ANZ Data Wrap

There was a lot to digest in this week’s Half-Year Economic and Fiscal Update and Budget Policy Statement. The Treasury not only downgraded their economic outlook, but they also revised down their forecast assumptions regarding how “tax rich” they expect the economy to be going forward. That led to a $13bn downgrade to the forecast tax take to June 2028, which combined with higher non-discretionary operating expenditure and a tiny bit more capex saw NZDM’s bond issuance guidance lift by a whopping $20bn.

GDP contracted 1.0% q/q in Q3, significantly weaker than expectations. Alongside the revised contraction in Q2 of 1.1% q/q (from -0.2%), the current trajectory of economic momentum appears significantly weaker than previously thought (though the level of activity is not, courtesy of revisions). At face value, these data add to the risk that the OCR will end up lower than our current forecast of a 3.5% trough. But these data are lagged, and timelier indicators are pointing to recovery. And with plenty more data to come before the February MPS (QSBO, CPI, labour market), we are comfortable at this stage with our expectation of a 50bp cut in February.  

After accounting for the “noise factor” in Q3 (which has seen our Q4 GDP forecast revised from +0.2% q/q to +0.4% q/q) and banking the revisions, our updated GDP forecast is for the economy to contract -0.5% on an annual average basis in 2024. For 2025, the economy is forecast to expand 1.0% as momentum picks up, finishing 2026 up around 3.0%. 

This is our final Data Wrap for 2024 – thanks for reading. We’ll resume this publication on 17 January. We wish you a safe and merry summer break.

A blockbuster week lies ahead for NZ economic data with the Treasury’s Half-Year Economic and Fiscal Update (HYEFU) and the Government’s Budget Policy Statement (BPS) released on Tuesday, and Q3 Balance of Payments and GDP data released on Wednesday and Thursday, respectively.

We expect the economy contracted 0.4% q/q in Q3, a 0.2%pt downgrade from our previous forecast and below the RBNZ’s November MPS forecast of -0.2% q/q. While that would mark yet another technical recession for the economy, with the RBNZ now in cutting mode (having delivered 125bp of OCR cuts since August), the economy is set to grow from here.  

Turning to HYEFU, The Treasury has signalled that its activity outlook is in for a downgrade as it dials back optimistic productivity assumptions underpinning prior forecasts and incorporates a little more near-term weakness. That’s set to weigh on their outlook for nominal GDP, and likely means a delay in the forecast return to OBEGAL surplus, wider-for-longer cash deficits, a higher debt projection, and more bonds for NZDM to issue. 

This week we revised up our forecast milk price for the current season by 85c to $9.85/kg MS and released our inaugural forecast for next season at $9.00/kg MS. Despite the lift in returns the dairy sector is consolidating rather than expanding, with many farmers focusing on reducing debt.

The final quarterly auction of carbon credits for the year this week resulted in some of the credits on offer being purchased at the floor price of $64/NZU.

Despite growth slowing across the Tasman, Australia’s economy continues to outperform New Zealand’s. However, the good news is that conditions are now in place for a cyclical recovery in New Zealand, so 2025 may well be the year we get one over the Australians with a stronger growth performance.

After senior RBNZ staffs were united in parading a third 50bp cut in February as their default expectation (despite a non-committal OCR track in Wednesday’s MPS), we have made that our baseline expectation too. One would now have to have markedly different near-term forecasts from the RBNZ to not also have a 50bp cut as the default expectation at this point. And in fact, our forecasts for the data between now and then are almost identical. Beyond that, we have a follow-up 25bp cut in April, taking the OCR to a low of 3.5% as before. The low for the OCR this cycle will depend very much on the vigour with which the economy responds to the monetary easing, which is highly uncertain.

This week’s economic data continued to highlight the stark divergence between current conditions and expectations for the future, including retail sales and our November Business Outlook and Consumer Confidence surveys.

We expect the RBNZ to cut 50bp, taking the OCR to 4.25% to welcome in the new year. A 50bp cut would be consistent with RBNZ October messaging, economists’ forecasts, and market pricing. Indeed, a 50bp cut is fully priced, with around an 18% chance of a 75bp cut. That seems fair. A 50bp cut is clearly the path of least resistance, but if there is going to be a surprise, given the RBNZ’s confidence regarding the inflation outlook and the unusually long gap until the next meeting (February 2025), 75bp seem likelier than 25bp. 

