24 November 2024: Bumpy landing (PDF 520KB)
Either a fall or a lift in the OCR track could be justified by the data flow at the RBNZ’s November Monetary Policy Statement on Wednesday, depending on judgements. The simplest would be to maintain the peak in the OCR track at 5.59%, publishing a very similar track to August.
If the RBNZ Monetary Policy Committee interprets the data more dovishly, they may lower the OCR track back to 5.5% and/or potentially move cuts forward. If they’re hawkish they could choose to raise the track to signal up to 50/50 odds of another hike and/or remaining high for longer.
Our October Truckometer was released this morning. Overall it’s consistent with weakening per capita activity.
17 November 2023: On track, but a long way from the finish line (PDF 520KB)
We’ve changed our OCR forecast. Our central forecast no longer includes a resumption of hiking, though we still see this as a real risk. We have pushed out our expectation for cuts by one quarter (to February 2025), with our terminal forecast at 4.75%, still considered contractionary.
We expect the RBNZ to hold the OCR unchanged at 5.5% at its MPS on 29 November, and to publish an OCR track that is very similar to August (with a peak of 5.59% but potentially later cuts). Either a fall or a lift in the OCR track could be justified by the data flow, but strategic considerations to avoid monetary conditions easing over the summer will be important, given the market is itching to price cuts more aggressively. As a result, we have revised our full suite of interest rate forecasts.
We’ve revised our Q4 headline CPI forecast from 0.9% q/q to 0.6% q/q and our non-tradables inflation forecast from 1.1% q/q to 0.9% q/q after softer than expected monthly price indexes. That’s still above the RBNZ’s August MPS forecast of 0.8% q/q, but the miss is now expected to be much smaller.
10 November 2023: Not so fast (PDF 576KB)
This week’s RBNZ survey of inflation expectations showed progress, but they remain well above where they need to be and much higher than the RBNZ’s own August forecasts. Businesses and professional forecasters think it’ll take about a year longer to get inflation back under 3%, implying four years of inflation above the target band.
PMI data for October made for grim reading, with the lowest outturn since 2009 (lockdowns aside). It certainly makes sense that manufacturers are experiencing tougher times, given their exposure to construction and the primary sector, both of which are under pressure currently. The contrast with the relative optimism evidence in the Business Outlook survey manufacturing responses is likely due to the different framing of the questions: the PMI asks about the last month, while the ANZBO questions are forward looking.
The current El Niño cycle is expected to be one of the strongest New Zealand has experienced, raising the risk of drought conditions occurring this summer, depressing milk volumes but bolstering meat production in the near term as farmers destock. A drought this summer could have a larger-than-usual economic impact given farmers are already under pressure from soft returns at a time of intense cost pressures.
3 November 2023: Further to go (PDF 556KB)
The Q3 labour market release had a slightly softer underbelly than both we or the RBNZ expected. In big picture terms, the Q3 data hinted that the imbalance between labour supply and demand is perhaps resolving a little faster than we had previously thought.
While this isn’t a game changer for the November MPS (where a hold is unanimously expected), it does shift the risk profile around a February hike a little. We’d say our call for a hike in February is now pencilled in a shade lighter than previously (but pencilled in nonetheless).
We remain comfortable with our prior assessment that the next move is more likely to be a hike than a cut. Indeed, a lot still needs to go right before the RBNZ can confidently declare victory over domestic (and potentially sticky) inflation, which has barely budged from its recent peak.
27 October 2023: Too hot to hold (PDF 580KB)
This week Australia’s inflation for Q3 printed at 5.4%, only marginally below New Zealand's rate of 5.6%. Inflation in both countries is looking like it will hang around longer than either central bank is comfortable with because core inflation continues to be far too high. We now expect both the RBA and RBNZ to hike their policy rates further.
New Zealand and Australia have a shared labour market to some extent and so have a shared services inflation problem, since citizens from either country can work in the other one. It will be challenging for the RBNZ to fully resolve persistent core inflation until Australia’s labour market and services inflation cools.
Next week brings Q3 labour market data. We expect the unemployment rate lifted 0.3%pt to 3.9% in Q3, the private sector Labour Cost Index lifted 1.0% q/q (4.2% y/y), and private sector average hourly earnings (ordinary time) rose 2.0% q/q (7.1% y/y).
19 October 2023: Break in the clouds (PDF 556KB)
Annual inflation decelerated from 6.0% to 5.6% in Q3 (RBNZ: 6.0%). The downside surprise is certainly welcome news for the RBNZ, even though all of it was due to weaker tradables inflation, over which the RBNZ has limited influence.
It's a high bar for the RBNZ to restart hikes. Following the CPI data, we don’t expect there will be enough evidence to get the RBNZ over the line in November, as things are still heading in the right direction. But we think the RBNZ will need to revise its output and domestic inflation forecasts higher in November, as they did in the August MPS. Continued upward revisions will naturally raise the question of whether an OCR of 5.50% is enough. We think the RBNZ’s next move will be a hike, but now see that occurring in February.
We’ve revised our inflation forecasts. Despite the lower starting point, our inflation outlook remains broadly unchanged. A faster normalisation in tradables inflation is mostly offset by sticky domestic inflation.
13 October 2023: Holding pattern (PDF 508KB)
The September REINZ release this week saw the House Price Index (HPI) level off, with house prices flat on a seasonally adjusted basis. Sales fell 1.9% m/m sa, partially unwinding their 6.4% rise last month, and remain below their historical average. Meanwhile, days to sell remain slightly above the historical average of 39, printing at 40 (August: 41).
Inbound migration is still near record levels. This week’s data showed that 110,200 people (net) moved to New Zealand over the last year – record numbers. All those migrants need a place to live and we are not consenting and building enough new dwellings to keep pace.
Stats NZ will release CPI inflation figures for the September quarter next Tuesday (17 October). We anticipate the report will highlight that the inflation problem has by no means been solved, and that there are still real question marks around whether an OCR of 5.50% is sufficient to get inflation sustainably back to target in an acceptable timeframe.
