ANZ Data Wrap

1 July 2022: House building to fall in 2023 (PDF 588KB)
The data flow this week reinforced recent themes – the outlook for economic activity is softening, but inflation remains far too high, and the labour market is showing no signs of slowing. With filled jobs rising 2.9% y/y in May, we suspect labour market tightness will get worse before it gets better. Our Business Outlook and Consumer Confidence surveys continue to make for grim reading, with inflation expectations still too strong, but confidence levels remaining worryingly low. Supply side issues continue to dominate firms’ concerns – highlighting the trade-off that has developed between stabilising inflation, and supporting growth. Our latest edition of the Property Focus does a deep dive into the outlook for residential investment – and it’s not looking flash. A confluence of factors on the demand and supply sides of the housing market are converging to create a soggy outlook for construction. We’re forecasting a 6% fall in residential investment in 2023.

 

23 June 2022: Watching like hawks (PDF 688KB)
With the RBNZ well on the way with its hiking cycle, the question now is at what point will they be satisfied they’re gaining traction on inflation, and feel comfortable returning to more normal 25bp hikes. We’re currently picking that to be after a fourth 50bp hike has been delivered in August. Official data are slow to be released, so the RBNZ will be keeping a very close eye on business and consumer surveys (which picked 2021’s surge in inflation well before most of us forecasters), as well as timely indicators like job vacancies, employment intentions, and monthly filled jobs data. Market expectations for New Zealand interest rates also matter – and these have surged in the past couple of weeks, on the back of a global reassessment of how far interest rates will have to rise to curb inflation. This has flowed through into higher domestic mortgage rates, adding to what’s already been a big tightening in financial conditions these past several months. That’s doing some of the RBNZ’s tightening work for them.

 

17 June 2022: Fifty-fifty-fifty-fifty (PDF 700KB)
We have tweaked our OCR call and now expect the RBNZ will lift the OCR by 50bps in both July and August (previously we were picking 25bps for August). We still think the RBNZ will be surprised by how rapidly it gets traction on domestic demand. But with solid monthly labour market and inflation indicators out in recent weeks, we’re just running out of time for the data to soften enough for the RBNZ to revert to 25bp hikes by August. Overseas developments have also put upwards pressure on interest rates, with inflation in the US last Friday printing at 8.6% in May (up from 8.3% previously), dashing the Fed’s hopes that inflation would ease over the rest of 2022. In response, the Fed hiked by 75bps – three times the normal size of hikes. GDP data for Q1 showed the economy shrank 0.2% q/q at the start of the year as Omicron constrained activity. We’ve pencilled in a 1.4% q/q rebound in Q2. But looking ahead, we think the domestic growth pulse will wane as high interest rates, high inflation, and falling house prices take their toll. A recovery in services should provide some offset as international tourism starts to recover.

 

10 June 2022: The S Word (PDF 700KB)
The word of the week was stagflation, with global markets fretting about the risk of global growth stalling even as inflation pressures remain high. Surging oil prices have only added to these concerns, with oil trading at around USD120/barrel over the week (versus USD73/barrel at the start of the year). But don’t expect downside growth risks to deter global (and local) central banks from continuing to rapidly hike interest rates. Inflation pressures are still far too strong – and many central banks are really only just starting their campaigns to restore price stability. Across the ditch the Reserve Bank of Australia (RBA) delivered a 50bp rate hike to 0.85%. The RBNZ will probably be quietly relieved to see the RBA getting on with their hiking cycle – as strong Australian labour demand is yet another source of pressure in our highly inflationary Kiwi labour market.

 

3 June 2022: Petrol points to 7% (PDF 660KB)
With petrol prices rising rapidly in the past few weeks we’ve tweaked our inflation forecast. We now expect inflation to peak at 7% in Q2, before easing (albeit remaining uncomfortably high for some time yet). Our forecast change has no implications for our OCR call. As tough as high inflation is for households, the real concern for the RBNZ is the persistence of domestic inflation pressure, rather than how high headline inflation prints due to oil prices. In this week’s edition of the Property Focus we also published a downgraded house price forecast. With the RBNZ turning even more hawkish last week, we’re now anticipating an 11% fall in house prices over 2022 (10% previously). A range of timely indicators out this week reinforced that we should see further softening in the housing market over 2022.

 

27 May 2022: How high can(t) you go (PDF 608KB)
This week the RBNZ lifted the OCR another 50bps to 2% - as was widely expected. The big surprise was just how aggressive their OCR forecast was, with the RBNZ forecasting the OCR could reach almost 4% in Q3 2023. Given the RBNZ’s laser focus on inflation, we’ve added another 50bp OCR hike in July to our forecast. However, we think domestic momentum will have slowed enough over the second half of 2022 that the RBNZ will feel comfortable returning to 25bp hikes at the August MPS. For similar reasons, we still expect a 3.5% peak in the OCR. For the RBNZ to be comfortable returning to 25bp hikes after July, they’ll need to see evidence that monetary policy is working and inflation pressures are retreating. We think our Business Outlook, which picked the rise in inflation over 2021 before most of us forecasters, will be a key indicator on the way back down. Consumer confidence, which remains at recessionary levels, is important too.

 

20 May 2022: Budget this week, MPS next week (PDF 660KB)
This week the Government released Budget 2022 – and it’s big, with the Government looking to tackle long term issues like climate change and health, while also providing some temporary relief measures to try and ease the burden of surging inflation. In the Treasury’s latest economic forecasts, real GDP growth has received a downgrade, with the economy expected to slow to a crawl over 2023. Inflation pressures are far too high (and persistent), and the Treasury are expecting the RBNZ will need to hit demand pretty hard to bring inflation back down. Next week the RBNZ are widely expected to lift the OCR another 50bps to 2.0%. We’ll be looking out for any changes in their estimate of the neutral OCR (ie the level of the OCR that is no longer driving inflation higher). Any upgrade to that estimate would, all else equal, increase the odds that the RBNZ isn’t done with 50bp hikes after next week.

 

13 May 2022: Rebalancing (PDF 612KB)
The Government has announced an “immigration rebalance”, which focuses on filling job vacancies in (mostly) high-paying and highly skilled industries. It represents a tightening in immigration policy, and means we most likely won’t see a return to the elevated levels of net migration seen in the 2010s. Next week the Government will unveil Budget 2022. With the domestic economy overheating, but long-term challenges around infrastructure, health, and climate change needing to be addressed, getting the balance right will be a tough gig. Whatever the Government decides, it’ll then be up to the RBNZ to set monetary policy to restore price stability. We continue to forecast a 50bp hike at the May meeting. But with longer-term inflation expectations measures no longer accelerating sharply, the RBNZ may conclude that they have the flexibility to take things at a more normal pace from the second half of the year.

