ANZ Market Focus

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

20 November 2017: Time to dual (PDF 452kB)

At face value, we don’t believe the proposed changes to the RBNZ’s mandate and operating model will have a significant impact on the way monetary policy is conducted. But shifting the focus away from the specific 2% target midpoint is arguably a little more meaningful. It hints at inflation being allowed to run on average at a higher rate than it would otherwise. Other central banks seem to be having that debate too, and at a time of lower real neutral rates, higher inflation targets potentially provide policymakers with a little more policy wriggle room. But just because a higher inflation rate is targeted, that doesn’t mean that it can necessarily be achieved in a world of ongoing structural deflationary pressures. And there are financial stability considerations too – systematically running policy looser is not without its risks. All up, it is another factor that could see the RBNZ continue to take a cautious approach to tightening policy this cycle. But ultimately we see this possible change as being about flexibility, which we fully support.

13 November 2017: More nuanced (PDF 552kB)

Our views on the economic outlook have become more nuanced. While we retain a broadly constructive view of the medium-term growth picture, we have turned more circumspect near term, and see a heightened chance of a growth wobble (in fact we have cut our near-term GDP forecasts). That wobble is not expected to turn into something longer-lasting, but it certainly marks us out as less upbeat than the likes of the Treasury and RBNZ. Above-trend growth is hard to achieve when the most cyclical part of the economy (housing) looks set to remain soft. That has obvious implications for both the outlook for tax revenue and monetary policy, although the picture is complicated by inflation risks that are shifting higher. Cost-push inflation, notably from the labour market, is something that policy makers will need to consider. It points to a shifting mix of monetary conditions (lower NZD/higher interest rates) going forward than would be the case otherwise. In data this week, housing market figures are likely to remain soft, while consumer confidence will be watched to see whether housing weakness is spilling over to the broader economy.

6 November 2017: Watching the vibe (PDF 440kB)

Last week’s labour market figures were strong, at least at face value. However, it is fair to say we are turning more circumspect on the near-term growth picture. Even ahead of recent political uncertainty, the chances of a growth air-pocket were high as the economy grappled with late-cycle challenges and a softer housing market. Political uncertainty adds to near-term risks, with the vibe from businesses turning jittery. In the face of a shifting policy mix, what firms say about their own activity and pricing, as well as the mix of investment and employment intentions going forward, will be critical to watch. This week, the RBNZ is likely to remain cautious too, even if inflation risks are pointing a little more one way. We suspect the RBNZ will feel there are still too many uncertainties to shift off its cautiously neutral message – we agree. Also this week, our Truckometer and Monthly Inflation Gauge will provide early signals on Q4 growth and inflation trends.

30 October 2017: A change of tack (PDF 464kB)

Details of the new Government’s policy direction and priorities are emerging. Lifting ‘well-being’ is clearly a focus, and the Government will be more ‘active’ in a number of areas to achieve that. Measurement of progress will be key if money is not to be simply poured down the sink. Ultimately, we are reasonably agnostic on what it could all mean, as the policy prescription still looks reasonably centralist in aggregate, though we are watching industrial relations policy closely. The challenge will be getting buy-in from businesses (a sustained hit to business sentiment would have negative growth implications) as well as hitting fiscal targets; the Treasury’s growth numbers are too high and there appears to be little in the kitty for initiatives beyond education and health. Some fiscal slippage looks likely and we don’t have major concerns over that, as long as it’s minor and not a trend. At this stage we are not inclined to alter our economic assessment. Concern over changes in the way the RBNZ will be operating look overblown too. We still see growth holding around 2½-3% on average.

24 October 2017: The 10-year curse? (PDF 284kB)

The economy has a number of factors going for it late in the current business cycle (compared with previous ones) that dilute the potential for a domestically induced correction and provide some resilience to global risks. However, the situation is complicated on two levels. First, the economy is currently transitioning in terms of its growth drivers – and transitions can be wobbly, and second, a new political broom spells a change in economic direction – and change can be unsettling. The last thing the economy needs right now is a repeat of the 2000 winter of discontent. While we still await policy details, we see a little more downside risk to the near-term growth picture (although the impact of the recent loosening in financial conditions should not be discounted). Further out, at first blush, some policies seem quite growth-enhancing and inflationary (additional fiscal spend, minimum wage increases, migration restrictions etc). However, it is far from clear cut. There remain a number of questions and moving parts. Indeed, what the ‘social justice’ version of capitalism means for longer-term growth prospects remains an important talking point, and not only in NZ.

16 October 2017: Waiting for Godot? (PDF 284kB)

When an economy is transitioning in terms of its growth drivers and dealing with headwinds from difficulty finding staff and a soft housing market, a period of policy uncertainty is not great timing. To be fair, a few days here or there won’t make much difference, although policy uncertainty looks set to extend beyond any coalition announcement given the ‘change’ that society is demanding. With recent soft retail spending figures also pointing to tentative signs of negative spill-overs from the housing market, it leaves us a little cautious on the near-term growth picture. Risks are becoming skewed to the downside. In data this week, we expect Q3 headline CPI inflation to lift a touch, and to be above the RBNZ’s projections. However, with core inflation to remain in a 1½-2% range, we see few implications for the monetary policy outlook. Even with the addition of more supply, NZX futures are pointing to a small lift in GDT prices.

9 October 2017: The waiting game (PDF 304kB)

With the final election results in, coalition discussions now get serious. Markets still look to be pricing in a roughly ‘status-quo’ outcome. Alternatives arguably would bring more policy uncertainty. However, much will depend on the policy concessions required to get a deal over the line. There is nothing bad about change per se. The key is how well it is communicated, as prolonged uncertainty can cause activity to stall. Politics aside, we continue to closely monitor spill-overs from the slowing housing market, the credit cycle, and terms of trade developments. Overall, we’re a little cautious on the near-term outlook. This week, food price data and our Monthly Inflation Gauge will allow us to firm up our views on Q3 CPI. ECT and consumer confidence figures will help gauge whether housing softness is broadening.

2 October 2017: Baton change (PDF 268kB)

Our latest set of economic forecasts depicts an economy performing in a solid, albeit unspectacular, manner. Headline growth is respectable; per capita growth and productivity growth are not. The drivers of the economic expansion are evolving (peak construction and migration, but commodity prices, fiscal stimulus and household income prospects are set to add some impetus), at the same time as there are some headwinds from housing weakness and capacity constraints. Ultimately we see growth holding in a 2½ to 3% range going forward. In data this week, the NZIER’s QSBO for Q3 is likely to show a little more caution on the part of firms, just as our September Business Outlook did. Dairy prices are biased higher, while our Commodity Price Index will provide another update on the broader farm-gate picture. Job ads will provide an update on labour demand.

25 September 2017: Horse trading (PDF 304kB)

We’re not expecting clarity on the political front for a number of weeks. While there are a few different scenarios and some potentially testy issues to negotiate, ultimately the political landscape appears as though it will remain relatively centralist and we are reasonably agnostic on what it all means. That said, at a time when the economy is not quite firing on all cylinders (as last week’s Q2 GDP figures highlighted), a lengthy period of policy uncertainty or potentially fractured political arrangement would not be positive. Business confidence (including our figures out this week) will be key to watch. But what is clearer in all this is that fiscal policy is going to be a far more critical focal point over the coming years. Monetary policy is on an extended holiday, a point the RBNZ will likely reiterate this week. Fiscal policy has far more levers to pull at a time when society (both here and abroad) wants change in some shape or form. In other data this week, we expect a modest trade deficit, while a little more stabilisation is expected in credit growth figures.

18 September 2017: Don't worry, be happy (PDF 292kB)

There remains limited evidence as yet that a softening housing market is spilling over into other parts of the economy. Consumers remain upbeat, suggesting positive labour market vibes are dominating. That said, this week’s Q2 GDP data will likely show that while the economy performed better than over the prior six months, it is still ho-hum and barely at trend. Late-cycle challenges are presenting headwinds, leaving growth around a 2½-3% pace going forward; the RBNZ needs growth above that to lift core inflation, and that’s hard when financial stability risks are forcing a slowdown in the most pro-cyclical part of the economy. Outside of the GDP figures, the election is also an obvious focus, and the last thing the economy needs is an uncertain outcome or policy uncertainty. However, change can also be good if initiatives are backed by evidence. This week’s balance of payments data should show a small narrowing in the current account deficit. Global dairy prices are likely to fall a little, while we expect net migration figures to remain broadly stable at an elevated level.