6 October 2023: Patience is a virtue? (PDF 536KB)
As universally expected, the RBNZ left the OCR unchanged at 5.5% on Wednesday. The Committee acknowledged the risk that activity and inflation does not slow as much as needed in the near term, and that “interest rates may need to remain at a restrictive level for a more sustained period of time”.
We got a slightly less hawkish signal than we were expecting, but the October Review was still a notch higher on the hawk-o-meter than the August Monetary Policy Statement. Our OCR forecast remains unchanged: we expect a 25bp hike in November. However, it’s fair to say a near-term hike is now a little more conditional, and the Q3 reads on both the CPI and labour market will take on even more importance.
Meanwhile, we need to keep a watchful eye on global economic developments, The US labour market is likely too tight to be consistent with price stability and the stabilisation of China’s economy has lifted export prices, albeit from low levels. We agree with the RBNZ that over the medium term “downside risks around the outlook for global growth remain”, but we don’t think these global risks are all one-sided.
29 September 2023: Softening? (PDF 568KB)
Business confidence broke into positive territory in September in our Business Outlook survey, rising 6 points to +2. Despite the lift in headline confidence, the survey is best described as ‘mixed’, with small falls in many activity indicators. Pricing intentions and cost expectations lifted, but only a smidgen, and inflation expectations eased slightly with the first sub-5% read since December 2021.
Our consumer confidence survey this week paints a weak picture for retailers, with a net 32% of consumers reporting it’s a bad time to buy a major household item. Meanwhile, headline consumer confidence lifted slightly, but remains very low.
We expect the RBNZ to keep the OCR on hold next week, remaining in ‘watch, worry and wait’ mode. However, we’re expecting the MPR to have a bit more ‘worry’ in it than the relatively sanguine August MPS. The neutral OCR is rising and the RBNZ’s mean assumption is that the OCR is 160bp into contractionary territory. That is over 100bp less contractionary than in 2007, while core inflation today is around 300bp higher. We’re expecting the RBNZ to return to the hiking table with a 25bp hike in November.
22 September 2023: Q2 GDP strong, but outlook still soggy (PDF 480KB)
The New Zealand economy bounced out of recession in Q2, lifting 0.9% q/q from an upwardly revised flat read in Q1 (see our Review for details). Importantly, these data alone don’t provide much indication of how much inflation pressure is still in the pipeline, so we don’t think they are a game changer for the October Monetary Policy Review (we continue to expect a hold). But they do increase the likelihood of the October statement having a hawkish tilt and support our view that a hike is likely in November.
After accounting for the Q2 starting point, our medium-term GDP outlook is little changed from that presented in our August Quarterly Economic Outlook. The economy is expected to continue its post-pandemic normalisation, with services exports (chiefly international tourism and education) continuing to recover. Meanwhile, domestic demand is expected to remain soft as restrictive monetary conditions weigh.
Also this week, the annual current account deficit narrowed more than expected in Q2 to 7.5% of GDP, helped by some historic revisions. While the narrower starting point is welcome news, the external accounts remain severely out of balance. At these levels, the current account remains a key vulnerability for the economy.
15 September 2023: Best case scenario (PDF 484KB)
The Treasury’s Pre-election Update showed more debt, more bonds and more deficits – and all this hanging off a relatively optimistic economic outlook. There is very little wiggle room in these forecasts to allow future Governments to loosen fiscal settings while still consolidating the fiscal position before the next inevitable shock comes along.
We think downside risks to the Treasury's economic forecasts are likely to materialise before the books are back in surplus. In short, the current forecast return to surplus has a ‘best-case scenario’ look about it.
New Zealand’s GDP figures will be released at 10:45am next Thursday and are expected to show the economy bounced out of recession in Q2. We’ve pencilled in a 0.4% q/q economic expansion, unchanged from our previously published forecast, and a touch below the RBNZ’s August MPS forecast of 0.5%. Given 0.6% q/q population growth in Q2, our forecast would be consistent with a continued contraction in per capita GDP.
8 September 2023: Show me the money (PDF 652KB)
The Global Dairy Trade (GDT) auction finally delivered some positive news! Whole milk powder (WMP) prices lifted 5.3% to trade at an average price of USD2,702/MT. We need to see further positive results to reach our current milk price forecast of $7.15/kg MS for the 2023-24 season.
Q2’s terms of trade rose 0.4% in Q2, stronger than we expected. Both import and export prices fell sharply, as ongoing softening in energy prices pushed import prices down 1.0% q/q, while export prices slipped a further 0.6% q/q.
The Treasury will open up the Government’s books on 12 September in the Pre election Economic and Fiscal Update – check out our preview. There is no hiding from the fact that the fiscals are in a much weaker position than forecast at Budget in May, with tax revenue for the 11 months to May 2023 running more than $2bn below forecast. That’ll need to be baked into the outlook.
1 September 2023: I’m still standing (PDF 576KB)
Thursday’s ANZ Business Outlook (ANZBO) showed good news all round. Business confidence lifted another 9 points in August to -4, the highest read since mid-2021. Expected own activity also jumped 10 points, to +11 and all activity indicators lifted, but remain subdued – hanging in there!
Consumers are a less happy bunch. This morning’s ANZ Consumer Confidence survey rose one point to 85, with the lift driven by an increase in the question of whether it’s a good time to buy a major household item, which rose from -39% to -31%. Consumer confidence is still below its readings in the GFC, as households navigate their way through rising prices, a softening labour market, and the highest mortgage rates in a decade.
Q2 terms of trade data are out next week. We’re picking a 0.6% q/q fall in the goods terms of trade. Our export prices are reliant on China’s economy, which is weakening rapidly, while import prices are not falling as quickly.
25 August 2023: Economy slowing, but is it enough? (PDF 520KB)
This week’s Q2 retail trade data (-1% q/q, core spending -1.8% q/q) highlighted that the economy is clearly slowing. The weakness in spending suggests cost-of-living pressures are well and truly biting for households.