 

6 May 2022: Central banks move against inflation (PDF 820KB)
Global central banks stepped up their campaign against inflation this week, with the US Federal Reserve delivering a 50bp hike, and the Bank of England and Reserve Bank of Australia raising rates by 25bps. As inflation pressures mount, there is an increasing sense of urgency amongst central banks around normalising policy settings. Q1 labour market data showed symptoms of COVID, with unemployment remaining flat at 3.2% (still a record low), underutilisation up, and hours worked down. But with peak Omicron disruption hopefully in the rear-view mirror, we should see the labour market tighten further over mid-2022. The big news story in the labour market data was the sharp acceleration in wage inflation, which has comfortably hit post-2009 highs across multiple measures. Our updated forecasts suggest hourly earnings growth could start to exceed inflation as early as the second half of this year.

 

29 April 2022: Another fall in unemployment expected (PDF 632KB)
Our latest Property Focus does a deep dive into regional housing markets. The housing slowdown has spread across the country, and we wouldn’t be surprised if annual house price inflation turned negative across all regions at some point this year. We continue to forecast a 10% fall in national house prices over calendar year 2022, with the tight labour market providing a buffer against even larger falls. With the housing market in retreat, it’s no surprise our latest Business Outlook shows inflation pressures easing in the construction industry. We expect next week’s labour market data will show unemployment fell to 3.1% in Q1 (vs. 3.2% in Q4). The data may be noisy due to Omicron disruption, but labour market tightness likely stretched further into uncharted territory in Q1, and that should reaffirm the need for a 50bp OCR hike at the RBNZ’s May meeting.

 

22 April 2022: Has inflation peaked? (PDF 576KB)
Annual inflation hit 6.9% in Q1. While that was below our expectation of 7.4%, it’s still the highest since 1990. We’re tentatively forecasting that we’ve seen the peak in headline inflation. Q1 saw the Omicron wave peak in New Zealand, as well as massive commodity price volatility due to the war in Ukraine. Touch wood, that means inflation prints will start to ease from here (albeit remaining uncomfortably high for some time). We’re not out of the inflation woods yet – and without ongoing monetary tightening (including we think a 50bp OCR hike in May) we would likely see domestic inflation pressures continue to spiral in the wrong direction.

 

14 April 2022: Delivering 50 (PDF 752KB)
As the market was largely pricing, though analysts were divided, the RBNZ lifted the Official Cash Rate (OCR) 50bps to 1.5% in the Monetary Policy Review this week. The housing market has continued to soften, with prices falling 1.3% m/m in March - now down 4.1% from their November 2021 peak. The RBNZ is not worried – seeing prices as moving “towards a more sustained level”. We expect Q1 inflation data next week will show consumer prices rose 7.4% in the year to March 2022, the largest annual increase since 1990.

 

8 April 2022: Playing catch-up (PDF 668KB)
The RBNZ meet next week, and we expect they’ll deliver a 50bp OCR hike as they play catch-up with surging domestic inflation pressures. A swathe of Q1 indicators are due next week. With annual food price inflation likely to have hit around 7.4% in March, pricing intentions through the roof, and rents steadily grinding higher we suspect the data will show plenty of upside risk to our current 7.1% annual inflation pick for Q1. Global inflation has continued to surprise to the upside in early 2022, and combined with new lockdowns in China, that could add further to imported inflation in New Zealand.

 

1 April 2022: Inflation expectations rise again (PDF 660KB)
Business confidence and activity expectations stabilised in March, after falling sharply in February. However, measures of inflation expectations continued to track sharply higher. Consumer confidence fell 4 points to a new low of 77.9 in March (versus long-run average of about 120). Again, inflation expectations were on the rise. All up it’s clear that the RBNZ’s measured approach so far (ie hiking in 25bp increments) is not looking sufficient to bring inflation and expectations down quickly enough – hence we continue to forecast 50bp OCR hikes in April and May. Despite forecasting aggressive OCR hikes, our base case remains a ‘soft’ landing. The strong labour market is the crown jewel in the New Zealand economy, and should provide a solid foundation for the economy to tolerate the strong medicine being administered by the RBNZ.

 

25 March 2022: Inflation creates recession risks (PDF 612KB)
Downside risks to growth are increasing. High and accelerating inflation points to further household belt-tightening, and higher interest rates will hurt borrowers. The RBNZ is increasingly looking like it’s stuck between a rock and a hard place. If they don’t get on top of inflation, and quickly, then rapidly rising inflation expectations could see inflation surge higher and become even more embedded than it already is. That would require even more aggressive hikes in interest rates than we’re forecasting – making a soft landing nigh on impossible. But the RBNZ isn’t alone. Expectations for a 50bp hike at the next US Federal Reserve meeting are also on the rise.

 

18 March 2022: Full employment needs price stability (PDF 752KB)
GDP rebounded 3% in Q4, after lockdown caused a 3.6% fall in Q3. But with cost pressures and Omicron disruption surging, the real economy may struggle to post strong growth numbers over the first half of the year. We've revised our GDP forecast and will publish more details next week. The Government announced a temporary reduction in fuel tax (among other measures) to reduce the burden of high inflation. We estimate it could shave 0.5% pts off the 7.4% peak in inflation we expect in Q2. But to truly resolve the surge in underlying inflation, aggressive (if painful) OCR hikes are needed. The US Federal Reserve lifted interest rates 25bps this week. Chair Powell made it very clear that price stability is required to ensure a sustained period of full employment. But restoring price stability will be a big job – the last time the Fed’s preferred core inflation measure was this high, the Federal Funds Rate was over 800bps higher.

 

11 March 2022: Forcing the MPC’s hand (PDF 584KB)
This week we changed our OCR call. We now expect the RBNZ will lift the OCR by 50bps at both the April and May decisions, and will keep lifting in 25bp increments to a peak of 3.5% in April 2023 (previously 3.0%). The Russian invasion of Ukraine has sent commodity prices soaring, and we’re now forecasting inflation will peak at 7.4% in Q2. Usually, the RBNZ would look through this – but with inflation expectations dangerously elevated, they have no choice but to act aggressively with 50bp hikes to defend their inflation target. Q4 GDP data next week should show a healthy 3.5% rebound from Q3’s lockdown-induced fall. But growth headwinds are building.  