11 September 2017: To and fro (PDF 268kB)

From housing and its potential spill-overs, to politics and spending promises, there is a number of factors we are currently watching that could shape the economy’s growth performance over the next couple of years. Even though the economy is transitioning as some of its previous growth drivers have peaked (or are peaking), we are still generally constructive and see growth broadly holding around trend. That said, we are mindful that election and policy uncertainty could lead to a bit of a growth air-pocket over the next six months or so, as the time-value option for firms is to watch and wait. The weaker housing market – and the potential for this to spill over into spending – is also shifting the risk profile. Data this week will be dominated by a number of our proprietary indicators that will provide timely updates on growth, inflation and sentiment trends.

4 September 2017: Give and take (PDF 340kB)

Household incomes are being boosted by wage gains, strong employment, a sharp turnaround in farm incomes, and a boost from the likes of secondary income sources. The way election promises are going, the latter looks set to see an even bigger lift. There are headwinds: discretionary cash-flow growth looks set to slow given a turn in housing equity withdrawal, and that will challenge the growth in spending on big-ticket items; our eyes are on motor vehicle sales. Nevertheless, the decent income growth backdrop should still be supportive for spending overall, and it also means that stabilising the ratio of debt to disposable income need not require credit growth to slow too much further. Q2 partial indicators this week should be consistent with reasonable GDP growth, while the next GDT auction and our commodity price index will provide a steer on farm-gate returns, especially in the context of the recent falls in the NZD.

28 August 2017: Transition (PDF 304kB)

The New Zealand economy is transitioning in terms of its growth drivers. Erstwhile drivers (net migration, construction, tourism and housing) are all showing signs of peaking (or have peaked already). However, the record-high terms of trade, fiscal impulse and buoyant household income growth will fill the void. More onus will fall on productivity growth to lift too. Building consent data this week will likely remain capped, while our Business Outlook will provide its usual timely update on activity momentum. Overseas trade index figures should show the terms of trade reaching new all-time highs.

21 August 2017: The kitty (PDF 356kB)

A weaker housing market is now a headwind for the economy, and would have historically seen us downgrading our views on the outlook for spending and growth. However, the fact that consumer sentiment remains elevated (indeed it is rising), suggest other positive forces are dominating. LVR restrictions will be removed in time, but not for a while, and likely in stages in the first instance. This week, the Pre-election Economic and Fiscal Update will show a broadly similar economic and fiscal picture to that outlined in the May Budget; in other words, a plentiful kitty for pork-barrel politics. Trade figures should show a modest monthly deficit, while new mortgage lending will likely continue to slow.

14 August 2017: Flirting with temptation (PDF 328kB)

We are tempted to flat-line our OCR projections, such is the degree of uncertainty. Secular forces and disinflationary signals are hard to ignore. However, we’re resisting that temptation for now, preferring to instead push out the timing for when we see the first OCR hike to November 2018 (from May). However, it seems clear, as we mentioned last week, that these forces have manifested in a lower ‘neutral’ rate, meaning any tightening will be gradual and modest. In data this week, dairy prices are expected to lift a little, while our consumer confidence gauge will be watched to see if households remain upbeat despite clearer signs of housing market softness.

7 August 2017: A wager on wages (PDF 308kB)

Nominal wage growth is subdued and so it should be, given inflation and productivity trends. But conditions are primed for an uplift. Secular forces do need to be considered – they mean any pick-up will be modest and unlikely to be shared equally – but it still looks like historical (Phillips Curve) relationships hold. The RBNZ should retain a neutral stance this week, but with some dovish undertones. Inflation expectations are likely to fall, while ECT and retail sales figures should point to a modest pace of spending growth. Our Monthly Inflation Gauge and Truckometer indicators will give early hints on Q3 inflation and growth momentum.

31 July 2017: Neutral colours (PDF 388kB)

Some simple ballpark calculations can easily deliver a neutral cash rate at 3%, which is lower than the RBNZ’s assumed 3.5% (although the RBNZ does have a range around that estimate). It all means that it is hard to see the OCR moving up a long way, if much at all – and the more the wedge grows between borrowing rates and the OCR, the greater the potential for pressure to be taken off the NZD. This week’s labour market data should show a further fall in the unemployment rate, but few signs of a lift in wage growth yet. Dairy prices are expected to be stable to higher, and our Business Outlook should give an early steer on Q3 momentum.

24 July 2017: Price check (PDF 344kB)

Continued soft CPI figures question the path for inflation going forward. While strong inflation suppressants remain, better growth momentum and a lift in wage growth should eventually flow into more price tension and core inflation lifting in a slow manner. But the RBNZ will feel fully vindicated in its ultra-cautious stance; so a hat-tip to them. The risks that the OCR stays low for longer are growing. In data this week, the trade balance should recover in seasonally adjusted terms, while new mortgage lending will likely weaken further. Building consent issuance is likely to continue to struggle to push much higher.

17 July 2017: Mind the gap (PDF 340kB)

Credit and interest rates sensitive parts of the economy (housing especially) have cooled as banks have attempted to close a ‘funding gap’ and the regulator (RBNZ) hit the market with LVR restrictions. Timely measures suggest that the hard work has been done and the ‘gap’ has closed. While we doubt this means that conditions are set to loosen significantly, it does imply less intense competition for domestic deposits and a little more wriggle room on the credit front. Tempering at the top of the cycle lessens future vulnerabilities, and we remain constructive on the economic outlook over the coming years. In data this week, headline inflation is expected at 1.9%, while core measures will be broadly stable. Dairy prices are expected to be broadly stable, while visitor arrivals figures will be strong on account of the Lions tour.

10 July 2017: Still wind in the sails (PDF 300kB)

Our latest set of forecasts show an economy with momentum lifting after the recent lull. However, the pickup is modest, with the economy facing capacity constraints and late cycle economic challenges, two of which are finding skilled labour and keeping excesses in check. Even so, the pace of growth should still be strong enough to continue to gradually absorb spare capacity. It’s a solid, without being stellar, story. Core inflation will slowly rise as a result, and with it interest rates. This week’s data will show the air continuing to be let out of annual house price growth, while food prices and our Monthly Inflation Gauge will allow us to finalise our expectations for Q2 CPI. ECT spending is expected to be supported by Lions rugby tour visitors.

3 July 2017: Inflection point (PDF 332kB)

Central banks’ reaction functions appear to be moving more towards financial stability risks. That flags a turn in the liquidity cycle. While any policy removal will no doubt be measured, gradual and well-signalled, it still speaks to a more challenging backdrop for ‘risk’ assets and a likely pick-up in market volatility. It’s a battle that needs to be fought, and a lot needs to go right for things not to go wrong. The New Zealand economy is well-placed to weather any volatility. That said, it is another factor leaving us cautious chasing the NZD around current levels and will be an additional headwind for the Auckland housing market. This week’s NZIER QSBO should paint a decent picture, and signal that 3% plus GDP growth is on offer. Global milk powder prices are expected to ease. Credit data should show that moderation in household lending continues.

26 June 2017: Keeping the faith (PDF 336kB)

Recent GDP figures have been disappointing. There has been a perplexing divergence open up between ‘hard’ and ‘soft’ data of late. We are keeping faith in the domestic economic story and expect headline growth performance to look stronger in Q2 and Q3. In fact, despite headwinds from capacity and credit constraints, and softer housing activity (which looks set to persist), we see the economy growing at around a 3% pace into 2018. That should be enough to continue to gradually eat into spare capacity. In data this week, an improving trade picture is expected, while our Business Outlook will, as always, give a timely update on economic momentum.

19 June 2017: A little bit bucolic (PDF 376kB)

Despite an uncertain global backdrop, we are generally positive on the outlook for NZ’s major agricultural sectors for 2017/18. We are most cautious on beef, with a large supply increase anticipated from the US and Brazil. For dairy, we expect $6.75/kg/MS in 2017/18 and are biased towards a milk price in the upper end of a high-$5/kg MS to high-$6/kg MS range in the medium term. The main horticulture sectors had challenging growing and harvesting conditions this year, impacting on the overall quality of crops. That said, decent prices are still expected, supporting overall revenue. Turning to the broader economic picture, last week’s disappointing Q1 GDP figures play right into the RBNZ’s cautious hands and we expect it to maintain a very similar watchful stance this week. But the lower Q1 figures have led us to bump up our growth numbers for the remainder of this year a bit, as we retain faith in the broad story. Our consumer confidence figures will be important in terms of colour on the apparent divergence of late between ‘soft’ and ‘hard’ data.