This week also brought further evidence of deteriorating external demand, with a trade deficit of $1.1bn in July. As we noted last week, global dairy prices have plummeted at recent Global Dairy Trade auctions, suggesting further export weakness ahead. China’s slowdown is certainly taking its toll, with the value of New Zealand’s exports to this destination down 24% y/y.
A challenging path lies ahead for the economy. Both we and the RBNZ are forecasting the economy is in recession (starting from Q3). But what remains highly uncertain is how much the economy must slow to get inflation back to target. We think RBNZ will eventually need to do more to get on top of inflation, but we are closely watching China’s slowdown, which could do the job for it.
18 August 2023: Domestic tailwinds meet external headwinds (PDF 544KB)
This week’s dataflow confirmed the dynamic we noted in our Quarterly Economic Outlook: the economy is facing risks in both directions. Weakening external demand will spill over into domestic consumption and investment. But for the time being, those risks are outweighed by tailwinds to domestic demand from net migration and a turning housing market.
As expected, the RBNZ left the Official Cash Rate unchanged at 5.50%, with a balanced tone. However, it unexpectedly lifted its OCR projection slightly (by 9bps), adding a hawkish tilt to the Monetary Policy Statement. While the Governor was at pains to downplay this as any kind of signal as to the likelihood of future moves, that’s what the OCR track is, at the end of the day, and it was a small but clear step towards our view that the RBNZ will hike again in time.
11 August 2023: What to expect when they’re expecting (PDF 604KB)
The RBNZ’s latest Survey of Expectations released this week showed gradual progress with regard to inflation expectations. Aside from a surprising tick up in the 2-year ahead measure from 2.79% to 2.83%, expectations fell across the curve. 1-year ahead inflation expectations fell 11bps to 4.17%, while the 5-year and 10-year ahead measures declined slightly to be 2.25% and 2.22% respectively, still above the 2% midpoint of the target band.
Other measures of inflation expectations such as in our own Business Outlook and Consumer Confidence surveys have been trending down in recent months, but remain higher than the RBNZ’s survey of professional forecasters. Also bucking the trend, 2-year ahead inflation expectations in the ANZ-Roy Morgan consumer confidence survey jumped from 4.3% to 4.7% in July, coinciding with the end of fuel excise and other transport subsidies. In the RBNZ’s own survey of households, inflation expectations have not yet budged from a peak north of 7%.
While we think the RBNZ can take some comfort in the gradual downtrend in inflation expectations in recent months, it’s too soon to call mission accomplished. Measures remain well in excess of target and more progress will be needed for the RBNZ to be confident that rates are sufficiently restrictive.
Next week is all about the RBNZ’s August Monetary Policy Statement (MPS). We expect the RBNZ will keep the OCR unchanged at 5.50%, and reiterate their “watch, worry and wait” stance.
4 August 2023: Onward to November (PDF 556KB)
The RBNZ will take some comfort from the Q2 labour market report, but there was still plenty to be concerned about in the details. For the RBNZ, easing capacity pressures and wage growth off its peak are good news, though the labour market remains far beyond sustainable levels.
Both we and the RBNZ are expecting the labour market to loosen from here, but where we diverge is how quickly that will occur. At the May MPS, the RBNZ forecast that the unemployment rate would rise as steeply as it did during the Global Financial Crisis across the second half of this year, reaching 4.6% in Q4. While rising unemployment and underutilisation indicate that the labour market is indeed turning, it doesn’t feel that fast.
The themes of this week’s Q2 labour market statistics were in line with our expectation, and we’ve revised our forecasts only at the margin. We expect the unemployment rate to rise to 3.9% in Q3, below the RBNZ’s May MPS forecast of 4.1% and still solidly in inflationary territory. While stronger labour supply growth is helping to increase the slack in the labour market and thereby reducing wage pressures, we now expect stronger employment growth to offset that in the near term.
Ultimately, labour demand will slow; it cannot remain immune to slowing momentum in the economy indefinitely. Weak labour demand combined with persistent strength in labour supply (reflecting current high levels of net migration) is expected to see the unemployment rate lift sharply, peaking at 5.2% in 2025.
What matters for the RBNZ is pace of that increase, and therefore guiding the labour market out of inflationary territory. The longer the labour market remains beyond sustainable levels, the more oxygen is given to inflation through persistent labour cost inflation finding its way into consumer prices. We don’t expect that the labour market will transition to an outright disinflationary state until Q1 2024, meaning more persistent domestic-driven inflation and more work for the RBNZ to do.
28 July 2023: The tale of two 6’s (PDF 496KB)
The downside surprise to Australian CPI was welcome news on Wednesday, supporting our call that the RBA will take an extended pause, leaving the cash rate at 4.1%. Here in New Zealand, we remain unconvinced that the RBNZ has done enough to get inflation sustainably back to target.
Australia’s quarterly inflation impulse from non-tradables and services both decelerated markedly, and trimmed mean inflation came in below the RBA’s expectation. In New Zealand, in contrast, while headline inflation declined, non-tradables and the suite of core measures showed worrying persistence.
Next week brings the release of the key Q2 labour market statistics. We expect the data to show a relatively looser picture than Q1, but in an absolute sense the labour market remains intensely inflationary. We expect the unemployment rate ticked up 0.1ppt to 3.5%, as 0.6% q/q growth in employment absorbed almost all of the new supply capacity from the migration-driven 0.7% q/q expansion in working age population.
21 July 2023: Q2 CPI points to sticky situation for RBNZ (PDF 548KB)
While headline inflation was in line with the RBNZ’s May MPS forecast, the details of the release were on the more worrying side with some evidence to suggest inflation could be ‘normalising’ above the RBNZ’s 2% target midpoint – which is ultimately the RBNZ’s biggest fear.
Sticky domestic inflation risks are going to remain a big worry for the RBNZ for as long as the labour market is unsustainably hot, with high labour cost inflation passing through to consumer prices. The Q2 labour market data is published 2 August – we’ll get our preview out next week. We now expect annual inflation to decline only slightly in Q3, from 6.0% y/y in Q2 to 5.8% y/y (previously 5.6%).