 

4 March 2022: Commodities surge, confidence dives (PDF 720KB)
As the tragedy in Ukraine continued to escalate, key commodity prices have surged. Oil prices broke through USD110/barrel, and dairy prices reached a new record high. Consumer and business confidence tanked in February – but inflation expectations remain too high, and rising commodity prices won’t help. The RBNZ was already tossing up a 50 vs 25bp OCR hike last week – and recent developments could tip them in favour of moving more aggressively. Fully vaccinated Kiwis can now enter and leave New Zealand without the risk of MIQ (or even the need to self-isolate). But foreign arrivals can’t enter the country yet – and the staggered timing of reopening risks a significant outflow of Kiwis over mid-2022.

 

25 February 2022: Say hello to QT (PDF 552KB)
As expected, the RBNZ lifted the OCR 25bps to 1.0% on Wednesday – and they seriously considered a 50bp hike. Russia’s invasion of Ukraine adds further upside risks to already too-strong inflation. The RBNZ also announced that they plan to start selling some of their NZ government bonds, starting later this year. Retail sales rebounded 8.6% q/q in Q4 – adding upside risk to our GDP forecast.

 

11 February 2022: Inflation in focus (PDF 620KB)
CPI inflation pressures are set to remain strong in the near term, and that should be reflected in rent and food prices out next week. But the housing market is slowing, as REINZ housing data should confirm. This should take some heat out of the CPI in time.

 

4 February 2022: Records for unemployment and commodity prices (PDF 616KB)
Q4 labour market data this week showed unemployment fell to a new record low of 3.2% at the end of 2021. We’ve revised our labour market forecasts, and now expect unemployment will ease slightly further to 2.9% this year, while wages may start to catch up with surging inflation at the end of 2022. But uncertainty is high – and it’s not clear how the border opening will impact labour market pressures. Commodity prices had a strong start to 2022, with the ANZ World Commodity Price Index up 1.0% in January, led by dairy prices.

 

28 January 2022: Core conundrum (PDF 596KB)
Q4 inflation came in at 5.9% - a whisker below our expectation of a 6% lift in consumer prices. But the domestic inflation pulse surprised with its strength, and key measures of core inflation are all now above the RBNZ’s 1-3% target range. We now expect inflation will peak at 6.4% in Q1 2022 – but we also think that it will take considerably longer to return to target, with a tight labour market reinforcing underlying inflation pressures. Next week’s labour market data should show further tightening over Q4. We’ve pencilled in a 3.0% unemployment rate – but uncertainty is high. The details of the data should confirm what we see in our Business Outlook, job vacancies data, and anecdotes – we are well beyond maximum sustainable employment, and will drift further away still.

 

21 January 2022: Double trouble (PDF 544KB)
This week we revised our OCR forecast up 100bps, with the RBNZ expected to lift the OCR at each of the next 9 meetings to 3% by April 2023 (previous forecast: 2% by end-2022). Global inflation pressures have continued to build in recent months, but more concerning for the RBNZ is the domestic inflation pressure that's building - in particular the ongoing tightness in labour supply. The imbalance between labour supply and demand won't be resolved quickly, and that's going to drive underlying inflation higher and higher without further aggressive action by the RBNZ. We expect annual inflation reached 6% in Q4.

 

14 January 2022: Inflation risks are worsening (PDF 600KB)
Jobs growth was accelerating at the end of 2021 – in stark contrast to our initial expectation that Delta would cause hiring to stall, and unemployment to rise slightly. The current labour market is not consistent with low and stable inflation – and further tightening would only exacerbate the problem, especially as global inflation keeps building. If the domestic and/or global upside inflation risks do eventuate in New Zealand, then we could easily see inflation come in well-above our forecast for a 5.8% y/y peak in Q1 2022 – making the RBNZ’s job even harder.

17 December 2021: Ending on a high note (PDF 660KB)
The Treasury has opened up the Government’s books, incorporating a sizable boost to Government spending, but also a lower debt forecast than in May. Stats NZ also released Q3 GDP – showing the economy ‘only’ contracted 3.7% due to the latest lockdown. All up, we saw nothing in the Q3 GDP data to suggest the RBNZ should stray from its current path of withdrawing stimulus in considered steps. Recent tweaks to consumer protections legislation and LVR restrictions have seen lending conditions for housing tighten considerably – and we’ve consequently revised down our house price outlook a touch.

 

10 December 2021: A busy end to 2021 (PDF 576KB)
We expect Q3 GDP data next week will show a 4.5% q/q contraction due to the latest lockdown. That’s better than the 7% fall we initially feared, and a solid rebound is expected over the next few quarters. HYEFU 2021 should show an improvement in the Government’s books, reflecting the significantly better starting point for the economy, and a stronger outlook for nominal GDP. Lending conditions in the housing market are tightening rapidly, as the effects of tighter LVR restrictions and tweaks to consumer protections legislation start to flow through. Conditions suggest an imminent softening in the housing market is due.

 

3 December 2021: Regime switch (PDF 580KB)
New Zealand has now moved to the traffic light system – the next step in the COVID response. How the economy responds is very uncertain, and that supports continued caution by the RBNZ as they continue their hiking cycle. The economy has a strong starting point – with record low unemployment, robust demand, and record high terms of trade. But vulnerabilities remain, with the housing market likely to have peaked, and tourism struggling through another summer with the door shut for international visitors. We’ll get more GDP indicators next week – showing us how big of a hit the economy took in the latest outbreak. But the rebound on the other side will be more important – and with employment still managing to rise 0.1% m/m in October, early signs are positive.

 

26 November 2021: Considered steps (PDF 524KB)
The RBNZ delivered a second interest rate hike on Wednesday – lifting the OCR 25bps to 0.75% as we expected. The RBNZ noted that continuing in “considered steps” is “most appropriate”, and their comments suggest that they will keep hiking in 25bp increments from here. Given they (and we) expect CPI inflation to get close to 6% inflation in coming months, these hikes will be needed to put a lid on inflation. The Government also announced that the border will gradually open over the first half of 2022 – but the tourism sector will have to survive another summer without international visitors before we get there.

 

19 November 2021: One last hike for 2021 (PDF 536KB)
We’re expecting the RBNZ will lift the OCR 25bps to 0.75% next Wednesday. We’ve seen big upside surprises to inflation and employment in recent weeks. But we still think the argument for a 25bp hike is stronger, given that risks to employment and growth are much less one-sided than inflation, and financial conditions have already tightened a lot. The housing market is increasingly looking like it’s peaked, and we are watching out for risks in the construction sector as supply roars ahead even as demand slows. The RBNZ’s Survey of Expectations showed a marked lift in near-term inflation expectations – but the RBNZ will be happy to see the 5- and 10-year-ahead measures still close to 2%.