12 June 2017: A healthy snapshot (PDF 312kB)

March quarter GDP and Balance of Payments figures will provide a reasonable snapshot of the economy’s cyclical and structural health. However, we’re more focused on the future than the rear-view mirror, and forward indicators continue to flag solid momentum, which is notable amidst a slowing in housing activity, difficulty finding staff and credit constraints. In other data this week, housing market figures should show a continued cooling in house price momentum, while we’d expect the monthly BusinessNZ indicators to be consistent with the generally positive signal from our own proprietary activity gauges.

6 June 2017: Greater scrutiny (PDF 316kB)

A key theme we are pushing is that more onus will need to fall on domestic saving to fund our future investment needs. The RBNZ is up with the play, reminding us in the FSR that our previous modus operandi of ramping up offshore borrowing faces greater scrutiny. While a gradual shift in interest rates in favour of savers and away from borrowers should assist with this in time, RBNZ analysis highlights that it is not the be-all-and-end-all for generating higher saving overall. Something more will be needed, and that brings us back to our view that more proactive saving policies are likely to be necessary in time. In data this week, we expect global dairy prices to be mixed, while manufacturing activity should rebound in Q1. Three of our key proprietary indicators (Job Ads, Truckometer and Inflation Gauge) will provide timely updates on labour demand, activity momentum and inflation trends respectively.

29 May 2017: The missing link (PDF 296kB)

The Budget had an enviable mix of social policy initiatives, infrastructure spending, tax cuts and debt repayment. It is hard to have many quibbles with that. But against a backdrop where funding our domestic saving shortfall via offshore borrowing is no longer the preferred modus operandi, domestic saving is going to need to lift in order for our investment needs to be met, and this is the missing link in the Budget. More proactive saving policies are likely to be necessary in time. The economic reality is simple: either saving performance improves or investment wilts. In data and events this week, the RBNZ’s Financial Stability Report will likely deliver another ‘financial system is sound, but risks exist’ message, and terms of trade figures should be strong, while construction and consent data look set to be mixed.

22 May 2017: On good terms (PDF 332kB)

A recovering and positive terms of trade outlook (we have lifted our forecasts) is set to boost national income growth. Not only is it another pillar in what is still a decent activity growth picture, stronger income growth (together with restrained consumption) will make it easier to generate the necessary saving to help fund what is still a large investment pipeline without blowing out the current account deficit. This decent nominal growth picture will also be a key element in this week’s Budget, helping to drive a pretty rosy fiscal picture. In other data this week, a small trade surplus is likely, while new mortgage lending will likely remain soft, in line with cooler housing market activity.

15 May 2017: Squirrel behaviour (PDF 312kB)

We don’t have too many quibbles with the RBNZ’s “aggressively neutral” stance. It does seem a tad too light on inflation (we think wage inflation is set to turn), but its benign view is admittedly manifesting in our Monthly Inflation Gauge and the RBNZ’s Sectoral Factor Model of core inflation, which has been sticky at 1.5%. Moreover, the RBNZ seems well on top of the tightening in financial conditions through the credit channel. New Zealand is facing a delicate balancing act going forward – if a savings shortfall is not to be funded via overseas issuance and the current account balance is to remain in check, then consumption must give way to ensure there is enough ‘saving’ to keep the investment wheels of the economy turning. We continue to favour a mid-2018 lift in the OCR, which places us behind the market but ahead of the RBNZ.

8 May 2017: Easier said than done (PDF 312kB)

The RBNZ faces a difficult balancing act this week. Recent economic developments (the growth pulse, higher inflation and inflation expectations, a tighter labour market, and lower NZD) make its explicit neutral stance now hard to justify. However, a still-shaky global scene (with commodities being belted of late), benign wage growth and an only gradual (and not broad-based) lift in core inflation will leave it cautious. We’ve been here before and seen broader inflation fail to materialise. A neutral, balanced tone will be maintained, but in order to maintain some wiggle room, the Bank will need to provide a hat-tip to recent events. The challenge will be doing that without the market running with it as a change in stance – easier said than done.

1 May 2017: Neighbourly squabble (PDF 328kB)

The NZD appears to have been caught in the crossfire of the latest North American trade disputes. Trade, together with broader fiscal and microeconomic agendas, is something both economic commentators and markets are going to have to increasingly get used to focusing on – the relative importance of central banks has waned at this juncture. While the threat of increased protectionism leaves us mindful, at this stage it appears to be more a neighbourly squabble than something broader. What’s more, the lower NZD has actually generated a meaningful loosening in financial conditions, so – hey presto! – the macro-framework works! This week, labour market figures should be solid, with the unemployment rate at least partially reversing Q4’s surprise lift. Dairy prices may moderate a touch, while inflation expectations should follow headline inflation higher.

21 April 2017: Slow grind (PDF 384kB)

While the lift in headline inflation can be discounted to some degree, the latest CPI figures still reinforce that core inflation is grinding higher, albeit gradually and not broadly enough to shift the RBNZ’s stance at this stage. Slow rises in core inflation are something we expect to continue amidst a lot of economic uncertainty (the impact of a sizeable tightening in financial conditions being a major one; the global situation is another). This week’s separate announcements with regards to equal pay and immigration policy add to that inflationary vibe at the margin, as they should provide an additional boost to wage growth. In data next week, net migration figures will be strong, while building consent figures are likely to be capped by capital and credit constraints. Our Business Outlook survey will provide a signal on how activity is tracking into the middle part of the year.

18 April 2017: Corporate challenge (PDF 296kB)

The economy needs to generate more domestic saving to fund its investment needs. The business sector has been a key source of saving over this economic cycle and will need to step up further at a time when investment risks being constrained by credit re-pricing and rationing. More retained earnings will need to be invested. A strong business sector profitability environment feeds into that, and the backdrop is generally still a good one. However, there are challenges developing, with waning productivity, skilled labour shortages, competitive forces and cost pressures more generally threatening to eat into margins. Navigating those challenges will not be plain sailing, but if successful, should help to keep the economy on an even keel at a time when tighter financial and credit conditions threaten softer growth outcomes. CPI data this week should show headline inflation back at target (or close to it), but the broader inflationary pulse will likely remain tame. Dairy prices are expected to lift modestly.

10 April 2017: Extended credit (PDF 292kB)

We keep getting asked why the RBNZ is so dovish. Capacity pressures are growing, headline inflation is close to hitting 2%, global growth is looking stronger and the NZD is down. It’s easy to point to the risk of inflaming the NZD on a shift in stance, the risks of moving pre-emptively or global uncertainty. However, one thing that we don’t believe is fully appreciated is the tightening in credit conditions already being seen across the economy. It is not just that retail mortgage interest rates are going up; it is the price and quantity of credit to the business and agricultural sectors too. It is broad-based and is likely to continue. While it doesn’t change our core expectation of solid momentum, it adds another layer of uncertainty. The economy needs the credit channel to be tightening at this juncture (it will help elongate the cycle), but such a tightening is fraught with tensions and challenges.

3 April 2017: Maturing and mellowing (PDF 292kB)

Our latest set of forecasts portrays an economy at a mature stage of its economic cycle. Late-cycle behaviours are apparent, and historically these have helped bring about a sharp slowdown, perhaps compounded by a global event. However, with credit/housing related excesses being actively curtailed, and numerous support factors remaining, we see the economy experiencing a ‘gallop to canter’ style moderation, with annual growth holding around 3% over 2017. The labour market will continue to tighten and domestic inflation pressures rise – that will necessitate a higher OCR in time. However, the RBNZ has time on its side. This week’s QSBO will likely be consistent with this more mature theme, with activity indicators holding up, but growing capacity pressures evident. Dairy prices are expected to show some stability, while our commodity price index will highlight the broader picture.

