ANZ Data Wrap

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

2022 editions

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.