In other news this week, we have revised down our farmgate milk price forecast for the 2023-24 season by 50c to $7.75/kg milksolid. Global demand for dairy products has been impacted by deteriorating economic conditions affecting consumer demand, particularly in China. Our forecast for 2022-23 remains at $8.20/kg milksolid. We have also introduced a new publication: ANZ NZ Merchant and Card Spending, a monthly chartpack showing the annual change in nominal merchant spend using ANZ data.
13 July 2023: RBNZ holds, next up Q2 CPI (PDF 520KB)
As universally expected, the RBNZ left the OCR unchanged at 5.5% this week, and confirmed it remains comfortably on hold while it waits to see the impacts of the rapid tightening thus far. We maintain our OCR forecast and continue to pencil in a 25bp hike in November.
There have been a few unders and overs in the data flow since the May MPS, but the hurdle for deviating from what’s a very fresh ‘on-hold’ strategy was always high.
Interestingly, the RBNZ acknowledged that the house price forecasts presented in the May MPS were too pessimistic – we agree and the June REINZ release does too.
The Q2 CPI is the next cab off the ranks (out next Wednesday). We expect annual inflation to decline to 5.9% in Q1 2023, below the RBNZ’s February MPS forecast of 6.1%. The bulk of the decline in annual headline inflation reflects an anticipated sharp fall in annual tradables inflation from 6.4% to 5.3%, as the price increases seen in the wake of the war in Ukraine fall out of the annual calculation. We expect annual non-tradables inflation is also past its peak, falling from 6.8% to 6.4%, close to the RBNZ’s forecast of 6.3%, but still roughly twice the level consistent with their target.
All up, the Q2 CPI release is expected to show things moving in the right direction. But that doesn’t necessarily mean the RBNZ has done enough to get on top of medium-term sticky domestic inflation risks. It’s very unlikely these data will give the RBNZ enough of a signal to challenge their watch, worry, and wait strategy, but the market may well disagree with that assessment on the day.
7 July 2023: Take the wins (PDF 520KB)
The messages out of the Q2 Quarterly Survey of Business Opinion were somewhat mixed. While confidence and experienced trading activity improved, expectations of future activity fell back towards Q4’s lows. Pricing and cost indicators remain elevated, but positively, expected costs and selling prices both fell.
Most importantly, supply-side constraints eased further. The biggest news was a surprisingly sharp fall in capacity utilisation from 94.0% to 87.1% – not far off the low seen during the GFC. That will be welcomed by the RBNZ, as it should help to cool inflation pressures.
We expect the RBNZ to keep the OCR unchanged at 5.5% at next week’s Monetary Policy Review. The RBNZ made it clear at the May Monetary Policy Statement that they are firmly in “watch, worry and wait” mode, as they are optimistic that they have done enough to bring inflation sustainably back to target. That remains to be seen, of course, but the data flow since May has broadly printed in line with RBNZ expectations.
30 June 2023: Cautious optimism (PDF 580KB)
Business and consumer sentiment both improved in June, following the RBNZ calling time on rate hikes in the May Monetary Policy Statement. While still very much subdued, the improving mood signals demand may prove a little more resilient across the second half of the year than the RBNZ is expecting, risking core inflation proving more persistent.
The improving tone of our consumer and business surveys doesn’t exactly resonate with the RBNZ’s efforts to engineer a slowdown, but it’s too early to say whether the optimism will persist. The improvement is conditional on inflation obediently falling back to target. Falling inflation expectations are a great start, but we suspect that an underlying inflation impulse will linger, tied to a relatively resilient labour market. We think the RBNZ will be forced to crash this somewhat sombre party by November.
This week we published our Property Focus. May’s data supports our assessment that the housing market has indeed found a base, with house prices on the cusp of lifting. We are forecasting house prices to claw back just a 3% lift across the second half of the year, but recent data suggests our forecast may be on the conservative side.
23 June 2023: Getting the balance right on the ETS (PDF 528KB)
The review of the Emissions Trading Scheme (ETS) moved to the public consultation phase this week. Under the current settings the ETS is expected to drive large-scale exotic afforestation but will not deliver a sufficiently high carbon price to incentive significant reductions in gross emissions.
It’s crucial that the Government keeps the purpose of the ETS front and centre in its deliberations. Welfare impacts on households can and should be addressed separately. The ETS will only work if the relative price of fossil fuels is allowed to rise.
Next week brings the monthly employment indicators for May and our consumer and business confidence surveys. These are important for getting a timelier gauge of where the economy is heading, and we’ll be watching for signs of resilience.
16 June 2023: A cyclone-driven recession (PDF 912KB)
The economy contracted 0.1% q/q on a seasonally adjusted basis in Q1. That was weaker than our expectation of +0.2% q/q, and the RBNZ’s +0.3% q/q, but broadly in line with the median market expectation.
Migration-induced population growth is bolstering demand for goods and services and adding to the supply of labour, and both will be a positive influence on headline GDP growth. But per capita GDP growth at -0.7% q/q shows economic conditions are quite soggy out there. High inflation and higher interest rates are certainly taking their toll.
Given the degree of noise in the GDP data at present, uncertain cyclone impacts, and sticky CPI inflation risks, we don’t think the GDP data will knock the RBNZ off its ‘watch, worry and wait’ course. A slowdown is unfortunately part of the plan.
Further, while the starting point for GDP may be weaker than our expectation, new economic tailwinds are now emerging before annual non-tradables inflation has even turned a corner. We see upside risks to growth momentum over the second half of the year due to both strong net migration and fiscal stimulus. Now we have Q1 GDP data, we’ve today updated our macroeconomic outlook for these significant developments.
In this week's special topic, we explore the implications of New Zealand’s wide current account deficit for the Kiwi.
9 June 2023: China's slowdown could exacerbate NZ's (PDF 500KB)
As the debate over whether central banks have done enough to quell inflation in advanced economies goes on, China’s experience stands out as markedly different, with the economy facing the risk of deflation as growth momentum weakens. With China New Zealand’s largest trading partner by far, it matters.