 

12 November 2021: The housing market with nine lives (PDF 552KB)
Inflation concerns continue to build, with firms’ inflation expectations lifting to 4.33% in the flash estimate of our Business Outlook. House prices continue to defy gravity, with prices up 2.3% m/m in October (sa, ANZ estimate). But it looks like we’re past the peak in annual house price inflation. Low interest rates, FOMO, and COVID disruption may have given the housing market a final boost over the past few months – but new housing supply is outstripping new demand by a significant margin. Prices can only push against these supply-demand fundamentals for so long.

 

5 November 2021: The tightest labour market on record (PDF 504KB)
The NZ labour market is the tightest it’s been since at least 1986. We’re now forecasting that the unemployment rate will fall to 3.0% in late 2022. It’s hard to see wages not taking off in the near future, underlining that the RBNZ has work to do. However, the labour market is a lagging indicator. With housing fragile and consumer confidence rolling over, NZ may have hit peak “data surprise”.

 

29 October 2021: A fog of uncertainty (PDF 552KB)
Our Business Outlook this week showed that firms are expecting already intense cost and price pressures to keep getting worse, and consumer confidence has fallen sharply – that doesn’t bode well for the retail sector. It’s hard to diagnose in real time if we’re in a demand shock, a stagflationary environment, or something else. In a note this week we explored the implications of three scenarios for monetary policy – and they show there’s plenty of room for policy mistakes, with the OCR ranging from slightly negative to 4% across the different scenarios (our forecast is 2% by end-2022). Stats NZ release labour market data for Q3 next week. It’s going to be a messy mix of pre-lockdown momentum, and the sudden stop as we went in Level 4 lockdown mid-quarter. The details of the release will be more important than headline unemployment – and we think robust employment gains will see the unemployment rate fall to just 3.8%. But uncertainty abounds.

 

22 October 2021: More inflation for Christmas (PDF 602KB)
The surprisingly strong lift in consumer prices in Q3 stole the headlines this week. Consumer prices rose 2.2% q/q (4.9% y/y) in September - stronger than our expectation of a 4.5% y/y lift, and well ahead of the RBNZ's forecast of 4.1% (made back in August). The rise in prices was broad based, with all groups in the CPI seeing price rises, except for communication. And more concerning for the RBNZ was the sharp lift in measures of core inflation. Some of these measures may struggle to distinguish between a broad-based supply shock (ie COVID) versus genuine underlying inflation pressure, but the big lift in the RBNZ's own sectoral factor model of core inflation, to 2.7% y/y, suggests there is a very strong underlying inflation impulse.

 

15 October 2021: Inflation – surging into the summer (PDF 55KB)
Data this week continued the theme that COVID restrictions are, on net, a supply shock. Indicators of economic activity were soggy, while price pressures continued to build. Of note, food prices rose for the sixth month in a row in September – a time when they usually fall. Looking ahead to next week, Stats NZ release Q3 CPI data. We’re expecting a 1.8% q/q (4.5% y/y) increase in consumer prices, along with a strong underlying inflation impulse that should make the RBNZ more confident that hiking the OCR last week was the right call. And inflation looks like it will get worse before it gets better, with Christmas demand for inventory running straight into already stretched supply chains. Meanwhile, downside risks to employment build every week we remain at heightened Alert Levels – raising the chances of an ugly tradeoff for the RBNZ between supporting employment, or subduing inflation.

 

8 October 2021: Tough choices ahead for the RBNZ (PDF 532KB)
For the first time since 2014 the RBNZ lifted the Official Cash Rate (OCR) this week, increasing it from the record low of 0.25% to a still-low 0.5%. The RBNZ again acknowledged that capacity constraints are a concern for meeting their mandate right now. That was reinforced by Q3’s QSBO data - we haven’t seen shortages of supply or labour being this much of a constraint in New Zealand since the 1973 oil crisis. But it’s going to get harder from here: inflation risks are to the upside, while growth risks are to the downside as lockdown and restrictions drag on, and vaccination remains below par. The RBNZ could end up facing a tough trade-off between supporting growth or controlling inflation. But that trade-off is the reason why central banks were made independent in the first place.

 

1 October 2021: Higher interest rates just around the corner (PDF 552KB)
The RBNZ meets next week for the October Monetary Policy Review. We think they will lift the OCR 25bps to 0.5%. We hold that view with some conviction – a 50bp hike would be inconsistent with their measured approach in the face of uncertainty, while not hiking would only exacerbate the risks of persistently overshooting their targets. Meanwhile, August filled jobs data showed that jobs increased by 0.7% m/m (3.9% y/y), despite the country spending half the month in Level 4 lockdown (figure 1). That suggests firms are once again adjusting hours worked, rather than letting staff go, which bodes well for a rapid labour market recovery once restrictions ease.

 

24 September 2021: Bird watching and lending restrictions (PDF 548KB)
The domestic data calendar was fairly light this week. Of note was the August read of the Services PMI, which fell sharply to 35.6 (55.9 previously). Combined with the Manufacturing PMI, which fell to 40.1 (from 62.2), it’s another reminder of the heavy cost of lockdowns. There’s been some progress, with Auckland moving to Alert Level 3 and Level 2 restrictions being relaxed slightly for the rest of the country. But with daily cases still in double digits, it’s uncertain how quickly we can keep moving down levels.

 

17 September 2021: Rolling with the punches (PDF 504KB)
The economy has continued to demonstrate resilience in the face of the current lockdown. This week, the flash estimate of our September Business Outlook saw a net 18% of firms expecting to increase their activity over the next 12 months. Meanwhile, FOMO is alive and well in the housing market - house prices posted a 1.9% m/m rise in August, despite lockdown. But headwinds are blowing strongly now, and we expect the housing market will eventually run out of steam. Q2 GDP data confirmed that the economy was surging over mid-2021, with the economy expanding a whopping 2.8% q/q. And while to some extent that’s old news given lockdown, early indications are that the economy has handled the current restrictions much better than in 2020. That should see the economy rebound quickly in Q4.

 

10 September 2021: Old news, but good news (PDF 504KB)
This week the majority of the country moved down to “Delta Level 2”, and case numbers have continued to fall in Auckland. An October OCR hike remains firmly on the table, although it’s still very uncertain whether the RBNZ will be able to complete their hiking cycle. With the Government increasing their spending capacity, that could make monetary policy normalisation more achievable. Q2 GDP is released Thursday next week – we’re expecting a solid 1.2% q/q increase. Of course, given recent developments it feels like old news. We’ll be watching household incomes closely over the next few quarters, hoping to see a similar level of resilience as we saw in 2020 (thanks to the fiscal support).