27 March 2017: In good (bad) company (PDF 280kB)

The latest productivity figures for New Zealand are poor. Some of it can be put down to timing lags, legacy issues, challenges transitioning the economy to a different economic model, recent supply-side (earthquake) shocks that have been disruptive, and perhaps even measurement issues, but all that can’t fully explain the extent of weakness. The weaker trend in labour productivity growth is not unique to New Zealand; it has been a global phenomenon and is one reason the global economy is (and will likely remain) in a low-growth rut relative to history. New Zealand has been ‘less bad’ when we eye relative shifts, though that’s cold comfort; absolutes matter, a lot. This week, the question as we await building consent figures is how much supply issues are dominating demand ones, while our Business Outlook survey will be used to assess whether firms remain, on the whole, upbeat.

20 March 2017: Sticking to the script (PDF 288kB)

We have bumped up our Q1 GDP forecasts on a belief that some of the softness in Q4 will reverse. Annual growth looks set to waddle around 3% over the coming year. But with the economy increasingly butting up against capacity and credit constraints, we expect dataflow to remain more mixed versus mid-2016, when 3½-4% growth was being recorded. We also see inflation close to 2% for Q1, boosted by food and the drag from lower petrol prices falling out. The RBNZ should be quite chuffed. The NZD is down, inflation is moving in the right direction, housing activity is slowing, inflation expectations are up, and banks are effectively doing its work for it by lifting retail interest rates. That’s as close to nirvana as it gets for a central bank, considering the challenges of prior years! When things are going well you stick to your already printed script so expect another neutral assessment this week.

13 March 2017: Battle-lines (PDF 304kB)

A notable shift in tone from key global central banks raises some key questions with regards to the global liquidity cycle, asset valuations, the trajectory for the NZD and by association, the stance of the RBNZ. The USD is in the box seat and yields have risen. But what does the shift in central bank stance and tightening in US financial conditions mean for future growth prospects? Do higher real yields mean asset valuations are at risk of realignment? Additionally, political risks still abound with markets less data-sensitive and more reactive to non-data developments. Plenty of risks and uncertainties remain, but at this stage we are taking a watchful stance when it comes to assessing our own forecasts.

6 March 2017: Stock-take (PDF 296kB)

A quick stock-take of our forecasts leaves us reasonably comfortable with our key views for 2017. There are some hits and misses. The boost to growth from construction and tourism looks like it could be a little less than expected, while migration will be stronger. The labour market is tightening, but wage growth is taking time to show up. Nevertheless, we still believe that inflation will lift further. In fact, we see upside risks to our near-term CPI forecasts (but more balanced risks further out). That leaves us comfortable with our view that the next move in the OCR will be up, and earlier than the RBNZ implies.

27 February 2017: Convoluted (PDF 360kB)

On the face of it, recent global developments are encouraging, with a synchronised reflationary-type upswing underway. But plenty of risks and uncertainties remain and that is presenting somewhat of a convoluted picture for markets, whose subsequent lack of conviction is being reflected in choppy, and in some cases directionless, price action. We still believe the NZD/USD is biased lower in time as US policy normalisation continues. But New Zealand’s economic prospects remain solid – despite a recent turn in some more cyclical elements – and thus the extent of NZD downside looks modest (outside of a turn in the liquidity cycle). We have lifted our NZD forecasts accordingly. In a busy week for domestic data, credit growth is expected to continue to cool, the terms of trade to bounce, construction volumes to lift modestly, and we get the first update on business sentiment for 2017.

20 February 2017: You ain’t seen nothing yet (PDF 360kB)

The supply side is responding to considerable housing pressures in Auckland, but barely sufficiently to keep up with demand. Two challenges, namely cost escalation and capital constraints (especially in the multi-dwelling space) risk curtailing the supply side response further. Finding skilled labour is an additional issue. While there are some natural ways the ‘market’ could offset demand-side strength (increased inter-regional migration and larger household sizes), headwinds to supply growth reinforce how correcting Auckland’s housing imbalances and affordability challenges is a multi-decade undertaking. In data this week, dairy prices are expected to slip, while trends in migration and visitor arrival figures (next week) should stay strong.

13 February 2017: When in doubt, do nowt (PDF 272kB)

The RBNZ effectively punted the ball out of the stadium, such was its ‘kick for touch’ on the notion of the OCR moving up any time soon. That’s sensible in the current environment. Over time, and as the economy increasingly butts up against capacity pressures, it will be a view that faces some tests, but not until we get more evidence that inflation is actually emerging (rather than just threatening to). Recent history has taught us that the RBNZ is right to be sceptical and cautious on that front. Our focus will be on the likes of our Inflation Gauge, wage growth, the global backdrop, and of course the trajectory of the NZD. In data this week, Q4 retail spending figures are likely to have been boosted by car sales, while annual house price growth should have continued to moderate. Soft indicators such as consumer confidence will help gauge the economic pulse in early 2017.

7 February 2017: Middle of the road (PDF 284kB)

While it feels like much has changed since the RBNZ’s November decision (and indeed a lot has), we don’t think the RBNZ will be ready to embrace a full tightening bias. Yes, it looks like the next move in the OCR is up. Yet with the NZD elevated, global uncertainties remaining, financial conditions tighter (on the back of a higher NZD and retail interest rates), and the RBNZ no doubt not wanting to repeat past policy reversals, caution should prevail. We expect the Bank to deliver a reasonably neutral tone this week. Elsewhere, inflation expectations are likely to rise a tad, while dairy prices could dip again. After prior weakness, we also expect to see bounces in building consents and retail card spending figures.

30 January 2017: Labouring on (PDF 304kB)

A tightening labour market (which data this week should confirm) is natural given the maturing nature of the business cycle. However, when firms are telling us that finding staff is their biggest problem, despite record net migration and the highest participation rate ever, it speaks to the strength of the demand and a skills mismatch that is only likely to worsen given the interaction of huge secular factors (technological, climate and demographics to name but a few). This will present a significant challenge for policymakers and the education system / necessary re-training / evolution of the workforce. In other data this week, new lending and credit growth figures are expected to continue slowing, while migration figures will no doubt remain strong.

24 January 2017: Better (inf)late than never (PDF 304kB)

This week’s Q4 CPI figures will show headline inflation lifting back into the RBNZ’s target band. However, the far more important story is that underlying inflation pressures are increasing too, albeit in a slow manner, which is something we expect to develop further as the year progresses. And while a firmer inflation theme has threatened before only to subsequently peter out – and some of the reasons why that occurred still persist – the sheer number of ‘traditional’ inflation drivers that are now pointing in the same direction is hard to ignore. It reinforces that the OCR will not stay at these levels indefinitely, even though for now time is still on the RBNZ’s side. In other data, the Government’s monthly financial statements should be close to HYEFU forecasts, while a modest monthly trade deficit is expected.

16 January 2017: The credit channel (PDF 312kB)

The recent increases in mortgage and deposit rates are a clear result of higher wholesale rates, a turn in the credit cycle and the need for banks to close a funding gap. Upside pressure on these rates is likely to persist. At a time when a number of other factors are pointing to the possibility of the RBNZ needing to contemplate policy tightening later this year (strong growth momentum, capacity strains, global reflation and a turn in the domestic inflation cycle), shifts in retail interest rates and renewed NZD strength buy the RBNZ a little more time – although as we noted last week, much will hinge on how households behave. This week, the QSBO should be consistent with a theme of strong growth but intensifying capacity pressures. Dairy prices are expected to remain stable and house price growth should soften further. Our consumer confidence series kicks off the 2017 domestic economic dataflow as the first piece of data relating to the New Year.

9 January 2017: Hand-in-hand (PDF 264kB)

With 2017 now underway, a number of important themes will shape the outlook for interest rates, the NZD and the economy more generally. One domestic theme we have a particularly close eye on is household behaviour. Up until recently restraint was the key word, with a housing boom not being followed hand-in-hand – as it typically would be – by a consumption equivalent. That has helped contain domestic inflation pressures. However, there are signs that this is changing, with some pre-2008 behaviours becoming apparent. We think this will prove transitory, but we are on notice, as is the RBNZ. A return of household behaviours of old would spell earlier OCR hikes and the potential for a wilder swing in the economic cycle. This week, a number of our own proprietary releases will provide a timely update on the state of the economy and momentum heading into the New Year.