Given scope for underlying judgements to change, assuming consistency between the RBNZ’s forecasts and policy decisions is risky. But starting point surprises still matter, and our RBNZ starting-point surprise chart pack shows some recalibration for recent data and OCR decisions will be required.

This week we published our Quarterly Economic Outlook. We now expect a faster recovery in economic activity, following front-loaded easing by the RBNZ and emerging signs the economy is already responding. Business confidence has lifted sharply, the housing market is showing signs of life, and activity indicators are off their lows. That said, it will take time for lower interest rates to be reflected in hard economic outcomes. There’s still a tough period to navigate in the near term with the economy still near the bottom of the cycle and labour market conditions still adjusting. 

ECT core retail card spending rose 0.6% m/m in October, buoyed by a strong lift in spending on hospitality. Following six months of contraction, card spending is now trending higher once again, with spending lifting on average 0.5% m/m since August. That coincides with income tax relief that started from 31 July, the move lower in interest rates, and lower fuel prices.

The REINZ House Price Index fell 0.5% m/m in October, but there were signs of a shift in momentum in the market. Sales volumes rose 0.8% m/m in seasonally adjusted terms and September’s fall was also revised away. That saw sales volumes return to around the historic average for this time of year, with the three-month moving average up 6.6% q/q. Meanwhile, days to sell fell from 49 to 46. That’s still a long way above the long-run average of 39, but the fall tentatively suggests the market is on a tightening trajectory (though still in loose in an absolute sense). Alongside the sustained bounce in the auction clearance rate over recent months, the data reinforce our expectation of a recovery in house prices across 2025.

This week also delivered the first snapshot of Q4 CPI inflation with the release of October’s Selected Price Indexes (SPI). Overall, our weighted aggregate index fell 0.1% m/m, close to our expectations, and consistent with our current forecast for Q4 CPI to slow to 2.1% y/y (RBNZ: 2.3% y/y).

Further afield the focus has been on what policies Trump will put in place once he takes the reins at the White House. Election campaign promises are expected to be watered down somewhat but increased tariffs are certainly on the cards. New Zealand’s economy is likely to be most affected by tariffs placed on some of our other major trading partners such as China and the EU. The US is a major trading partner for New Zealand, with beef being our largest export. New Zealand’s lean beef is typically combined with US meat to create meat patties with the ideal fat content. Therefore, restricting access for NZ beef would do little to support US farmers, while it would push up the cost of a burger for US consumers.

Broadly speaking, President-elect Trump’s policy agenda represents an upside risk to US inflation, wider-for-longer fiscal deficits, higher global bond yields, and weaker economic growth outside of the US.

Not surprisingly then, markets reacted to the Trump win by driving the USD and bond yields higher. While both have corrected lower, with US data still painting a picture of resilience and the Fed’s tone more balanced, markets are wary of the potential for higher bond yields and steeper yield curves.

NZ’s Q3 labour market release was close to our expectation, with the unemployment rate rising 0.2%pts to 4.8%, employment contracting as labour demand continues to soften, and the participation rate falling as opportunities in the labour market continue to fade.

Our updated labour market forecast is little changed from previously. We expect the unemployment rate to rise to 5.1% in Q3, peaking at 5.5% in the middle of 2025 before gradually declining to 4.8% by the end of 2026 as the withdrawal of monetary restraint facilitates a modest recovery.

The US presidential election is set to be held on Tuesday 5 November, with results likely to be reported from around midday Wednesday 6 November (NZT). Polling suggests the race is too close to call, while betting markets have Donald Trump as the favourite.

The Q3 labour market data will be released Wednesday 6 November. We expect the unemployment rate lifted 0.3%pts to 4.9%. That would be very close to the RBNZ’s August MPS forecast of 5.0%, and certainly not a large enough variance to challenge the broad narrative.

Given typical volatility in the HLFS, we think it would take a significantly lower unemployment rate than the RBNZ’s forecast of 5.0% to take a 50bp cut off the table in November. A higher unemployment rate than that, on the other hand, would very likely see market pricing shift further in favour of a 75bp cut – and may see economists equivocating.