 

3 September 2021: Keeping calm and carrying on (PDF 580KB)
With all of New Zealand except for Auckland now moving down to Alert Level 3, we’re starting to see the light at the end of the Lockdown tunnel. Case numbers, business confidence, and card spending data all suggest we’ve handled it pretty well so far – fingers crossed that continues. So it’s looking like October is still game on for the RBNZ to begin the OCR hiking cycle that was so rudely delayed by the current outbreak. But it’s worth remembering there’s still a lot that has to keep going right between now and October before hikes are locked in. Building work put in place next week will give us another piece of the Q2 GDP puzzle piece. We’re expecting a 4% rise in building activity, reflecting surging consents, concrete production, and construction intentions.

 

20 August 2021: Lockdown stymies OCR hike (PDF 536KB)
It was bound to happen at some point. Delta, the extremely infectious variant of COVID-19, has finally found its way into the New Zealand community. With just 23% of the population fully vaccinated, an aggressive public health response is needed to protect us – so we now find ourselves back in Level 4 lockdown. Of course, the main headline this week was meant to be the RBNZ raising the OCR for the first time since 2014. On the day, because it was the first day at Alert Level 4, RBNZ decided to not rattle the cage, given an already rattled population, and kept the OCR on hold. So what happens now? If this lockdown proves short, we doubt it will have much of an impact on the aggregate economy. But everything is in flux at this point, and the health and fiscal responses now take centre stage. The Delta variant has proven to be extremely aggressive and hard to contain – so fingers crossed that our early and tough lockdown proves as effective as it did in 2020.

 

13 August 2021: Countdown to hikes (PDF 548KB)
The RBNZ will release the August Monetary Policy Statement on Wednesday next week at 2pm. We expect the OCR to be lifted by 25bps to 0.5%. This is an event to mark in your diary, as it’s the first OCR hike since 2014. The Government has announced the plan for how we gradually open up to the rest of the world. It’s going to be a slow process and widespread vaccination progress will be key. House prices continue to defy expectations, with prices up 2.0% m/m in July – over 30% y/y.

 

6 August 2021: Labour market power shift (PDF 508KB)
Labour market data this week confirmed that the economy has flown past full employment, with unemployment dropping to 4.0% in Q2, and wages up sharply. The RBNZ is overachieving on both sides of the dual mandate, and they need to remove emergency OCR cuts quickly to mitigate boom-bust dynamics in the economy. We suspect the best is yet to come for the labour market – with unemployment to drop below 4%, and wage pressure to build over this year.

 

30 July 2021: Data confirms strong Q2 for jobs (PDF 552KB)
Cost of living indexes continue to show life is getting tougher for those with low incomes, as the Commerce Commission shines a harsh light on supermarkets. All eyes are turning to the labour market data release next week, with jobs filled data this week confirming that employment grew strongly over Q2.

 

23 July 2021: Strong inflation just beginning (PDF 516KB)
For the first time Statistics NZ have published a quarterly data series for the income measure of GDP. These data show how the wage subsidy, as expensive as it was, supported households through lockdown. Household net disposable income dropped just 0.1% q/q in 2020 Q2, despite a 10.7% q/q fall in overall income GDP during the quarter. We also updated our inflation forecasts this week in the wake of Q2’s 3.3% y/y rise in consumer prices. The broad-based momentum in the inflation numbers shows that strong CPI prints have only just started, and we’re expecting that inflation will peak at 4.2% y/y in Q3 2021. We still expect inflation to slow over the next few years, as supply disruptions and other temporary factors ease, and the RBNZ raises the OCR (starting in August).

 

16 July 2021: Monetary policy turning point (PDF 548KB)
The monetary policy cycle has reached a turning point, with the RBNZ announcing an end to the LSAP, headline inflation at 3.3% y/y, and core inflation measures hitting (and some exceeding) the top of the RBNZ’s 1-3% target range. OCR hikes are needed to cool down an overheated economy. We expect that starting with the August 2021 MPS, the OCR will gradually be lifted from the current low of 0.25%, to a peak of 1.75% at the end of 2022.

 

9 July 2021: Hikes on the horizon (PDF 556KB)
This week we brought forward our expectation for interest rate hikes. We now expect the OCR to be increased to 0.50% in the November 2021 meeting, with further hikes at each MPS until we reach a terminal OCR of 1.75% in early 2023. The QSBO reinforced what we’ve seen in our monthly Business Outlook – the economy is running red hot. Looking ahead to the Monetary Policy Review we expect a significant change in tone in the RBNZ’s Record of Meeting, acknowledging the strength in the recovery, and the intense capacity pressures building across the economy. Timely indicators from our capacity pressure suite show that pressures are building in line with what we predicted in our Quarterly Economic Outlook. All up, it’s time for the RBNZ to start removing stimulus.

 

2 July 2021: Capacity pressure as far as the eye can see (PDF 520KB)
Data flow continues to point to an economy that’s in a very strong cyclical position. The economic expansion appears to be well into the inflationary zone, as labour shortages, shipping delays, and other COVID-related disruptions continue to bite. As we explored in an Insight published yesterday, these disruptions are unlikely to fade anytime soon. The housing market is also still in the vice of strong demand and weak supply. Data released by Realestate.co.nz this week showed available listings continuing to grind downwards in June. That caps off a first half of 2021 where listings were well below levels seen even during the depths of lockdown in 2020. This week we published an upgrade to our labour market forecast. This reflects strong recent data, including the large 1.6% q/q rise in Q1 GDP, record-high job vacancies, strong increases in monthly filled jobs, and the near-constant flow of news articles highlighting the struggles Kiwi businesses are facing trying to find enough workers to be able to operate. If unemployment falls to 4.5% in Q2, as we expect, that would imply historic levels of labour market tightness, given super strong job vacancies.

 

18 June 2021: Strong GDP brings rate hikes closer (PDF 556KB)
What happened this week? The Q1 GDP figure blew every market forecast out of the water. Our expectation (shared by the market) was for a 0.5% q/q rise, while the RBNZ expected a 0.6% fall. On the day GDP rose 1.6% q/q, with GDP now comfortably above pre-COVID levels (although still below a counterfactual where COVID never happened). The rise in GDP confirms that New Zealand has seen a spectacular economic recovery, and while there is residual weakness in industries exposed to international tourism, this is being swamped by domestic momentum. As a result, we have changed our OCR call. We now expect the first OCR hike to take place at the February 2022 MPS, followed by hikes in the May and November 2022 and May 2023 meetings. These four hikes would bring the OCR up to 1.25% in mid-2023.