19 December 2016: A happy ending (PDF 320kB)

September quarter data this week should provide a nice snapshot on the state of the economy, which we believe is solid: decent GDP growth with a contained current account deficit. That goes to the heart of our latest economic forecasts, which show that while activity growth is likely to moderate over the course of 2017 as natural headwinds build, we are not talking a full-blown downturn. The global scene remains a key risk but the economy does not have the internal imbalances (excesses) we’ve seen before at this stage of the cycle that can demand the piper is paid. In other data, dairy prices may rise further, while trade figures are expected to show a small monthly deficit. Net migration figures will undoubtedly remain strong, while credit growth and new mortgage lending will likely cool further.

12 December 2016: Saving grace (PDF 288kB)

Rising national saving (though still too low), particularly by the business sector, and a solid fiscal position – and outlook – are encouraging, as they can help insulate the economy against severe swings in the cycle. It doesn’t kill the business cycle, of course, and a deteriorating household savings position needs to be watched, but it does reinforce the economy’s better structural health compared with the past. This week, our final consumer and business sentiment measures for the year will update us on how economic momentum is shaping into early 2017; we expect okay numbers with some payback from Q2 evident. Partial indicators for GDP (manufacturing and construction) will allow us to finalise our expectations for next week’s Q3 figures.

5 December 2016: Full credit (PDF 276kB)

The credit cycle is turning in New Zealand, which will have implications for interest rates, credit availability, the housing market, investment and ultimately growth. Together with capacity pressures, a more moderate rate of credit expansion is a key reason why we see GDP growth eventually moderating from today’s strong 3½-4% pace towards 3% by the end of 2017. But we view this turn as a positive thing for the economy’s medium-term growth sustainability. Another year of strong credit growth would up the ante considerably on another boom-bust type cycle. This week, the HYEFU is likely to show the Government’s books taking a near-term hit from the earthquake, but still in good shape overall. Our Truckometer, Job Ads and Monthly Inflation Gauge will provide signals on growth and inflation trends as the year draws to a close. And global dairy prices are likely to have risen further.

28 November 2016: Assessing the risks (PDF 312kB)

The economy’s current solid momentum should continue into 2017, with it in good shape to absorb any potential challenges. But there are many uncertainties – financial conditions, the housing market, earthquake fallout, consumer behaviour (binging or otherwise), capacity strains (and some early signs of inflation), the global scene (excess leverage, the liquidity cycle, China, politics) and how banks respond to ongoing funding pressures. We are focused on many of these themes as we look towards next year. This week, the RBNZ’s Financial Stability Report should note that the financial system is sound and that risks, while still present, have perhaps eased since May. Our Business Outlook will provide an early gauge of any confidence hit from the earthquakes, while commodity price data will provide a signal on the near-term direction for the terms of trade.

21 November 2016: Raising the (shaky) stakes (PDF 332kB)

The extent of damage from last week’s earthquakes, and the economic impact itself, remain highly uncertain, though we are erring towards the higher side, with major questions surrounding the extent of damage in Wellington and Marlborough, let alone Kaikoura. We have shaved our GDP forecasts a touch in Q4 and Q1, offset by a modest lift in mid-2017. However, we are reluctant to upgrade our medium-term figures on account of the rebuild as capacity constraints are already biting and will ultimately require resources to be shifted from elsewhere. Given the resource pressures (and direct inflation consequences from the quakes such as higher insurance premiums), we have lifted our inflation forecasts a touch, but the RBNZ can (and will) look through this.

14 November 2016: Rock and roll (PDF 492kB)

Global markets have settled after the initial reaction to last week’s US election. While that is encouraging, numerous issues and concerns remain. More than anything, it has further cemented our view that politics and fiscal policy will gain far greater prominence going forward. For New Zealand it is obviously early days, but we believe the economy is less vulnerable to a possible weakening in global growth than it has been historically. Moreover, it is hard to see migration slowing or NZD weakness extending too far given New Zealand’s economic credentials, although there will be increased political pressure locally to avoid the same populist shifts seen globally. This week’s retail sales data should be reasonable, and our job ads and consumer confidence series will help gauge prospects for spending into year end. Tighter supply should lend further support to global dairy prices.

7 November 2016: One and done (PDF 316kB)

The US election is the focus this week. There are real risks to New Zealand, but also good reasons not to panic. The endgame for the political posturing and populist pushback is not good but it’s a thematic that will just need to be dealt with. The RBNZ will cut the OCR this week because it has said it will, but strong economic data and signs of a turn in inflation suggest a risk they could be overcooking it. Risks of further cuts remain, but in our view this would require an ugly event offshore (for which there are plenty of candidates, admittedly). Data this week should continue to flag that domestic economic momentum is strong, but that housing momentum has topped out courtesy of the LVR restrictions and affordability constraints.

31 October 2016:  Haunted housing? (PDF 636kB)

New lending data, together with our own internal anecdotes, suggest that the latest round of LVR restrictions has seen housing market activity cool. History suggests this cooling will be temporary given a shortage of supply, and the market will fire up again in around six months. However, this time looks different as banks are actively attempting to lean against excesses, the interest rate cycle (both domestically and offshore) is maturing, valuations are even more stretched, additional macro-prudential measures are being worked on, and market forces (i.e. more intra-regional migration) will assist. This should temper the market from firing again until the supply side catches up.

25 October 2016:  Harder to justify (PDF 452kB)

We have removed the second OCR cut we had pencilled in our forecasts for early 2017. There are certainly still reasons why the RBNZ could get dragged back to the easing table (a global event, ongoing weak tradable inflation through NZD strength, or failure of inflation expectations to lift). But when balanced against strong domestic growth, emerging capacity strains, rising domestic inflation pressures and some signs of a turn in the global inflation cycle, additional OCR cuts have become harder to justify as a central scenario. After a final cut next month, we now see the OCR stabilising at 1.75%. Overseas trade figures this week should show a large deficit on weaker primary exports, while new mortgage lending should have cooled further.

17 October 2016: Late-cycle behaviour (PDF 272kB)

The economy is growing strongly and some late-cycle behaviours are now evident. We have housing valuation excesses, deteriorating saving, strong credit growth, re-leveraging households, the prospect of a rising net external liability position, capacity pressures emerging, and a tightening labour market. Such excesses can build up imbalances that weaken an economy’s foundations and ultimately require purging and an economic correction / downturn. While the economy is certainly not bulletproof, there are key differences now relative to the past. We are not seeing a wholesale deterioration in structural indicators, policy makers are far more active, banks are leaning against excesses near top of the cycle and inflation is low, and set to remain that way. It gives us confidence that when the domestic growth cycle eventually turns, which it will, it will be a deceleration as opposed to a downturn. Q3 CPI data this week should mark the trough in headline inflation. Dairy prices are expected to be supported by a tighter GDT supply backdrop.

10 October 2016: Shifting the focus (PDF 280kB)

We believe we are heading into a period where markets need (and appear) to be a little less focused on monetary policy, looking harder at fiscal and microeconomic policy. The former has reached exhaustion point and many of the globe’s current key economic issues are structural rather than cyclical in nature. New Zealand’s microeconomic fundamentals are far from pristine but better than most. The fiscal situation is part of that, and the Government’s FY16 statements this week should show a decent picture; one where there are options. This is not something easily said about many other parts of the world. Elsewhere this week, housing data should cool further while activity indicators should still point to decent economic momentum overall.

3 October 2016: Groundhog Day (PDF 268kB)

Last week’s European financial sector issues are a clear reminder that considerable vulnerabilities within the global backdrop remain. And while our base-case for the global economy is still of the ‘muddle-through’ variety, such global wobbles reinforce that the path to recovery post the GFC continues to be a long, arduous, drawn-out affair. Amidst all this, the domestic scene remains buoyant, and our latest set of economic forecasts is consistent with that solid message, with decent economic momentum set to continue for around the next 18 months before natural headwinds (capacity and balance sheet constraints) see growth moderate. This week, the QSBO is expected to be consistent with the ‘solid growth and emerging capacity pressure’ message, while after some solid gains, a softer GDT auction result looks possible.

26 September 2016: Unconventional times (PDF 276kB)

Conventional monetary policy drivers argue for no further OCR cuts. But these aren’t conventional times. Global deflationary forces, NZD strength, migration challenges and shifts in the bank funding backdrop (increased deposit competition) are all altering the monetary policy playbook. As such, the OCR is going lower unless either domestic inflation pressures emerge (and quickly), the NZD falls (but for positive global growth reasons, not the opposite) or housing thumbs its nose at the latest LVR restrictions. All seem unlikely, at least in the near term; hence the RBNZ will remain on its signalled easing path. This week, we will be watching for further signs of cooling (off strong rates) in new lending growth, while our September Business Outlook will provide a signal on how growth and inflation are tracking into the final part of the year.