China’s PMI readings for May suggested that the contraction in the manufacturing sector accelerated both domestic and external demand softened, with excess capacity putting downward pressure on prices and dragging on profits. While the recovery in the services sector was ongoing in May, it stepped down in pace. Consumer sentiment is languishing, weighed down by weak wage growth and deteriorating labour market conditions. Weaker confidence is driving precautionary saving and weighing heavily on property sales.
On the plus side, weaker growth in China is supporting ongoing global goods disinflation. However, weaker growth in your biggest trading partner can only ever be at best a mixed bag. The flipside is New Zealand’s export prices haven’t experienced the anticipated boost from China’s reopening either. Reflecting concerns about China’s growth outlook, this week we revised down our 2023/24 season farmgate milk price forecast 25c to $8.25/kg MS.
Looking ahead, next week brings a blockbuster data flow, chief among them Q1 GDP (released on Thursday). We’ve pencilled in a 0.2% q/q expansion, as strong population growth more than offsets disruption from Cyclone Gabrielle. While the economy is certainly slowing in response to higher interest rates, we think part of the weakness in GDP growth can still be explained by lingering supply constraints.
On Wednesday, Balance of Payments data are also released. We’re expecting the annual current account deficit narrowed to 8.7% of GDP from the record-wide 8.9% of GDP in Q4. While a narrowing in the deficit is good news, the level remains far too high.
2 June 2023: Resilience evident (PDF 452KB)
This week we revised up our house price forecast, calling the floor and expecting prices to lift a bit over 3% over the rest of the year. Recent data suggests a turn. House prices were flat in April, and auction clearance rates in Auckland have risen quickly. Sales volumes remain very weak, but with new listings also weak, inventory levels are tightening. A surge in Barfoot & Thompson sales in May highlights the direction of risk.
This week’s ANZ Business Outlook survey also gently challenged the RBNZ’s narrative of widespread sogginess across the economy, with most activity indicators off their lows and rising. While most indicators are still at weak levels, the direction of travel doesn’t suggest things are rolling over rapidly. Positively, most inflation indicators eased, although only gradually. While inflation is on its way down, we’re not convinced the job is 100% done. We expect the RBNZ will be back at the hiking table by the end of the year.
By November, the RBNZ expects the economy to be in a demand-driven recession, with the unemployment rate to have lifted to 4.1%, house prices to still be falling and non-tradables inflation to be down to 5.7% y/y. We will wait for Q1 GDP data to update our forecasts and incorporate the Budget and migration news. But in short, we think the data will tell a more resilient story on balance, warranting a further hike and risks of another. November is a long time away, and our call may well look wrong before it comes right.
26 May 2023: On pause … until November (PDF 524KB)
As expected, the Reserve Bank raised the OCR 25bp to 5.5% this week, but the tone of the MPS was much less hawkish than either we or the market were expecting.
Last week’s Budget didn’t seem to concern the RBNZ, despite their warnings in April that it was an upside risk to inflation. It’s true that inflation is hitting the Government too, meaning the Government is using less of the economy’s capacity for the same nominal spend. But an injection of 1.4% of GDP next fiscal year in an economy that continues to run up against capacity constraints seems likely to culminate in stronger inflation pressures.
Then there was the migration puzzle. After identifying it as an upside risk to medium-term activity and inflation in April, the RBNZ sounded far more unsure this month. The RBNZ has tripled its assumption for annual net migration (working age) for 2023 to 75,200. While that’s likely to ease constraints in the labor market and put downward pressure on wages, we are wary of the impacts on general demand and house prices and rents in particular, just as the housing market is showing signs of life.
Given these upside risks, we still think further hikes are on the table, but it’s a high hurdle for the RBNZ to recommence tightening having called a pause now. Looking at the key incoming data before the next few meetings, we don’t see it as being enough to sway the RBNZ from holding rates at 5.50%. But we expect these demand effects will continue to build, and by November the case for further hikes will be clear.
By November, we’ll have Q2 GDP, which we expect to show a bounce-back from cyclone-induced weakness in Q1. We’ll have more survey data (QSBO, ANZBO, HLFS) on whether capacity is opening up as rapidly as the RBNZ requires, and the election will be out of the way. We’ll have more data on wages and CPI that will reveal how fast inflation pressures are dissipating. We’ll also know whether the housing market is trending up, down or sideways.
In past tightening cycles the Reserve Bank has paused before hiking again. In 2005 it paused for six months before hiking twice, then went on hold for over a year before hiking four more times. A pause is not necessarily a peak; the data will dictate. We expect by November the data will show inflation still sticky, and we see the risk of a further follow-up hike. We’ve pushed back our expectations of cuts a little, to start at the very end of 2024.
19 May 2023: Awaiting RBNZ's take on a big Budget (PDF 572KB)
Budget 2023 is another big budget with a focus on the cyclone rebuild and the cost of living. Responding to the cyclone is absolutely the right thing to do, but current macroeconomic conditions mean that because this isn’t going be paid for with higher taxes or more significant reprioritisations, it implies more macroeconomic stimulus, more pressure on CPI inflation, and therefore upside risk to the OCR outlook.
Spending (both operational and capital) is higher. After accounting for reprioritisations and the usual reshuffling of Government spending between fiscal years (owing to delays etc), Budget 2023 injects a little more than $5bn of additional spending (opex and capex) into the economy in the very near term (year to June 2024) compared to the Half-Year Update. That’s about 1.4% of GDP over the next year for the RBNZ to consider next week.
The current macroeconomic context is not conducive to further fiscal expansion, particularly in the near term. A near record-low unemployment rate shows there is currently little spare economic resource to accommodate additional demand. The Treasury’s own report states “Our rule of thumb for the impact of fiscal policy on inflation and interest rates is that an additional fiscal stimulus equal to 1% of GDP would cause the OCR to rise by an additional 30 basis points”. That’s something the RBNZ will be considering next week.
We expect the RBNZ will raise the Official Cash Rate (OCR) 25bp to 5.50% at its Monetary Policy Statement (MPS) next Wednesday. Clearly a pause is now a very unlikely scenario, and the odds of another 50bp hike have risen. We’d now put the chance of a 50bp lift as high as 40%. We’d also put greater odds on the May MPS showing a higher OCR forecast peak than our 5.7% expectation. A 6-handle can’t be ruled out.