 

11 June 2021: Survey says inflation (PDF 532KB)
What happened this week? The preliminary read of the June ANZ Business Outlook showed further evidence that New Zealand’s economic recovery is running into capacity constraints – ie we’re trying to grow faster than available resources and COVID disruptions will allow. This is feeding into higher prices and costs for firms, and we expect strong inflation prints over 2021 (peaking at 3.0% y/y in Q3). What are we watching? Next Thursday, GDP data for Q1 2021 are released by Stats NZ – see our Preview. We think that production GDP increased by 0.5% q/q, after a 1.0% fall in Q4.

 

4 June 2021: Inflation is coming (PDF 496KB)
Building work put in place (WPIP) for Q1 was released today. It lifted 3.7% (following a 0.5% contraction in Q4). This is normally a pretty reliable indicator for construction GDP. However, that wasn’t the case with the Q4 GDP release, where the 8.7% q/q fall in construction activity was much weaker than WPIP was suggesting. This week we released our Quarterly Economic Outlook. The New Zealand economy is well on the way to recovery. While some sectors are still suffering, others have bounced back so rapidly that they’re now running into severe capacity constraints. As a result, we think that the New Zealand economy overall currently has a positive output gap – that is, it is trying to grow faster than available resources can sustain. A positive output gap generates inflationary pressure – and that’s why we expect that headline CPI inflation will peak at 3.0% y/y in Q3.

 

28 May 2021: Return of the OCR track (PDF 500KB)
The RBNZ left monetary policy settings unchanged this week, with the OCR at 0.25%, and the LSAP and FLP programmes untouched. That was universally expected. The big news was the reinstatement of the OCR track. We had been hoping to see this, especially since the RBNZ’s previous forward guidance had expired. And the RBNZ well and truly delivered, publishing an OCR track very similar to ours. As expected, the RBNZ’s forecasts have been upgraded to reflect the improved economic outlook since the February MPS. The labour market is much closer to full employment than they were expecting, and like us, the RBNZ thinks that unemployment has already peaked. That said, the RBNZ is forecasting a slower decline in the unemployment rate than we are – we think that unemployment will be around 4% by the end of 2023, versus the RBNZ’s forecast of 4.3% by mid-2024. Overall there’s probably upside risk to their labour market outlook, and this tilts the risks to a slightly earlier date for the first OCR hike.

 

21 May 2021: Balancing the books after COVID (PDF 484KB)
This week the big event was Budget 2021. The Budget showed that the Government is looking to balance rebuilding fiscal buffers and addressing significant issues facing New Zealand. The Treasury’s economic forecasts were revised upwards, reflecting the improved economic outlook since the Half Year update in December. This has provided the Government with more room to spend money on key projects, whilst also staying on track to stabilise debt levels. See our Review for more details. The May Monetary Policy Statement will be released on Wednesday next week (May 26). The RBNZ is unlikely to shift from their cautious stance just yet – they remain data driven, and while we have seen encouraging signs of economic recovery, the RBNZ will want to see a few more strong data prints to be sure the economy is on track to meet their inflation and employment objectives. That said, we think conditions will continue to improve, and enough so that the RBNZ will feel comfortable starting to raise interest rates from August 2022. Encouragingly, indicators from our ANZ Business Outlook, the PSI and PMI are all pointing to economic momentum building over mid-2021.
PMI, PSI, and GDP growth.

 

14 May 2021: Is housing momentum finally slowing? (PDF 436KB)
What happened this week? Yesterday’s April house price data was the first chance to see the impacts on the red-hot housing market of the Government’s housing policy changes. As it happened, house prices rose 1.7% m/m, down from 2.8% previously (ANZ seasonal adjustment). And the number of houses sold dropped 12.8% m/m. Overall, that points to some softening in housing activity, but prices (which lag sales) have a bit more momentum than we had pencilled in. That doesn’t mean that the impact of the policy announcements is smaller than we had expected. A single data point is just the opening bid. There’s a lot going on, and we’ll need to keep our finger on the housing pulse for a while yet. But we have tweaked our house price forecast to take into account the stronger starting point (figure 1). The fundamentals of the housing market continue to suggest a moderation in house price growth from here: affordability constraints, mortgage rates that are more likely to go up than fall further, loan-to-value ratio restrictions back and bigger than ever, building consents at historical highs, and population growth that’s severely curtailed by the border closure.

 

7 May 2021: A stronger outlook for employment (PDF 528KB)
What happened this week? The Household Labour Force Survey lived up to its reputation for delivering surprises, with the unemployment rate falling from 4.9% in Q4 2020 to 4.7% in Q1 2021. The details of the data were very robust, and a stronger-than-expected 0.6% q/q rise in employment saw the unemployment rate fall, despite a rise in participation to 70.4% (70.2% previously). Consequently, we’ve upgraded our labour market outlook. There was a lot of genuine strength in the release, and it looks like jobs growth will just about be able to keep pace with higher labour force participation over 2021. Consequently, we expect that the unemployment rate will hold steady at around 4.7% over the rest of 2021 (figure 2). This reflects our expectation that further strong employment gains will be hard won while the border remains closed, due to matching issues, and employment growth is likely to drop to low (but positive) levels over H2. Combined with a slight uptick in the participation rate to 70.5% in Q2 (vs 70.4% in Q1), this sees the unemployment rate drift sideways for the next 12 months.

 

30 April 2021: Hold on to your hats, it’s a busy week ahead (PDF 484KB)
Q1 labour market statistics will be front and centre next week. We expect to see a small lift in the unemployment rate to 5.1%, but the participation rate is a bit of a wild card and the possible range of outcomes is wide (table 1). The details of these data will be important. A tick down in the unemployment rate alongside weak participation would suggest there could still be some way to go towards recovery, while a higher unemployment rate coupled with markedly higher participation and solid employment growth would suggest a more advanced recovery. Looking forward, the RBNZ will be assessing a range of measures, such as the underutilisation rate. They’ll require broad-based improvement across the suite of indicators they monitor before concluding employment is at or above its maximum sustainable level. A positive surprise in the Q1 data is extremely unlikely to go that far.