19 September 2016: Taking care of business (PDF 340kB)

It’s largely a case of business as usual across the New Zealand economy, with Q2 GDP data confirming solid overall momentum and ANZ job ads showing ongoing growth in labour demand. We’re not convinced that this is as good as it gets for the economy, with a lack of excess on the consumer side (ex-housing) and reduced risks for the dairy sector suggesting the expansion has legs. That said, we remain wary on a few fronts: the housing market and household debt, global developments, and the endgame associated with cutting rates in the face of a strong and expanding economy. We don’t expect the next cut this week – the RBNZ has a preference for moving at MPS dates, so we’re picking November. This week also brings another GDT auction, where further improvement is expected, and another read on net migration – expected to stay strong.

12 September 2016: Muddle through (PDF 312kB)

The strong domestic economy is clearly a driving force behind NZD strength, particularly against a ‘muddle through’ global backdrop. Valuation-wise, the NZD is stretched. But for it to fall meaningfully, either the domestic scene must deteriorate sharply (we can’t really see that) or something major needs to occur offshore. And with regards to the latter, it is the scenarios at the extremes of the global growth ‘bell curve’ that we suspect will be what drives a meaningful shift in currency markets, although we are far more mindful of the negative end of the spectrum at present. In the meantime, this muddle-through global scene should ensure the NZD remains a ‘buy on dips’.

5 September 2016: Pastoral pulse (PDF 296kB)

Beyond the now-familiar themes affecting the outlook here and abroad, this week we take a quick look at the key forces shaping the price outlook for New Zealand’s major agricultural sectors. The dichotomy across key sectors is expected to continue in 2016/17. The operating environment still looks challenging for key livestock sectors despite some expected improvement for dairying. In contrast, the main horticultural crops are on track to post near-record export volumes and still achieve solid prices in most cases. This week, manufacturing data will allow us to firm up our Q2 GDP growth expectation, while our Truckometer and Monthly Inflation Gauge will provide early reads on how growth and inflation are tracking.

29 August 2016: 'Targeting' targeted (PDF 284kB)

Inflation targeting remains in the spotlight, both here and abroad. While some of the scrutiny is fair, some of it isn’t. But in a world of unprecedented stimulus yet still-low inflation and lacklustre growth, and frictions across society and the political scene amidst impotent fiscal policy and income inequality challenges, it is a debate that is unlikely to go away (or be solved) any time soon. In the meantime, though, monetary policy challenges will mean more prudential policy tweaks and ongoing interest rate convergence. This week, our Business Outlook survey will again provide a timely update of domestic economic momentum, while partial indicators for Q2 GDP (OTIs and building work) will help confirm whether or not there is upside risk to our current GDP expectation of 0.8% q/q.

22 August 2016:  Rolling on (PDF 284kB)

New Zealand’s growth picture still looks good, and some downside risks (dairy) are also starting to diminish. Outside of quarterly volatility (strong Q2 and perhaps a softer Q3), it is a growth story we expect to continue. Further capacity pressures should emerge as a result, although new underutilisation figures suggest spare capacity in the labour market remains, giving a little more context to recent benign wage growth. It of course contrasts with firms reporting it is more difficult to find staff, although that just further supports the argument that the “mix” of current strong migration gains is not quite right. This week a small trade deficit is likely, while new lending figures will remain strong ahead of the next round of LVR restrictions.

15 August 2016: A question of balance (PDF 288kB)

The RBNZ struck an appropriate balance last week. There is no denying the challenges ultra-loose policy settings elsewhere place on the RBNZ and NZD. Inflation expectations look biased even lower in the near term, which means so too is the OCR. But this needs to be balanced against a New Zealand economy that is not weak and the fact that some inflation forces are beyond the RBNZ’s control. In fact, Q2 GDP is shaping up as strong. Inflation targeting will continue, but a huge degree of flexibility and pragmatism is required. This week, dairy prices look set to lift again, while the HLFS should show an unchanged unemployment rate (with risks perhaps skewed a little higher).

8 August 2016: More convergence on offer (PDF 316kB)

The RBNZ will return to the rate-cutting table this week, and no doubt signal that more easing beyond that is to come. We don’t favour a BoE “bazooka” style approach (i.e. the 50bp OCR cut that some speculate); the economy just doesn’t warrant it, and the NZD is strong for a few reasons, not just yield. Stepping back, we continue to ponder the end-game of the race to the bottom (and below) for central bank policy. Global inflation pressures are low for many reasons that the price of money will not alter. In the meantime, central banks are contributing to a number of market distortions. Inflation-targeting frameworks in their current form look on borrowed time. Elsewhere this week, retail spending figures (while respectable) will show an ongoing element of household restraint. Our Truckometer and Inflation Gauge indicators will give early heads-ups on Q3 activity and inflation trends.

1 August 2016: The wedge (PDF 272kB)

Although the OCR is set to go lower, we’re not convinced it will take the NZD with it in a sustained fashion. The growth cycle needs to turn for currency weakness to be sustained. That’s not around the corner. We’re also not convinced that a lower OCR will be fully passed on into retail deposit and borrowing rates, particularly with bank funding costs higher than last year and credit growth outstripping deposit growth. Deposit rates cannot be taken continuously lower, which means the same for borrowing rates. A wedge between wholesale and retail rates will help the RBNZ as it tackles competing housing and currency tensions. This week, surveyed inflation expectations could dip a little more. We will also be on the lookout for more hints that while still low, the wage cycle is starting to turn. We are expecting to see a steeper forward curve at the next GDT auction.

25 July 2016: On the offensive (PDF 300kB)

By tightening LVR limits and signalling a lower OCR, the RBNZ has knocked the NZD down a tad as it deals with housing, currency and inflation tensions. We can’t argue with the spirit of what is being attempted, though we continue to ponder the endgame. We don’t believe it meaningfully alters the outlook for the NZD (reasons for strength remain), and likewise for housing, where a host of problems exist (demand/supply imbalance, capacity etc). Furthermore, low inflation is a global rather than local phenomenon. These announcements go some way towards responding to tensions, but they are tweaks and not much more. A challenging operating environment remains where policy trade-offs are required. This week we expect credit and lending growth figures to be strong, while our Business Outlook survey is the first one to capture the impact, or not, of recent global ructions.

15 July 2016: Capacity vs currency (PDF 312kB)

Momentum is accelerating across the economy. This solid story should manifest in a further lift (off lows) in domestic inflation within next week’s Q2 CPI figures. Historically, that would be most pertinent for the monetary policy outlook, although low headline inflation and the impact of the strong NZD are clearly relevant given their (now greater) influence on already-low inflation expectations. The RBNZ is in a pickle. The unusual step to provide an economic update next Thursday has been taken by the market to mean higher odds for a cut in the OCR. We don’t think the economy needs it despite the elevated NZD, and in the absence of a major reduction in the OCR (well below 2%), a high NZD will be around for a while. Elsewhere, net migration figures will remain strong, while we are a little uneasy over the near-term GDT price outlook. We still hold concerns about the global scene and global growth prospects despite equities surging.

11 July 2016: Situation vacant (PDF 264kB)

The economy continues to perform well and we expect more of the same over the years ahead. Challenges in dairying and a high NZD are being outweighed by other sectors. Solid demand will see capacity constraints intensify (firms are finding it harder to find labour) and domestic inflation pressures gradually lift off lows. We are lukewarm on the prospects of the OCR going lower in the near-term (and see the RBNZ holding fire in August), although the strong NZD and global forces will likely drag it back to the easing table over time. Key risks facing the economy are that a) too much domestic-centric growth, a housing market boom and the associated debt build-up will require a purging process; and b) global wobbles turn into outright weakness. It’s the latter that worries us most. This week, REINZ figures should be strong, particularly outside of Auckland. Local consumer confidence data is the first release since the latest global turbulence.

4 July 2016: Knowns versus unknowns (PDF 348kB)

Markets have settled somewhat after the Brexit-inspired tumultuous start to last week. We doubt it will last. Populism will make it difficult to drive sensible policy outcomes, which will impact growth over time. Asset values will need to reflect that, and it’s a question of when, not if. Against that, New Zealand continues to truck along nicely, in fact too nicely with regard to housing and credit. That is presenting the RBNZ with a dilemma. The NZD is a clear headache and the global scene still a lottery, but it is clear that the economy is not crying out for more monetary policy stimulus right here and now. And that’s a known, whereas the path of the currency is an unknown. This makes the odds of another OCR cut in August far from obvious. This week’s QSBO should rebound solidly, while the GDT auction result reveals a soft underbelly.