New Zealand’s annual trade deficit narrowed just $300m to $9.1bn in September, still far too wide to be called sustainable. Progress on narrowing the deficit has slowed over recent months as export performance has disappointed, while import demand cools only gradually.

To balance the books New Zealand needs to be producing a larger proportion of higher-value goods, as the option to simply increase volumes is limited for many industries. More intensive land uses, such as horticulture, will potentially generate higher returns, but only if there is the marketing to support the products being produced. To do this well, you tend to need a reasonable level of scale. Our kiwifruit industry has scale but most of our other horticulture enterprises lack scale or have fragmented marketing efforts.

NZ’s greenhouse gas emissions lifted 1.1% q/q in Q2 on a seasonally adjusted basis. Emissions from the electricity sector shot up in Q2 as the sector had to burn more coal to produce electricity with hydro production constrained due to low lake levels. Emissions have generally been trending down relative to economic activity, but in Q2 emissions intensity lifted 1.9% as GDP fell more than emissions did. Emissions per capita also lifted marginally.

Turning to offshore, this week saw the Bank of Canada join the list of central banks that have delivered outsized cuts, with their 50bp cut rounding out 125bp of cuts since June. Eight of the 11 G10 central banks (the USD and the 10 most-traded currencies against it) have now cut, delivering 20 cuts between them. Canada’s cut shored up local market confidence that another outsized RBNZ cut is coming next month, but comments by Governor Orr about having scope to be “more incremental” on the way down have seen the market shift a little closer toward expecting a 50bp cut (rather than 75bp).

The housing market’s pulse in September was weak: After seasonal adjustment sales fell 2.3% m/m (broadly flat in y/y terms), the number of days it is taking houses to sell lifted by 2 days to 50 (very high by historical standards), and the number of properties available for sale, while starting to plateau, edged a little higher (currently at their highest level since July 2015). The market is very clearly running cold. But despite all this, the national-level house price index lifted 0.3% m/m after seasonal adjustment, leaving prices down 0.4% y/y on a 3-month moving average basis.

The slowdown we’ve seen in housing market activity and the residential construction sector is contributing to lower CPI inflation pressures. That was clear in the Q3 CPI data, which slowed from 3.3% y/y in Q2 to 2.2% (slightly weaker than our forecast of 2.3%). 

With the Q3 CPI in the bag, we’ve updated our CPI forecast. The bulk of the surprise in the Q3 CPI vs our forecast came from the one-off impact of the FamilyBoost rebate, meaning there wasn’t a lot of new news to incorporate into our updated CPI forecast other than the starting point. We continue to pencil in a 0.4% q/q rise in the CPI in Q4, driven by a 0.7% q/q lift in non-tradables and a 0.1% contraction in tradables. That would see annual headline inflation slow 0.1% pt to 2.1%. While we and the RBNZ remain concerned about structurally higher inflation over the medium term, cyclical indicators suggest there is enough spare capacity in the economy to guide domestic inflation back to where it needs to be. We continue to pencil in a 50bp cut in November. 

The RBNZ cut the Official Cash Rate by 50bp to 4.75% at this week’s Monetary Policy Review. Financial markets and almost all economists approached this week’s decision with the view that the RBNZ would likely cut 50bp, despite the August Monetary Policy Statement setting up a 25bp cut, and no significant data surprises since then. The Record of Meeting notes that the Committee discussed the relative benefits of cutting 25 or 50bp and agreed that “a 50-basis point cut at this time is most consistent with the Committee’s mandate,” describing a 4.75% OCR as “still restrictive.”

The tone of the Policy Assessment tilted to the dovish side, consistent with ongoing cuts. There was nothing in the commentary to dissuade the market from continuing to price a follow-up 50bp cut in November. That seems entirely fair, and it’s our forecast. If the RBNZ remains confident that inflation is beaten, then getting the OCR rapidly closer to neutral is a very defensible strategy.

Next Wednesday the Q3 CPI data are released. We expect annual headline inflation to slow 1%pt to 2.3%, marking the first time annual inflation has been back in the 1-3% target band since Q1 2021.