 

23 April 2021: CPI - Petrol and housing pump up price (PDF 436KB)
This week Stats NZ released CPI inflation data for Q1. Consumer prices rose 0.8% q/q (1.5% y/y) vs our expectation of a 0.7% q/q rise (figure 1). The outturn was more or less as expected, with temporary drivers pushing the headline number higher. This data underscores the need for patience, as the RBNZ has been saying for some time now. The details show that temporary factors are supporting prices, and core inflation measures may not be the most reliable guide right now. And, as the RBNZ emphasised in the recent Monetary Policy Review, they want to see evidence that CPI inflation will be ‘sustained’ at 2%, and the Monetary Policy Committee is anticipating a ‘prolonged period of time’ before conditions are in place for this. We’ve updated our inflation forecasts to account for two factors. Firstly, tradables inflation was stronger than expected in Q1 (a technical change). Secondly, continued labour market pressure has led us to revise up our near-term non-tradables and wage inflation forecasts. As we noted in a recent Insight, labour shortages remain acute in New Zealand, despite the unemployment rate still being above pre-pandemic levels. And, demand for labour has only increased, with job-ads now at record highs less than a year after a recession.

 

16 April 2021: RBNZ on hold ahead of CPI data (PDF 484KB)
What happened this week? The RBNZ met this week and, as expected, made no changes to policy settings. The RBNZ reiterated its wait and see approach, including on the likely effects of housing policy and travel bubble announcements.
What are we watching? CPI inflation for Q1 is released on Wednesday. As we outlined in our Preview, we think consumer prices rose 0.7% q/q (1.3% y/y). That’s off a 0.5% q/q rise in Q4. The bottom line is we don’t expect the data to be a game changer for the RBNZ. Of particular note was MBIE job vacancies data for March – this data can be volatile, but even when we smooth it, we’re looking at a record high for the series.

 

9 April 2021: Travel bubble unlikely to disturb the OCR’s slumber (PDF 444KB)
How has the view changed? On Tuesday the Government announced the opening of a travel bubble between New Zealand and Australia from 19 April. This is fantastic news for families and friends who have been kept apart for a year, Kiwis desperate to get out and about, and tourism firms who have battled through a summer without international tourists. Wednesday next week will be the RBNZ’s first opportunity to comment on the state of the world since the February MPS. As we outlined in our MPR Preview yesterday we’re expecting that the Monetary Policy Committee will reiterate their “wait and see” approach.

 

1 April 2021: In the vice; construction and capacity constraints (PDF 484KB)
How has the view changed? This week we've been keeping an eye on indicators of activity in the construction sector. While timely indicators for this sector can be pretty noisy, we're seeing an emerging risk that residential building has been more constrained by supply and capacity pressures than we previously thought. The construction sector has been the star performer of New Zealand's post-lockdown economy, driving economic momentum forwards. But with the sector running into serious capacity headwinds, there's a question around whether this momentum can be sustained. To start with, our recent Business Outlook showed that pricing intentions and cost expectations in the construction sector continued to grind higher in March, whilst confidence, activity, employment, investment, and profit all declined - clear signs of hitting some kind of constraints. It's not unusual for construction sector firms to get into trouble during very busy times due to stretching themselves too thin, but the supply shortages we're seeing - and in particular, the associated project delays - could cause considerable cash-flow pain. Once capacity constraints start to grip the sector, rising costs can seriously impact the bottom line, especially for larger multi-unit developments.

 

26 March 2021: House price outlook slightly weaker (PDF 392KB)
How has the view changed? Of the Government's suite of housing policy announcements this week, the removal of interest deductibility on investment property is the one that surprised us - it's bold. We doubt we'll see a sudden flood of sales as investors run for the hills en masse. The peak impact on property investors likely won't be until year 5, because the policy will be phased in over four years. But, it's true that buying a new investment property today is less appealing and riskier than it was last week. And the highly leveraged investor has been top bidder at a lot of auctions lately. All up, we expect this to take the wind out of the housing market's sails (and sales) faster than we previously thought, but we think there's enough competition out there to prevent a complete landslide. For annual house price inflation, we now expect a peak of just under 25% mid-year (about 2%pts lower than previously) and a faster decline from there.

 

19 March 2021: Down but not out: GDP falls in Q4 (PDF 376KB)
How has the view changed? This week Stats NZ released GDP data for Q4. It was always a toss-up whether we would see the economy expand or contract. On the day, GDP declined 1.0% q/q against our expectation of a 0.5% rise. That's definitely a sizeable negative surprise, but it's not enough to change our overall view of the economic outlook. The real challenge is trying to work out how much of a signal to take from this data. The data is still pretty noisy under the hood, and it looks like some of the drop in Q4 came from industries experiencing a technical retracement from their record rises in Q3. But it's also true that the headline numbers are probably understating the degree to which the economy was hurting over 2020. When we compare what actually happened in 2020 with a counter-factual scenario in which COVID never happened (figure 1), we estimate that the economy is around 5% smaller than it would have been.

 

12 March 2021: Housing market tightens further in February (PDF 420KB)
This week REINZ data for February showed that the housing market is still running hot. House prices surged ahead 3.7% m/m, with annual house price inflation now sitting at 19.4% y/y (3mma). Notably, average days to sell declined to 26 – a record low for this data, which goes back to 1992. This indicates that housing inventories are extremely stretched by strong demand. The robust outturn presents upside risks to our house price forecast and the broader economic outlook. We expect that unaffordability, high debt levels, the re-imposition of LVRs, credit constraints, and high levels of residential construction activity will see house price inflation cool down over 2021 – but the timing and extent of this is uncertain. In the meantime, the strong domestic housing market continues to support activity in the wider economy.

 

5 March 2021: Dairy strong, capacity biting in construction (PDF 404KB)
How has the view changed? The new COVID-19 outbreak was on everyone's minds this week, with Auckland back into Level 3 and the rest of the country in Level 2. While as of yesterday there had been no new community cases in four days, the recent lockdowns remind us that New Zealand's stellar economic recovery is extremely fragile until herd immunity is achieved and the risk of returning to lockdown fades. While lockdown dampened the mood domestically, our global commodity prices defied gravity. The ANZ World Commodity Price Index rose 3.3% m/m in February - and even more gains were seen this week. In the GlobalDairyTrade auction, whole milk powder prices rose a whopping 21%, supporting a 15% rise in the overall GDT price index. Consequently, we revised up our farmgate milk price forecast for the 2020-21 season to $7.70/kg MS.

 

26 February 2021: RBNZ holds; bond bear market escalates (PDF 420KB)
How has the view changed? The Minister of Finance announced yesterday that housing would be added to the RBNZ’s Financial Stability Remit, stating that, ‘the Bank will have to take into account the Government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers.’ The Minister has asked the RBNZ for advice on debt-to-income limits and interest only loans, which could lead to the RBNZ’s macro-prudential powers being beefed up. But these appear likely to apply to investors only. When setting monetary policy, the RBNZ will also have to “assess” the impact on housing sustainability. That means the interaction between monetary policy settings and housing is likely to become a more prominent part of RBNZ communications, but it won’t have a meaningful impact on policy settings.