We have built one more 25bp hike in July into our own OCR forecast, which would take the OCR to 5.75%. The (relatively) happy place to sit and “watch, worry and wait” keeps inching just out of reach.
12 May 2023: Budge up and the Budget (PDF 600KB)
The REINZ House Price Index was unchanged on a seasonally adjusted basis in April. Coupled with a 7.1% m/m (sa) increase in sales (albeit from very low levels), and no change in the number of days to sell, the outturn was consistent with a housing market that’s nearing a turn. While it’s only one month of data, it adds upside risk to our recently updated house price forecast (an 18% peak-to-trough decline, from 22% previously). While we’re not expecting house prices to take off again, the boost to demand from surging migration does pose some upside risk. Net migration continued to surge in March, with a net inflow of 12,100 new migrants, and revisions to Stats NZ’s historical data adding an extra 1000 migrants in the last year. The annualised rate for the first three months of the year is nearly 130k – well in excess of the highs we saw pre-COVID, and adding upside risk to our activity, labour supply and house price forecasts, as we all budge up. The impact on inflation, however, is ambiguous. All else equal, greater labour supply will ease capacity constraints in the tight labour market and reduce wage pressures. But wages tend to respond with a lag, and new migrants entering the country add to demand in other areas, particularly the housing market. The overall inflation impact of migration will partly depend on the composition of new migrants, but our gut feel is that it’s an upside risk to the OCR.
5 May 2023: Q1 labour market data not a game changer for RBNZ (PDF 644KB)
Wednesday’s labour market data offered little to suggest that momentum turned meaningfully south in Q1. The unemployment rate gave away no secrets, being unchanged at 3.4%, but underlying that were strong details. Bumper employment growth of 0.8% q/q outpaced migration-driven growth in the working age population of 0.5% q/q, seeing the employment rate rise 0.2%pts to a fresh record high of 69.5% (and 80.4% for those aged 15-64, which for comparison, is 3%pts higher than Australia). However, in terms of the unemployment rate, this was offset by a lift in the labour force participation rate to a fresh record high of 72.0%. If participation had held at its previous level, the unemployment rate would have fallen to 3.1%. The strength of employment thus in part reflects an improvement in labour supply, and there’s likely an element of ‘catch up’ occurring, with previously unmet labour demand now being worked through. So, it would be a mistake to read the data as a sign that labour demand is gaining fresh momentum. Nonetheless, it’s clear that labour demand remained strong in Q1. Wage growth accelerated, although annual growth in the private sector Labour Cost Index at 4.5% came in lower than expected by both us (4.8%) and the RBNZ (4.7% y/y). This will be welcomed by the RBNZ, given the importance of wage inflation to the outlook for non-tradables inflation. All up, we don’t see the outturn as a game changer for the RBNZ. Although the starting point for the labour market is broadly tighter than they expected in February, there are lots of moving parts on the supply side; this is very much a look in the rear-view mirror; and forward-looking indicators do signal waning labour market pressures over the rest of the year. The themes of this week’s Q1 labour market statistics were in line with our expectation, and we’ve only revised our forecasts at the margins. Weaker demand as supply continues to improve is expected to cause the unemployment rate to rise from 3.4% currently to 5.4% by the end of 2024. Lower wage inflation (than we were expecting) does add some downside risk to our non-tradable inflation forecast, all else equal. But to put it in context, the LCI still remains at a record high, and we’re still expecting non-tradables inflation to prove persistent across the second half of the year. As noted above, disinflationary wage impacts from stronger labour supply could be more than offset by the inflationary impacts of associated stronger demand. Decision time is looming for the RBNZ. Markets are worried about a potential 50-pointer after strong Q1 labour market data, and the RBA’s surprise hike this week. But blasting through the previously announced expected OCR peak would be an aggressive move that just doesn’t strike us as necessary when ‘new news’ has been mixed, and rates are there or thereabouts.
28 April 2023: LVR restrictions to ease; Q1 unemployment to fall (PDF 652KB)
The Reserve Bank announced this week that they are proposing an easing of the ‘speed limits’ on high loan-to-value (LVR) restrictions from 1 June. The decision looks startling on the face of it, but it’s important to note, however, that financial stability tools and monetary policy are separate. It’s monetary policy’s job to respond to the consequences of macro-prudential policy settings, whatever they may be. It is difficult to quantify the impacts of the proposed LVR changes, given the uncertainty around the outlook for the housing market. While banks are currently pretty much filling their high LVR-lending allotments, it’s not a given that the proposal will see banks lend up to the new limit. We’ll be watching lending data closely in the coming months to see how much unmet demand for higher LVR lending is being unmet and what the consequences of unleashing it will be. Next week sees the release of NZ Q1 labour market data. As we note in our Preview, the New Zealand labour market remains exceptionally tight. Unemployment is forecast to dip 0.1ppt to 3.3%, driven by a 0.5% q/q (1.9% y/y) lift in employment. We expect wage growth accelerated, with finding labour still the biggest problem facing firms in Q1 according to our Business Outlook survey, tourism demand keeping the pressure on, and inflation expectations elevated. We expect QES private sector average hourly earnings (ordinary time) to rise 2.1% q/q (8.3% y/y), and the productivity-adjusted private sector labour cost index to lift 1.2% q/q (4.8% y/y). This week we also published out latest Property Focus. In it, we upgraded our house price forecasts, and now expect a peak-to-trough decline of 18% (from 22% previously). This has been driven by slightly stronger than expected housing market data of late, falls in some fixed mortgage rates, and a proposed easing of high-LVR lending restrictions.