We have pencilled in a 50bp cut at next Wednesday’s Monetary Policy Review, but this one is feeling like a bit of a coin toss, with economic arguments for a 25bp versus 50bp cut quite balanced. At the end of the day, now that most economists are calling it and the market is pretty much fully pricing it, one has to conclude that on balance the likeliest scenario is that the RBNZ will just take what’s on the table and go 50bps. Our updated OCR forecast is for 50bp cuts in both October and November, followed by 25bp cuts at each meeting from February 2025 until the OCR gets to 3.5% in May 2025 (our terminal OCR forecast has not changed).

Business survey data this week reaffirmed that while the economy is still doing it tough, firms are responding favourably to interest rate falls. The NZIER’s QSBO in particular contained strong disinflationary signals, with labour as a limiting factor at its lowest level in more than a decade, suggesting sticky domestic inflation risks stemming from the labour market are well mitigated. QSBO’s pricing intentions dropped like a stone too. But it’s not all one-way traffic. ANZBO pricing intentions remain elevated, and actually lifted in the month of September. And cost pressures in both surveys, while easing, remain stubbornly high too.

Selected Price Indexes (SPI) for September are out Friday 11 October, and will be the last piece of the puzzle ahead of the Q3 CPI. Flat food prices, another 0.3% m/m rise in rents, lower petrol prices (-3.5% m/m) and weaker accommodation prices are expected to see our estimated weighted SPI index fall 0.5% m/m. We’ll publish our Q3 CPI Preview after these data are released, but currently see risks around our 0.8% q/q forecast as balanced.

It’s been a quiet week on the domestic data front, but that hasn’t dampened the debate over the RBNZ’s next move. With less than two weeks until the RBNZ’s 9 October Monetary Policy Review, we thought we’d take the opportunity to lay out the arguments for and against the RBNZ stepping up the pace of OCR cuts to a 50bp move. That’s the outcome that financial markets are betting on, with 43bp of easing priced in for October. Our expectation is the RBNZ will cut by 25bp (conditional on what the NZIER QSBO brings).

NZIER’s Q3 Quarterly Survey of Business Opinion (QSBO) is released next Tuesday. We expect the same theme as the ANZ Business Outlook survey: sentiment improving in response to lower interest rates. That said, our focus on the day will be on what this means for firms’ pricing behaviour and the inflation outlook. Capacity measures in QSBO will be key for the latter. While Q2 GDP (-0.2% q/q) was stronger than the RBNZ’s August MPS forecast of -0.5% q/q, whether/how this impacts the RBNZ’s estimate of the output gap isn’t straightforward. The RBNZ uses a wide range of indicators to estimate the degree of spare capacity in the economy, and the QSBO measures are certainly some of the more important ones.

The annual current account deficit was little changed from a downwardly revised $27.6bn in Q1 to $27.8bn in Q2. As a share of GDP, it was unchanged at 6.7%, still wider than any reasonable estimate of sustainable levels. We had gone into this release expecting better news, with a narrower deficit (6.6%) and possible upwards revisions to services exports. While the latter did occur, they were accompanied by offsetting revisions to the income deficit. All in all, the data now show that the annual deficit troughed at a wider share of GDP than previously thought (9.4% in Q4 2022 vs 8.8% previously), and while the subsequent narrowing from there to early 2024 has been relatively sharp, the lack of progress in Q2 is concerning.

This week’s Q2 GDP report was better than feared, though certainly not strong in any sense of the word. The economy contracted 0.2% q/q in Q2, close to our expectation of -0.1% q/q, but well above the RBNZ’s forecast of -0.5% q/q. Putting the weakness into perspective, the RBNZ’s potential output growth assumption (the economy’s growth speed limit before generating inflation) was +0.6% q/q for Q2. Given today’s outturn was well below this threshold, it’s highly likely that the RBNZ will interpret these data as consistent with rising spare capacity and ongoing disinflation.

The August Selected Price Indexes release this week confirmed that risks to our Q3 CPI forecast were skewed to the downside. We have therefore downgraded our Q3 CPI pick from 1.0% q/q (2.6% y/y) to 0.8% q/q (2.3% y/y). However, in terms of what’s behind the downgrade, it’s important to note that it’s all coming from the relatively volatile tradables component, with weaker-than-expected petrol prices behind the bulk of that, driven by a mix of the removal of Auckland’s regional fuel tax (which we did expect) and falling global oil prices. 