 

19 February 2021: Hold the line - RBNZ to stress challenges ahead (PDF 432KB)
How has the view changed? Hold the line. That’s been the theme within our internal discussions as we’ve worked to digest the data flow and separate noise from signal. Higher house prices remain a massive driver of domestic momentum at present, but sales have shown some signs of returning to more normal levels, albeit from a pretty nutty place last year. That’s in line with our assumption that house price inflation will slow this year to something around average, as policymakers try to engineer a soft landing and as affordability and credit constraints bite. A weak PSI number this week confirmed all is not well in services industries, and soft migration data once again reminded us that we cannot rely on population-led growth to support GDP. But another strong GlobalDairyTrade result offered some relief and added further justification for the elevated NZD. Then there’s the renewed lockdown measures. A short, sharp lockdown like we’ve seen shouldn’t cause too much of a loss in broader activity, but some (namely Auckland hospitality) will certainly feel it more than others. And another round remains an ever-present risk. None of the new news above challenges our broader macro view, but it all goes to show that this crisis is pushing and pulling the economy in many directions – and it’s not over yet.

 

12 February 2021: RBNZ tightening a way off, but housing market poses risks (PDF 408KB)
How has the view changed? Although data volatility is still expected, the dust has settled sufficiently to see how resource pressures are faring and, as such, we have updated our ANZ capacity suite. Consistent with our view that more stimulus is not required, our estimates of the degree of resource pressures in the economy suggest that in aggregate the economy is operating with only a little spare capacity – though clearly experiences across the economy are very varied. This picture is far better than the RBNZ dared hope three months ago, reflecting a much greater surge in demand out of lockdown than anticipated, while the economy continues to grapple with supply constraints. We expect the RBNZ to remain cautious, looking for assurance that its targets can be achieved sustainably, especially given closed-border headwinds and downside risks to the outlook. But clearly, the economy is much closer to full employment than the RBNZ ever envisaged, and that does raise the spectre of policy normalisation in time. We think that the RBNZ will want all its ducks in a row before embarking on this process, with employment, inflation and inflation expectations sustainably near target, and downside risks having abated. That will take time. At this stage, we see tapering of LSAP purchases as the first part of this process, potentially in the second half of 2022 based on current forecasts. See our ANZ Insight – the path to normal for more details.

 

5 February 2021:  RBNZ has done enough, but won’t want to spook the horses (PDF 408KB)
We no longer expect the RBNZ to cut the OCR again this cycle, with the economy more resilient than previously believed. This view reflects a range of factors, but especially a better starting point for the labour market. Recent developments take further monetary stimulus off the table, provided downside risks do not materialise, with the outlook for inflation and the labour market looking even more assured (see Economic Forecasts). The RBNZ will want a high degree of certainty about sustainably reaching its goals, which speaks to policy being on hold for a long while (including an extension to the timeframe of the LSAP programme – which implies a slower pace of asset purchases, but importantly, also gives the RBNZ optionality). But for now, the RBNZ has done enough. 

 

29 January 2021: Better labour market outlook sees RBNZ on track (PDF 404KB)
How has the view changed? Recently we updated our forecasts to reflect stronger economic momentum into 2021, which means a better outlook for the labour market too. Better prospects for inflation and the labour market tilt risks away from further monetary policy easing. But we haven’t seen the peak in unemployment yet, and continued caution is warranted. Headwinds to the economic outlook, especially related to the closed border, are expected to weigh on employment this year, with the unemployment rate expected to peak near 6% in mid-2021. We expect the RBNZ will extend the LSAP guidance in February, affirming forward guidance that monetary conditions will remain expansionary for some time. Although the data is yet to show it, we are assuming these headwinds will become more evident in time, motivating the RBNZ to cut the OCR once more ‘for luck’ to 0.1% in May. However, this may not be deemed necessary if the strong data run continues.

Improvement in the labour market is expected to be gradual until herd immunity is reached and the border opens, with faster declines in the unemployment rate possible once economic activity normalises and the recovery accelerates and evens out. Down the track, once the RBNZ’s targets are in sight, policy normalisation will be on the cards. There is significant uncertainty when looking that far into the future, but tightening in monetary conditions may be able to start by mid-2023 based on our current forecasts, and upside risks could see this happen sooner.

 

22 January 2021: Solid CPI but more noise to come (PDF 408KB)
How has the view changed? Today’s Q4 CPI data were stronger than expected, with a solid 0.5% q/q lift. We’ve updated our forecasts for the starting point. Volatility in annual inflation is expected in coming quarters, due to recent noise. As we expected, scarcity of goods resulted in pockets of price pressure in Q4 on the back of rising shipping costs and supply disruption – in fact, this impact was even greater than we expected. But these impacts are expected to be transitory and the RBNZ will look through them, plus they aren’t great for growth. Over the medium term, our forecast for a gradual lift in underlying inflation remains the same – with a strong NZD, fragile global backdrop and domestic challenges (like the closed border) providing headwinds. Encouragingly, though, core inflation measures have generally lifted. Although these may ease from here, this is good news for the RBNZ. A stronger underlying pulse is supportive of inflation expectations and a better starting point makes returning to target just that bit easier. We expect the RBNZ will remain cautious about downside risks, but they may not need to cut the OCR further if momentum in the economy can be maintained. Indeed, the housing market could tip the balance there. We’ve recently added a little more oomph into our outlook for house prices, but a picture that is even stronger than we expect could tip the balance away from a further OCR cut in May.

 

15 January 2021: Better outlook supports OCR call change (PDF 408KB)
How has the view changed? We now expect only one more OCR cut in May to 0.1%. That means a negative OCR is now off the table unless downside risks materialise. Underpinning our updated call is a stronger starting point and outlook for the economy (see Economic Forecasts). The economy bounced strongly (14% q/q) in Q3, and we now expect a little more momentum on the back of a stronger housing market (see our ANZ Property Focus out next week), business resilience and higher export prices, including a better milk payout. This means that there is less spare capacity in the economy than previously feared, meaning fewer job losses. We now expect the unemployment rate to peak at a lower level (6% versus 7%). The medium term outlook for inflation is also looking more assured on stronger GDP and improving inflation expectations. Still, the starting point is low and improvement will be gradual. In this environment, it will take some time for the RBNZ to be confident that it will meet its targets, justifying a little more stimulus, especially as the economy experiences a wobble into 2021. Strategically this is consistent with the RBNZ’s ‘least regrets’ approach. That said, should the economy maintain momentum, it would be easy to make a case for no further cuts at all.

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.