27 June 2016: Sideswiped (PDF 264kB)

Markets are set for a tumultuous period following the UK EU referendum result. Society has sent a message against globalisation and economic integration; that’s negative for microeconomic policy settings and ultimately growth. A key issue now is whether Brexit spills over into wider Europe. We suspect it will, and from there likely into emerging markets. Global growth will be lower, although we are coy about making sweeping assessments at this early stage. What we know is that a) the global economy is already vulnerable; and b) steps towards anti-globalisation and disintegration are negatives that need to be reflected in asset valuations. At this stage, we expect the domestic impact to be small, but it is a moving feast and we are watching our 6 C’s closely. Weaker commodity and credit markets, and a resilient NZD, would be an unwelcome combination.

20 June 2016: Push back (PDF 312kB)

The Brexit vote takes centre stage this week. When global thematics such as this are front and centre we eye our 6 C’s: confidence, contagion risks, commodities, cost of funds, currency (and China). Stepping back, Brexit is one of many signs of political fragmentation and push-back against inequality, the establishment, economic integration and globalisation. It’s a worrying trend as it portends weakening support for microeconomic reform, as fringe politics become more relevant. It’s an environment where populism is trumping leadership. Compare that to centrist policies in New Zealand, reasonable growth and political stability, and one concludes migration numbers won’t be returning to the average of 15k per year any time soon, nor the NZD heading materially lower.

13 June 2016: Tensions aplenty (PDF 304kB)

Familiar tensions between housing and NZD strength are complicating the RBNZ’s job once again. The outlook for the OCR is delicately poised as a result. It is not the most optimal policy outcome, but escalating pressures mean additional macro-prudential measures look set to be a partial circuit breaker to this tension. In fact, we would not be surprised to get some sort of firmer signal in the coming months. Q1 GDP data this week should be a little softer than growth recorded over the second half of 2015, although timelier signals on Q2 activity are generally hinting that any Q1 softness is likely to be temporary. A further modest lift in GDT dairy prices is also expected this week.

7 June 2016: The pendulum (PDF 436kB)

We expect the RBNZ to retain the OCR at 2.25%; the economy doesn’t need additional stimulus right now. In fact, a scenario where no further easing is delivered at all is actually becoming more credible. However, that looks a step too far for the RBNZ at present, and a clear easing bias will be retained on fear of turbo-charging the NZD to ever-greater heights. Admittedly, we still expect further easing too, in part because we expect to see pressures in the deposit market ramp up later in the year, which, in the absence of lower wholesale rates, will mean higher retail rates. Also this week, manufacturing data is likely to be mixed, while our Monthly Inflation Gauge will give an early steer on Q2 CPI. Housing data will no doubt be strong.

30 May 2016: Recalibration (PDF 420kB)

The dairy sector remains the clear soft point in what is otherwise a good economic picture. Amidst strains, one facet not fully appreciated is the recalibration of cost bases; a welcome and necessary adjustment, albeit painful. Without sugar-coating the challenge, those who respond and adapt the best will emerge in the strongest positions in the future. We hold the sector in higher regard than we do many global peers that are becoming more vocal about government support. That just delays the inevitable market adjustment. It is a busy week ahead, with some backward-looking data (which we expect to be mixed) and more forward-looking gauges (including some of our propriety indicators) to focus on. This week’s GDT auction is expected to eke out a small rise.

23 May 2016: The worm has turned (for now) (PDF 416kB)

While we still have further RBNZ easing as our base case, we see little near-term urgency to cut and the market is increasingly coming around to the same view. There are challenges (low inflation being the big one), but the economy doesn’t appear to need further stimulus (demand is solid and we think inflation is turning) or kerosene on the housing fire right here and now. The Budget is the key event this week and we expect it to paint a respectable picture, with New Zealand remaining in the top echelon of economies from a fiscal perspective. The April trade balance is expected to show a surplus of similar size to that seen in March.

16 May 2016: When, not if (PDF 488kB)

While the RBNZ did not announce any additional macro-prudential measures last week, it is a question of when, not if. Housing is booming, speculative behaviour appears to be on the rise and households are leveraging (and this looks set to continue, given our analysis of some of the long-run drivers). At the same time, low inflation and global forces (slowing growth and the hunt for yield) will keep up the pressure for a lower OCR. We still see the OCR heading lower, but further down the track than June; it doesn’t pass the smell test to be upping the ante on housing and pouring petrol on the fire at the same time. This week, we see a possibility that inflation expectations may tick up slightly given petrol’s bounce, while global dairy prices look set to continue ‘bouncing along the bottom’. Consumer confidence figures will show whether consumers, like their business counterparts, remain reasonably upbeat.

9 May 2016: Riding in kanga's pouch? (PDF 388kB)

The RBA has thrown the cat amongst the pigeons by cutting and flagging more to come. We’re not buying into the notion there’s enough in that to seal the deal on a June cut from the RBNZ on fear of the NZD/AUD moving up more. There are wider considerations at play and to us the Fed will have a far greater bearing on RBNZ action than the RBA will. We still feel the RBNZ will get dragged back to the easing table more than once, but to us June is still a line-ball call; the economy doesn’t appear to need it at present. This week’s RBNZ Financial Stability Report should highlight concern, and the possibility of further macro-prudential action. Data should show respectable consumer spending, while two of our proprietary indicators (Truckometer and Monthly Inflation Gauge) will give an early signal on Q2 activity and inflation.

2 May 2016: Subtle shifts (PDF 500kB)

A June OCR cut from the RBNZ is far from a done deal, with domestic housing and economic anecdotes making it more tenuous with each passing day. That said, we still believe further easing is more likely than not, considering global vulnerabilities and NZD strength amidst currency games from other central banks. The Fed continues to drag its heels over further tightening and more RBA easing can’t be ruled out this week following the soft CPI, although recent BoJ and ECB reluctance means it is admittedly not a unanimous signal, and we are on the lookout for any subtle shifts. Domestic labour market data this week is expected to send a decent signal (notwithstanding quarterly volatility), while dairy prices are likely to lift modestly off low levels.

26 April 2016: Up, up and away (PDF 548kB)

The consensus is far from settled heading into the RBNZ’s decision this week. A case for cutting can certainly be made. However, we do not buy the argument that the RBNZ needs to respond to NZD strength, particularly as it is being driven by offshore – not local – factors. We expect policy to be left unchanged, with an easing bias retained. While we still forecast the OCR heading lower in time, our conviction that that would be the right thing for New Zealand is dwindling. Each passing day reveals more stratospheric housing anecdotes. Elsewhere this week, our Business Outlook will tell us whether the mood among businesses is holding at decent levels, as it is for consumers, while credit figures should remain strong and provide a clear reminder of some of the risks a lower OCR brings.

18 April 2016: Double, double, toil and trouble (PDF 428kB)

While we are forecasting a lower OCR, we continue to feel uneasy about the trade-offs a lower OCR will bring. Regional housing markets are booming, Auckland is coming back to the boil, and construction cost anecdotes are huge. Yet we have the (high) NZD, low inflation expectations and dairy challenges to deal with. Today’s CPI figures (low headline, but mixed details) muddy the waters. The odds of more macro-prudential measures are growing by the day, and we wonder whether tighter LVR restrictions for all investors (i.e. not just those in Auckland) are the next step. This week, dairy prices look set to continue to bounce along at low levels, while activity measures (consumer confidence, job ads, PSI) will be watched to see if they join others in pointing to moderation.

11 April 2016: Patchwork quilt (PDF 344kB)

While signs of economic moderation are emerging, it’s not enough to surprise or concern. Both demand (dairy) and supply-side (capacity) influences are at play. But with inflation already low (notwithstanding ongoing evidence of pipeline pressures), moderating growth means the OCR is still going lower. And whether that occurs in April looks set to hinge on the Q1 CPI next week. The decision is certainly “live” but at this stage we don’t think there will be enough for the Bank to pull the trigger. This week, REINZ figures are likely to show clear regional divergences but a frothy market in aggregate. They will also stand as a reminder that a lower OCR should not be taken for granted as inevitable. We still harbour concerns over the trade-offs with the RBNZ trying to get inflation up when households are re-leveraging and asset prices are surging.