New Zealand’s Q2 Balance of Payments and GDP figures will be released at 10:45am next Wednesday and Thursday respectively. We’ve pencilled in a 0.1% q/q (-0.3% y/y) contraction in Q2 (previously -0.3% q/q). While our forecast is well above the RBNZ’s August MPS forecast of -0.5% q/q (-0.7% y/y), it’s certainly not ‘strong’ in any sense of the word. The annual current account deficit is expected to narrow 0.2% points of GDP to 6.6%, and revisions to services exports in prior quarters could shave another 0.3%pts or so off that (note: forecasting revisions can be a dangerous game!).

In other data this week (hot off the press this morning), we also have two more post-MPS high-frequency data releases: the August PMI and REINZ house sales. The latter revealed yet another soggy month for the housing market, but it’s still a bit too early to expect to see the impacts of falling mortgage rates (perhaps next month). Meanwhile, the PMI bounced a little further, albeit to subdued levels overall. Clearly, manufacturing momentum looks like it’ll remain soft in Q3 – next week’s Q2 GDP data will provide the first evidence on how much signal the recent weakness in high-frequency indicators contained. 

The merchandise terms of trade lifted 2.0% q/q in Q2, broadly in line with our expectation, though still around 9% below the 2021 peak. Export prices lifted 5.2% q/q, led by gains in dairy and meat, while forestry returns continue to be hampered by the slowdown in China’s property sector. Import prices rose 3.1% q/q, with import prices excluding fuels up 2.9% q/q. That may be of some concern to the RBNZ given the implications for tradable inflation, but it follows a fall of a similar magnitude in Q1. Looking at the broader trend over recent quarters, import prices have been largely flat.

Our Commodity Price Index saw the NZD Price Index lift 1.5% m/m in August, reflecting a 2.1% m/m rise in the World Price Index and a 0.7% m/m fall in the NZD Trade Weighted Index. Dairy and meat prices led the charge, up 2.7% m/m and 3.2% m/m respectively in world price terms. 

Globally, the US non-farm payrolls data over the weekend is a key focal point for markets trying to work out how aggressively the FOMC might enter the global easing cycle. 

Domestically, the last of the Q2 GDP partials (eg manufacturing survey) are out next week, and so too are the Selected Price Indexes (SPI) for August. Risks around our Q3 GDP forecast of -0.3% are feeling broadly balanced ahead of these data, but we are going into the SPI with some downside risk to our Q3 CPI forecast of 1.0% q/q (RBNZ: 0.8% q/q), but this is largely via the more volatile tradables component.

Monthly filled jobs fell 0.1% m/m in July, remaining on an unambiguously weak trajectory and indicating that excess economic capacity continues to build.

Our August Business Outlook saw headline confidence spike to its highest level in a decade, with many of the forward-looking activity indicators following suit. However, experienced activity remains subpar, suggesting it’s still tough out there.

ANZ-Roy Morgan Consumer Confidence lifted in August, up another 4 points to a still-subdued 92.2. Cutting the data into pre- and post-MPS samples didn’t reveal a significant difference in headline confidence, but it was notable that confidence was higher in the second half of the month for those paying off mortgages, but lower for renters.

We’ve lifted our farmgate milk price forecast for the current (2024/25) season by 50c to $9.00/kg milksolid. 

The July snapshot of high-frequency economic indicators show a synchronous bounce, albeit to still-subdued levels. The evolution of these indicators over coming months will be important for gauging the economy’s responsiveness to lower interest rates and the risks surrounding the RBNZ’s easing profile.

This week we published our Agri Focus. The outlook for the primary sector is generally improving but it is very mixed. The dairy and beef sectors are doing well but returns for sheep and forestry are still very low. Farmer sentiment has generally been buoyed by recent regulatory changes, falling interest rates, and relatively favourable weather conditions.

The RBNZ cut the Official Cash Rate (OCR) 25bp to 5.25% this week in what the Record of Meeting notes was a consensus decision. Our updated OCR forecast is for 25bp cuts at each meeting, to a low of 3.5%.