21 April 2023: Weaker than expected CPI, but still way too high (PDF 628KB)
The Q1 CPI surprised to the downside versus our forecast, but this was a volatile tradables inflation story. Non-tradables came in as expected, accelerating to a new high of 6.8% y/y. Under the hood, some measures of ‘sticky’ inflation continued to accelerate in Q1, suggesting the RBNZ still has plenty to worry about. Annual non-tradables inflation was 0.3% points below the RBNZ’s forecast. But while a weaker non-tradables inflation starting point reduces the risk of the OCR needing to go higher than the 5.5% peak we are forecasting, there are offsets: there could be more fiscal stimulus to lean against come Budget day, and the RBNZ may yet have more cyclone-related inflation to bake into their outlook (as signalled in the April Monetary Policy Review). After accounting for the starting point, our inflation outlook is little changed from previously. We have retained previous cyclone impact assumptions, and still see plenty of underlying inflation pressures stemming from the too-tight (but loosening) labour market. We continue to expect a 25bp hike at next month’s MPS. The Q1 CPI data is likely not going to be seen by the RBNZ as warranting a pause, but it should rule out another 50bp hike. In other news, REINZ housing data for March and net migration data for February present fresh upside risks to our outlook for housing and GDP. But that begs the question: is the RBNZ ready to tolerate that?
14 April 2023: All about CPI (PDF 564KB)
We’ve decided to wait until Monday’s March food and rents data before publishing our Q1 CPI Preview. While these data only represent about 10% of the Q1 CPI, there is plenty of scope for cyclone impacts to be larger or smaller than our working assumption. And this could be the difference between annual inflation accelerating or decelerating from Q4. Assuming a 1% m/m rise in the March FPI and a 0.4% m/m rise in rents, our data monitoring suggests headline CPI inflation will come in 0.1 percentage points weaker than our current published forecast of 7.3% y/y. At the current juncture, it looks like the hurdle for an upwards surprise to the RBNZ’s non-tradable inflation forecast in Q1 is pretty high – but we’ll never say never given the recent tendency for these data to surprise. The million-dollar question is whether weaker non-tradable inflation in Q1 than the RBNZ’s forecast will warrant a change in monetary conditions. That’s how the market is likely to interpret the data, but we’re not so sure. The RBNZ did signal a potential upgrade to its inflation outlook in the April Monetary Policy Review, and that suggests that a weaker starting point for non-tradable inflation may not be a game changer for overall policy settings. The RBNZ needs inflation and inflation expectations to fall, and the output gap to turn negative to be confident that a peak OCR of 5.5% is restrictive enough. A higher inflation outlook, further increases in inflation expectations, or another supply shock could all mean the OCR will need to be more restrictive than otherwise. Taylor Rules demonstrate this risk.
6 April 2023: Another 50 (PDF 620KB)
The RBNZ hiked 50bp this week, defying both market and analyst expectations for a 25bp hike. We’ve updated our OCR call, banking the 25bp surprise in April and maintaining our expectation for a 25bp follow-up in May (which will take the OCR to a peak of 5.5%). We’ve also pencilled in three cuts for late 2024. The RBNZ also announced this week that it intends to add a new financial stability tool to its tool belt: debt-to-income restrictions, which could come into force from March 2024. The NZIER’s Quarterly Survey of Business Opinion showed capacity and price pressures are on the right trajectory, but the overall level of these indicators suggest the RBNZ hasn’t got the economy back into balance just yet. Government financial statements show downside economic and upside interest rate risks to the Treasury’s Half-Year Update forecasts are materialising.
31 March 2023: To 5% and beyond (PDF 604KB)
Global markets tentatively stabilised this week. At 0.4% m/m, filled jobs growth in February points to upside risk to our Q1 employment forecast. Our Business Outlook remained stable at generally pessimistic levels, suggesting the RBNZ is getting traction. February’s 9% fall in building consents suggests traction is real too. Labour productivity recovered sharply in the year to March 2022 as the COVID-induced shackles loosened. We expect the RBNZ to hike 25bp next week, and keep a follow up in May on the table.
24 March 2023: A more cautious Fed (PDF 596KB)
With a very light data calendar this week, all eyes were on how the US Federal Reserve would react to recent issues in the global banking sector. On the day, they hiked the federal funds rate 25bp to a range of 4.75%-5.0%, but softened their forward guidance, and acknowledged tighter credit conditions could weigh on inflation. The Ministry for the Environment announced a review of the Emissions Trading Scheme to assess changes required to encourage emitters to reduce CO2 emissions, rather than just offsetting polluting activities by planting trees. RBNZ Chief Economist Paul Conway delivered a speech yesterday titled “The path back to low inflation in New Zealand”. The speech hammered home some of the key messages from the February Monetary Policy Statement, but didn’t contain any new news.
17 March 2023: Volatility (PDF 620KB)
Financial market volatility lifted sharply this week in the wake of bank collapses in the US and as contagion later spread to Switzerland. Q4 GDP data showed the economy shrank 0.6% q/q in Q4, while the current account deficit expanded further to -8.9% of GDP (a fresh record). We published a Forecast Update, refreshing our macroeconomic forecasts and extending them to include 2025. Our OCR call (for a 5.25% peak by May 2023) is unchanged.
10 March 2023: Powell hawks it up (PDF 680KB)
Hawkish comments from Fed Chair Jerome Powell, combined with ongoing strength in US labour market data, saw market expectations for the fed funds rate take another leg higher this week. The domestic data flow was mixed, with the volume of building activity falling 1.6% q/q in Q4, after Q3’s upwardly revised 5.3% bounce. We’ll be releasing our Q4 GDP Preview later today. Our latest Insight note takes a look at how inflation pressures are rotating away from goods prices and into sticky services prices. The feedback loop between a super-tight labour market and surging services inflation will be a key determinant of how far (and how quickly) the RBNZ will raise interest rates.
3 March 2023: Mixed bags and second winds (PDF 632KB)
We released the latest edition of our Property Focus this week. House prices have fallen 15% from their November 2021 peak, and we continue to forecast a 22% peak-to-trough decline. Activity indicators were a mixed bag. Q4 retail sales volumes fell 0.6% q/q, while our February Business Outlook survey showed another incremental improvement in business confidence and the activity outlook. Timely indicators point to a more resilient labour market than expected over the first half of this year.