4 April 2016: Jekyll and Hyde (PDF 348kB)

The economy has somewhat of a split personality at present. Some sectors are doing well, while others are not (dairy). That doesn’t look set to change any time soon. But amidst volatility and uncertainty, particularly from offshore, we see the economy navigating challenges relatively well (we see GDP growth of 2½-3% over the coming three years). This week, the QSBO should be consistent with a respectable activity backdrop but is likely to contain convoluted messages for inflation and capacity. NZX futures suggest GDT dairy prices will again bounce along the bottom, although some signals look poor. Our Truckometer and Monthly Inflation Gauge will be closely eyed for domestic momentum and inflation signals.

29 March 2016: Risk profiling (PDF 416kB)

The economy continues to perform pretty well, but most of our focus is on the risk profile. While not all risks are downside ones, we are paying particularly close attention to the flow-on impact of dairy strains and the global scene. Together with the stubbornly high NZD and structural shift in funding costs, the OCR remains biased lower. But a lower OCR still remains a view that sits a little uneasy with us, especially with re-leveraging behaviour evident, regional housing markets booming and a few stronger inflation nuances we are now detecting. Another OCR cut by June (which remains our view) shouldn’t be taken for granted. This week, our Business Outlook will be used as a gauge of domestic momentum, while building consents data should rebound.

21 March 2016: Concerted concern (PDF 368kB)

We are back on the familiar treadmill of global unease inspiring more central bank action, softer rhetoric, and markets (who are hooked on the liquidity drug as opposed to watching fundamentals) going back up. While welcome and appropriate to a degree, we are left shaking our heads over the end-game amidst negative rates, currency shenanigans, limited micro reform, high leverage, and liquidity-inspired market behaviour. Locally, the economy continues to perform well. While our core view is still additional policy easing, it is globally dependent and the trade-offs need to be weighed carefully. It is a relatively quiet week for local data, although trade data should show a small monthly surplus, in line with the usual seasonal pattern.

14 March 2016: An uneasy reality (PDF 828kB)

The OCR is still biased lower, with the global scene, still-high NZD, bank funding costs and the dairy sector some of the drivers. While we can rationalise further cuts on broader inflation grounds, we are becoming somewhat uneasy about the trade-offs. Surging debt and asset price inflation foretell problems down the track; there is no free lunch. This week, Q4 GDP and current account data should show the economy ended 2015 on a reasonable footing, while consumer confidence data will help gauge if that momentum has been sustained. Dairy prices should show more signs of stabilising (at a low level).

7 March 2016: A hat tip (PDF 348kB)

The “right here and now” still looks pretty good for the economy. However, the risk profile is skewed lower despite better nuances globally over the past week. The strong NZD is problematic, the dairy sector is severely challenged, and while the global scene has stabilised, we expect more wobbles. As such, we suspect the RBNZ will have a “bob each way” this week: acknowledging the risk profile, but not yet having cuts as its central scenario. In other data, our Truckometer and Monthly Inflation Gauge will provide a timely update on New Year activity and price trends, while housing data is likely to show clear regional dimensions.

29 February 2016: More likely than not (PDF 716kB)

Further reductions in the OCR are now more likely than not. We have pencilled in cuts for June and September. While there are several contributing factors (stubbornly high NZD, lower inflation expectations, receding export prices, dairy payout prospects) three themes have been enough to tip us into the rate cut camp: 1) a moderation in economic momentum now looks to be around the corner at a time when inflation is already low; 2) global unease – China has problems and they will be exported; and 3) a structural shift in funding costs, which, if not compensated for by monetary policy, will accentuate decelerating economic momentum. We are still constructive on the outlook for the economy but part of this is contingent on a relaxation of financial conditions via the NZD and monetary policy.

22 February 2016: Twist and shout (PDF 624kB)

Stabilisation in financial markets this past week has been welcome, but the overriding themes shaping the global backdrop and risks haven’t changed. Bouts of turbulence will return. Locally, the domestic economy continues to show resilience to global wobbles and despite a further fall in surveyed inflation expectations, this resilience, if sustained, should be enough keep the RBNZ on the side-lines. This week, data is expected to be consistent with recent themes, with net migration remaining strong and a small trade deficit likely. Early next week, our first Business Outlook for the year will be watched closely for any signs of movement.

15 February 2016: Credit where credit's due (PDF 800kB)

Weakness across credit markets is adding to – and symptomatic of – global market angst. We view price action as more akin to 2011 than 2008. New Zealand remains vulnerable to continued weakness in funding markets and commodity unease, although it is structurally far stronger than in prior periods of dislocation. We expect a bumper retail sales figure, which should cement a strong Q4 GDP result. Our eyes are more on the forward data, with consumer confidence to be perused for any offshore impact. Another weak dairy auction looks likely. We expect inflation expectations to nudge a tad lower but not sufficiently to validate the notion that low headline inflation is materially altering expectations.

8 February 2016: Leading and lagging (PDF 604kB)

Deteriorating global credit markets (funding costs are on the rise) and the ongoing weakness in export prices (beyond just dairy) is a nasty mix. It highlights tension between where key leading indicators are headed – or could be headed (financial conditions have tightened a lot but confidence is holding up) – and lagging ones (the labour market is performing well). We’re not seeing concerted signs of a turn in the former that would necessitate altered views towards the NZD and OCR, but we’re watchful. Activity data this week should hold up okay, while our Monthly Inflation Gauge comes at a favourable time to add more to the ‘diverging headline versus core’ inflation outlook debate.

1 February 2016: The tea leaves (PDF 524kB)

We can clearly tick an array of boxes across our key C’s for a lower OCR (commodity prices, China, cost of funds) but there are still numerous sticking points; credit growth is reasonable – with housing remaining solid, confidence is strong and the outlook for core inflation is disconnected at present from a low headline. We’ll change our assessment of the latter if inflation expectations start to drift lower again. Governor Wheeler’s annual sifting of the tea leaves speech is expected to be very balanced and labour market statistics are expected to show recoil and improvement. We remain lukewarm on any rebound in dairy prices eventuating anytime soon and expect this week’s GDT auction result to be soft. This will reinforce the downdraft from lower export prices and the terms of trade, which is going head-to-head with construction boosting the economy in the other direction.

25 January 2016: You gotta have faith (PDF 608kB)

The global backdrop remains top-of-mind and it is hard to see issues settling any time soon, given some structural elements at play. Amidst turbulence, the New Zealand economy continues to largely go about its business. Sentiment is up, the labour market is stabilising and there are even some hints of demand-pull inflation forces returning. We expect this week’s batch of local data to once again prove solid; strong migration, booming tourism, good tax nuances from the fiscal accounts, a good trend in building consents and strong credit growth. We expect the RBNZ to stick to the script and have faith in the framework delivered in December as opposed to react to even lower headline inflation prospects over 2016. That means a hat-tip to the possibility of the OCR moving lower if required, but not much more than that.

18 January 2016: Jitterbug (PDF 356kB)

The vibe from our Chief Economist’s recent trip to Asia has not inspired confidence regarding the region’s near-term growth prospects, although we still believe in the positive medium-term story. Risks and challenges are clear. Although the domestic economy is still chugging along well – data this week (QSBO) should be consistent with that – it reinforces that the risk profile for the OCR is still skewed lower. We continue to closely watch the five factors we listed last year (China, funding markets, domestic inflation, credit growth and NZD) to determine whether a change in our view of a stable OCR is warranted. However, for now, across real economic barometers we expect the positive vibe apparent in late 2015 to extend into 2016; the economy is looking okay.

11 January 2016: World-wary (PDF 368kB)

Our core economic assessment continues to be that the New Zealand economy is in reasonable shape and will perform modestly well over the year. However, within that overall picture there are obvious tensions and frictions, winners and under-performers. As highlighted by market volatility last week, the global scene remains the greatest source of downside risk, with China’s (mis)allocation of capital, asset valuations amidst a tightening Fed (a re-pricing of capital) and poor commodity price action front and centre. This week’s local data focuses on export commodity prices, consumer prices, the housing market and retail spending, with the Truckometer signalling whether the lift in local momentum is likely to continue into 2016.

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