The Selected Price Indexes release this week points to a smidgen of downside risk to our Q3 CPI forecast of 1.0% q/q. However, this is just the first month of the quarter, and given some of the surprise came from the more volatile components we’re happy noting the risk to our forecast and waiting for the August release. Compared to the RBNZ’s Q3 CPI forecast of 0.8% q/q, the July SPI is pretty much in line, and therefore do not present a roadblock to another 25bp cut in October.

This week we also published our Quarterly Economic Outlook. Recent high-frequency data suggests the slowdown in the economy is broadening and gathering pace. While interest rates are heading lower, there are still risks to the disinflation trajectory and the pace of policy easing remains uncertain.

This week was all about the Q2 labour market data. The unemployment rate rose 0.2%pt to 4.6%, in line with the RBNZ’s May MPS forecast and providing no smoking gun for imminent cuts. We have updated our outlook for the labour market. Compared to our previously published forecast, changes to our unemployment rate forecast are relatively minor, but under the hood we have downgraded our expectation for both labour demand and labour supply just a little. 

Domestic focus next week will be firmly on the August MPS. We expect the RBNZ to hold the OCR at 5.5%. The data since May, and particularly since the July Monetary Policy Review, points to a clearly slowing economy, and solid disinflation progress. That justifies cutting the OCR far earlier than August 2025, as was signalled in the previous Monetary Policy Statement. But while we certainly wouldn’t rule out a cut next week, it is difficult to justify such a radical change in the RBNZ’s thinking based on the evolution of data in recent months. 

Selected Price Indexes for July are also out next week. We’ve pencilled in a 0.3% m/m lift for both food and rents. MBIE data suggests petrol prices rose 2.5% m/m. Domestic and international airfares and domestic and overseas accommodation prices are expected to lift modestly m/m, but these components often surprise on the day. All up, these data will give us our first steer on how the Q3 CPI is shaping up, but typical m/m volatility means we should always treat the first month of the quarter with a little caution. 

The July ANZ Business Outlook survey was a mixed bag. Forward-looking activity indicators generally bounced, but it’s worth remembering that they are expressed as expectations of higher or lower versus current conditions, and those generally continue to worsen.

We’ve downgraded our near-term house price forecast and now expect a 1% contraction in prices over 2024 (previously +1%). Subdued sales activity and rising stock on the market suggest that weakness is likely to persist in the near term.

The Q2 labour market statistics are out next Wednesday, marking the last major piece of data ahead of the RBNZ’s August Monetary Policy Statement. We expect the unemployment rate to lift from 4.3% to 4.7% in Q2. While that’s very close to the RBNZ’s May MPS forecast of 4.6%, the details are expected to be a touch softer than their expectation. In big-picture terms, while the Q2 labour market data may not provide the smoking gun for rate cuts that the market appears to be looking for, the recent downturn in almost all the forward-looking indicators suggests downside risks are emerging around our economic outlook and that the gradual loosening we’ve seen in the labour market over the past year or so could be on the cusp of accelerating.

New Zealand’s annual trade deficit narrowed to $9.4bn in June, a marked improvement from the record deficit of over $17bn recorded in the year to May 2023, but still far from a level anyone could call sustainable.

The trade deficit is improving, though the adjustment will take some time. Restrictive interest rate settings are curtailing import demand, while import prices are easing in line with weakening global demand and the post-COVID normalisation in global supply chains. But the recovery in the trade balance is not without its challenges. Export returns are under pressure due to weak demand from China.

China’s economy is adjusting from a heavy focus on property investment and export returns to an economy that is driven more by domestic consumption. Unfortunately, the marked downturn in the property market and reduced employment opportunities have eroded confidence amongst Chinese consumers. While China’s economy continues to struggle, its demand for the products that New Zealand supplies, such as logs for construction timber, is also likely to remain subdued. It is expected to take several years for China’s property market to recover and this has been one of the drivers of lower confidence amongst Chinese consumers. 

This week’s Q2 CPI report all but confirmed that headline inflation will be back within the RBNZ’s 1-3% target band next quarter. Headline inflation fell from 4.0% to 3.3%, in line with our forecast, but below the RBNZ’s May MPS forecast of 3.6%.

On the back of the more reassuring CPI data, we have changed our OCR call and now expect the first OCR cut to occur in November (previously February), with the risks tilted towards an earlier start.

