline.
10 February 2020: Uncertain (PDF 820KB)
It’s MPS week. We’ll be watching for a steer on how the RBNZ is thinking about the known and unknown economic impacts of China’s novel coronavirus outbreak. RBNZ comments will no doubt highlight the enormous uncertainty of a fast-moving situation. The devastating human toll of the virus is centred on the city of Wuhan, but it is disruption at China’s ports that is taking a large economic toll on the New Zealand economy at present. This will hopefully be resolved very quickly, but it is just round one, with exports of tourism and education services already affected, and the extent of damage to China’s economy unclear. This week we use the information available to assess the possible implications for the near-term economic outlook. Uncertainty is extreme, but it hopefully provides a framework to think about the economic implications of developments as they unfold.
3 February 2020: Change is coming - 'weather' you like it or not (PDF 792KB)
The human impact of the new coronavirus is very worrying and our thoughts are with those affected. From an economic perspective, it is far too early to gauge the impacts, but New Zealand could be affected through a range of channels and we are watching developments closely.
Stepping back, this week we explore some of the possible channels through which climate change may impact our economy. In the short term, the most significant effects are being felt as a result of regulatory changes. But looking forward, changing consumer preferences and investment decisions will contribute to a changing economic landscape, and direct impacts of environmental conditions will be increasingly felt. Overall, the economic effects are highly uncertain, but change is inevitable, and the transition presents costs, opportunities and risks.
28 January 2020: Cross-currents (PDF 604KB)
The NZD-TWI exchange rate moved higher in recent months, though it remains below levels seen a year ago. We expect news of the new Wuhan coronavirus will weigh in the short term, but developments beyond that are hugely uncertain. Assuming it is contained, over the coming year, we see the OCR on hold for now, with the NZD expected to hover close to current levels, held up by export prices, global monetary stimulus and improved risk appetite. Policy easing from some other central banks will be supportive, but we see upside as limited, with the domestic outlook largely priced in. If the NZD did move higher, we don’t think it would perturb the RBNZ provided it was consistent with a positive data story, even if it softened the outlook at the margin. All of that said, the currency outlook would change rapidly if risks were realised and we saw a large global shock. But in that case, the whole economic landscape would change too.
21 January 2020: On track, flat track (PDF 640KB)
We've updated our OCR call, removing the cut we had pencilled in for May. Our central forecast is now for a flat OCR track. Since the November MPS, forward-looking activity indicators have improved, the Government has announced more spending is in the pipeline, the housing market has strengthened, and inflation looks like it is sitting close to target. It's true that revisions mean that GDP decelerated more sharply over 2019 than previously thought. But momentum appears to be stabilising, and it now looks more likely that the economy will be able to generate growth around trend over the medium term, despite headwinds. The RBNZ has scope to be patient and await further signals on the economic direction. Downside risks have not gone away - we see the market's pricing of a decent chance of further cuts as entirely appropriate - but a near-term cut would require an abrupt change of circumstances. Our full set of forecasts will be updated in our ANZ Quarterly Economic Outlook on 28 January, following the release of Q4 CPI.
13 January 2020: 20/20 vision - what to watch in the year ahead (PDF 728KB)
A new year is upon us. Unfortunately we don't have 20/20 vision when it comes to the 12 months ahead; if we did, we'd be traders, not economists. But still, it's useful to kick off the year by taking a big picture look at what we'll be watching closely - including some of the tail-risks that could mean our forecasts are completely wrong. First up, we should acknowledge that over a one-year horizon, the fate of the NZ economy isn't entirely in its own hands. The weather, natural disasters, commodity prices, global geopolitics, global credit markets and the NZD could all have a say in how the economy performs, but it's a case of rolling with the punches. In terms of things that actually reflect our choices and policy settings, we'll be watching credit availability, business sentiment activity indicators, the details of the Government's infrastructure spend-up, the housing market, and indicators of resource stretch and inflation pressure in the economy. This week we kick off with the QSBO and a range of inflation indicators, as well as reads on housing and manufacturing.