ANZ Market Focus

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

12 February 2018: The volatility dragon awakens (PDF 420kB)

Global financial market volatility has staged a dramatic come-back, raising questions regarding possible contagion, broader asset price corrections and a negative hit to growth. We are watchful and will be keeping a close eye on broader financial conditions (which have tightened only modestly so far). While we think decent global growth can persist for a while and inflation looks unlikely to surge higher, higher volatility is something that looks here to stay as markets transition to a world where central bank liquidity is less abundant. While more ‘normal’, it does present a less favourable backdrop for risk assets, all else equal. For New Zealand, we see few reasons to change any of our core views yet. A stronger external balance sheet means the economy is more resilient to shocks, although our asset prices have also benefited from low global interest rates, so we can’t completely turn a blind eye. But for now, we see it primarily as another factor that leaves us comfortable with our cautious views on the RBNZ, and our belief that at these levels, the NZD will remain on the defensive.

5 February 2018: Golden globe (PDF 424kB)

The global economy is in a strong and synchronised upswing. It is a positive backdrop that we by and large expect to continue, although it is probably ‘as good as it gets’. But this strong global picture is one of the main reasons we retain a constructive view on New Zealand’s medium-term growth outlook. The impact of the strong global picture can already be seen in the likes of the record terms of trade and December’s all-time high in export earnings. The NZD has also clearly benefited. But we would question how much further the latter theme can run, especially with interest rate differentials to the US narrowing sharply. The shine came off the NZD Friday night and we would not be surprised to see this continue. The RBNZ should remain cautious and watchful in this week’s Monetary Policy Statement, and we expect Q4 labour market figures to show a reversal from Q3’s phenomenal strength.

30 January 2018: Suspended animation (PDF 416kB)

While it was not the only factor that contributed, the soft Q4 CPI figures were the catalyst to see us push out the timing of when we see the first RBNZ OCR hike to August next year. Indeed, the first hike is now such an intangible notion we toyed with the idea of flat-lining our profile altogether. It is clear that the relationship between economic slack and the inflation process has weakened in recent years, which emphasises the need for the economy to run hotter to get inflation up sustainably. At a time when we have a somewhat circumspect view on the near-term growth picture, and see growth returning only to trend (or thereabouts) after that, there are questions over how inflation is going to lift in a sustainable fashion. While we do still believe that wage growth will pick up off cycle lows, it is not clear that this is going to be enough to offset ongoing global deflationary forces. In data this week, our jobs ads and consumer confidence series will give the first steer on early 2018 activity, while net migration figures are likely to be consistent with a peak in net inflows.

22 January 2018: Proof is in the pudding (PDF 420kB)

There are three potential inferences for the inflation outlook and hence monetary policy from the recent upward GDP revisions: 1) the economy was running hotter, and higher inflation is coming (if not stronger growth); 2) domestic inflation hasn’t eventuated so it must be that the potential growth rate of the economy was higher too; or 3) it doesn’t matter much in any case as the relationship between the output gap and inflation has weakened. We suspect there are elements of truth in all three, but it all leaves the outlook for inflation rather murky. Our own forecasts do incorporate a modest lift in domestic inflation pressures in time. Ultimately, this highly uncertain inflation outlook is likely to keep the RBNZ watchful. For now, we expect this week’s Q4 CPI figures to show annual inflation holding steady, with signs of a lift in price pressures beyond housing still only tentative at best.

15 January 2018: Turn the beat around (PDF 440kB)

When we take a look at what has been driving GDP growth over recent years, we are left with the clear impression that the economy will require a reasonable lift in productivity performance if recent GDP growth rates are to be maintained. It is entirely possible that will occur, but it is hard to have strong conviction, given weak productivity trends both here and abroad. It doesn’t mean we are bearish on the domestic growth outlook, but we do see a more modest pace of growth occurring going forward, lower than official projections. In data this week, the QSBO is likely to show a hit to sentiment, but perhaps not as much as our own Business Outlook. Housing market figures may show further stabilisation, while three of our proprietary indicators (Monthly Inflation Gauge, Truckometer and Commodity Prices) will help form views on how growth, inflation and local farm-gate returns finished 2017.

18 December 2017: Santa pause (PDF 448kB)

Our latest set of economic forecasts portrays an economy grappling with some clear headwinds. It leaves us a little circumspect on the near-term growth picture. However, our view is that any growth pause will not turn into something longer-lasting. We believe there are still enough positive forces to see growth return to broadly around trend over the next couple of years (but probably not much more). Q3 GDP figures this week are expected to look a little mediocre, while consumer and business confidence data will provide a steer on whether this softer momentum is likely to persist into the New Year. Global dairy prices are expected to be broadly stable, while a modest trade deficit for November is likely. New mortgage lending figures for November could lift, following the better housing market activity figures of late, but overall credit growth should remain modest.

11 December 2017: The purse strings (PDF 444kB)

The Half-year Economic and Fiscal Update takes centre stage this week. The numbers will show the Government hitting its fiscal target of reducing net debt to 20% of GDP within five years. However, it’ll be based on nominal GDP forecasts that in our view are a little rosy, and is likely to imply very little wriggle room should unexpected costs emerge or growth disappoint. In our view the risks are pretty one-sided. Other data this week will show a housing market still on ice. PMI and PSI take on more importance than usual in the context of the sharp drop in business confidence. And our own proprietary indicators, the Monthly Inflation Gauge and the Truckometer, will give timely reads on the non-tradable inflation and activity pulse respectively.

4 December 2017: Don't panic (PDF 392kB)

We were already somewhat circumspect regarding the near-term growth picture, but our latest Business Outlook survey has put us on notice. The economy is clearly delicately placed, and near-term risks are downwardly skewed. However, we also need to be careful to avoid 'Chicken Little' prognoses. There are still reasons for optimism and we are maintaining a core view that any near-term growth wobble won’t turn into something longer-lasting. In data this week, construction work and manufacturing production figures for Q3 will help us finalise a view on Q3 GDP growth (which at this stage we still see growing a modest 0.3% q/q). Global dairy prices are expected to remain under modest downward pressure, while our Commodity Price Index will provide an update on the broader picture. Job ads figures will provide a steer on labour demand, while ECT data will provide a timely read on consumer spending trends ahead of the key Christmas shopping period.

27 November 2017: A shift to thrift (PDF 424kB)

A stronger national saving performance has helped keep the current account deficit in check. With more restrictions and scrutiny regarding offshore borrowing, the ability to ramp it up as in the past to fund a domestic saving shortfall is limited. That implies a stronger saving performance needs to continue, as the alternative is a weaker investment backdrop, which wouldn’t be welcome. However, not all sectors have been pulling their saving weight. Households continue to be the laggard. But with the housing market soft, and expected to remain so, we do think that will change – even if only modestly – resulting in a slower pace of consumption growth going forward. In data this week, the RBNZ’s Financial Stability Report will be perused for any signs of a plan regarding the easing of the LVR restrictions. Our November Business Outlook will be watched for any reaction to the new coalition announcement, while OTI figures are expected to show the terms of trade hitting all-time highs.

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.


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