17 February 2023: Devastation (PDF 564KB)
The scale of Gabrielle’s destruction is hard to fathom. It will have economic reverberations for years to come. The rebuild effort will increase resource stretch in the economy, and will be inflationary. Targeted fiscal policy is a better tool than blunt monetary policy to provide disaster relief. Deferring OCR hikes could do more harm than good, and we continue to expect a 50bp hike next week. But the RBNZ can help by scaling back or suspending quantitative tightening to facilitate funding the fiscal response.
10 February 2023: A higher minimum (PDF 528KB)
This week we released our first Quarterly Economic Outlook of 2023. We expect the RBNZ will join other central banks in dialling back the pace of interest rate hikes at their first meeting of 2023, on 22 February, delivering a 50bp OCR hike (to 4.75%). We see risks on both sides of our call for a 5.25% peak in the OCR. There are plausible scenarios where the RBNZ could end up delivering a series of further ‘top-up’ hikes over 2023 and 2024, or could find themselves cutting rates aggressively if spending and employment deteriorate by more than they anticipate. The Government announced the minimum wage will be increased by $1.50 to $22.70/hour from 1 April 2023. The announcement will likely cause overall wage (and CPI) inflation to be marginally higher than otherwise. But unless that bleeds through into higher inflation expectations, it’s unlikely to influence the RBNZ’s decision.
3 February 2023: A tough week (PDF 608KB)
The unprecedented rainfall and flooding across parts of the North Island have seen lives lost, homes and businesses destroyed, and infrastructure damaged. The economic cost is, as yet, unknown. Our initial view is the floods are unlikely to be a game changer for the economic outlook, but they will likely be inflationary. Q4 labour market data this week portrayed conditions the RBNZ would no doubt still assess as being ‘beyond maximum sustainable employment’. But in a similar theme to last week’s Q4 CPI report, the data just weren’t as strong as the RBNZ expected back in November, reinforcing our expectation that the RBNZ will downshift to a 50bp hike at their 22 February meeting. We have updated our labour market forecasts for the Q4 data. We expect the labour market to soften over 2023 and 2024 as higher interest rates see the domestic economy contract. Unemployment is forecast to lift from Q4’s still-low 3.4% to a peak of 5.4% in 2024, with wage growth slowing over this period. The Government has announced an extension to the cost of living support measures introduced last year (including the 25 cents/litre reduction in fuel excise duty). These are now due to finish at the end of Q2 (previously Q1). We have updated our CPI forecasts to account for this, and estimate it will shave 0.5ppt off our annual CPI inflation forecast in Q2, but add 0.5ppt in Q3. We have also attempted to factor in the inflationary impacts of the flooding on CPI components like fruit and vegetables, insurance, and used cars.
27 January 2023: A slower pace (PDF 624KB)
This week’s CPI report showed inflation in New Zealand remained far too strong at 7.2% y/y in Q4. But the details were much better than the RBNZ feared back in November. The RBNZ then expected inflation to re-accelerate to 7.5% (it was stable at 7.2%) with non-tradables inflation lifting to hit a fresh record high of 7.0% (instead, it was also stable at 6.6%). We have subsequently changed our OCR call, and now expect the RBNZ to hike the OCR 50bp in February (previously 75bp), followed by two more 25bp hikes, bringing the OCR to a peak of 5.25% by May (previously 5.75%). The RBNZ’s inflation battle is far from over, and there are still aspects of the CPI data that are concerning. But having updated our inflation outlook to incorporate the Q4 data, we think non-tradables inflation will come in significantly below the RBNZ’s forecast over the next two years, and combined with deteriorating activity indicators, we think there’s a strong argument for the RBNZ to dial back some of the additional hawkishness it added in November. Next week will bring the Q4 labour market report – another key release ahead of the RBNZ’s February meeting. We expect the data will echo the relentless strength seen in the labour market over 2022, with unemployment picked to dip 0.1ppt to 3.2%, and private sector wage growth likely to accelerate further as well. But that’s old news to some extent, with timely indicators of labour demand pointing to a significant softening in the labour market over 2023.
20 January 2023: No respite from high inflation (PDF 640KB)
The Q4 QSBO, surveyed after the RBNZ’s hawkish November MPS, reiterated the risk that economic momentum may slide further and faster than the RBNZ is intending. But with labour market capacity measures still far too high, and cost and price measures also increasing, it’s not clear the RBNZ will feel they have the flexibility to ease back on the aggressive pace of OCR hikes anytime soon. December food price inflation did nothing to quell inflation fears, with food prices up 1.1% m/m (11.3% y/y). They are usually flat/falling in December. The housing market ended 2022 on another soft note, with prices falling 1.2% m/m in December (ANZ seasonal adjustment). Prices are now down 15% relative to their November 2021 peak. Stats NZ release Q4 CPI data next week, and we anticipate annual CPI inflation remained high at 7.2% y/y. That’s a touch lower than the RBNZ’s November MPS forecast for 7.5%, but with non-tradables inflation forecast to accelerate to 6.9% y/y (6.6% previously, RBNZ picking 7.0%) we’d be hesitant about celebrating too soon. The indicators point toward inflation falling over 2023, but the RBNZ may need to see it in the data to believe it.
13 January 2023: Finally getting traction (PDF 672KB)
The risk profile around future monetary policy moves is evolving. Inflation in New Zealand is far too high and looking well entrenched, but early signs are that the shock value of the November Monetary Policy Statement could have been very significant. We see downside risks to our OCR call (a peak of 5.75%), but upcoming Q4 CPI data will be key. Stats NZ released monthly filled jobs data for November, which showed ongoing resilience in the Kiwi labour market. Filled jobs were up 0.2% m/m in November, matching October’s upwardly revised 0.2% lift. But storm clouds are building for the labour market over 2023, with employment intentions and job ads falling in recent months. In an encouraging development, annual US CPI inflation dropped to 6.5% in December (down from a peak of 9.1% in June). But services inflation is still rising on an annual basis, and combined with a still-solid labour market, we think that will see the Fed deliver two more 25bp rate hikes, bringing the ceiling of the fed funds rate corridor to 5%.