With the Q2 CPI data in the bag, we’ve updated our inflation forecasts. Our near-term outlook is broadly unchanged. Headline inflation looks set to be comfortably back within the 1-3% target band in Q3 on its way to 2%. Weaker tradable inflation continues to drive headline inflation lower, and we are growing increasingly confident that disinflation momentum will persist. Outside of persistence effects, we have downgraded our medium-term inflation outlook, reflecting the recent broad deterioration in activity and labour market indicators.

As universally expected, the RBNZ left the Official Cash Rate (OCR) unchanged at 5.50% at this week’s Monetary Policy Review. 

The tone of the Policy Assessment and Summary Record of Meeting covered all bases, with sticky inflation risks getting a mention (no surprises there), and the softer vibe of some of the recent growth and inflation indicators also acknowledged (this wasn’t a surprise, but went a touch further than we thought likely). In particular, it was the hint that the RBNZ may be close to reassessing their medium-term inflation outlook on the back of recent soft survey data that got markets excited, with short end rates moving sharply lower.

Attention now turns to next week’s Q2 CPI report. We expect headline inflation rose 0.4% q/q, taking annual inflation down from 4.0% to 3.3%. Such an outcome would be below the RBNZ’s May MPS forecast of 3.6% y/y, though that reflects weaker tradable inflation, particularly across volatile components such as food, fuel and airfares. We expect tradable inflation of -0.2% q/q (0.6% y/y), well below the RBNZ’s May MPS forecast of 0.3% q/q (1.1% y/y). On non-tradable inflation, where the RBNZ’s attention has been fixed of late, we are forecasting a 0.8% q/q rise (5.3% y/y), in line with the RBNZ’s May MPS forecast, with balanced risks.

The NZIER’s Q2 Quarterly Survey of Business Opinion (QSBO) made for grim reading. Business sentiment remains dire, while experienced domestic trading activity, which historically has given a good steer on GDP (COVID volatility aside) also deteriorated further. While the operating environment for businesses is incredibly challenging, the report confirmed that monetary tightening is having the desired impact of generating spare capacity across the economy, leading to lower cost and pricing pressures. 

Next week brings the RBNZ’s July Monetary Policy Review (MPR). We expect the OCR will remain unchanged at 5.50%. Since the May MPS, the data have tilted weaker, but it’s primarily been the ‘soft’ data (surveys and anecdotes). We’d expect the evolving data tone to be acknowledged, but such data faces a high bar to bring about an overall change in rhetoric from the RBNZ compared to, say, CPI inflation or unemployment rate data.

ANZ-Roy Morgan Consumer Confidence Index and our Business Outlook deteriorated in June. The latter suggests the NZIER’s QSBO will make for grim reading next week. But it also showed a decent fall in inflation indicators, with both the proportion of firms intending to raise prices imminently, and the expected magnitude of those price increases, sharply lower.

QSBO indicators of capacity stretch will be a key focus for us (and the RBNZ) next week as we assess the degree of inflation pressures in the economy. The limiting factors on production, ease of finding labour, and capacity utilisation measures will all be important. Our suite of capacity indicators suggests the economy has been in disinflationary mode for about a year now, whereas the RBNZ’s current estimate is that the economy has only just reached disinflationary territory. In any case, forward indicators of labour market slack certainly suggest a widening output gap is just a matter of time.

At 0.2% q/q, Q1 GDP was in line with our and the RBNZ’s expectation. However, there were overs and unders in the details which the RBNZ could use to justify a small shift in view in either direction (depending on what takes the Committee’s fancy). Our take is that the GDP data are not a game changer for the RBNZ, and we remain comfortable predicting that OCR cuts will arrive sooner than the RBNZ has signalled. In big picture terms, economic momentum is very soft and it looks like there is further to soften. 

Indeed, forward indicators such as our Business Outlook survey, the PMI and PSI, house sales and visitor arrivals suggest the economy is sputtering and that quarterly growth in Q2 is likely to be weaker than Q1. Accordingly, we’ve downgraded our Q2 GDP forecast from +0.2% q/q to -0.1% (RBNZ: +0.1% q/q).

Meanwhile, the annual current account deficit narrowed slightly less than expected in Q1, and at 6.8% of GDP it’s still too wide to call sustainable. Taking signal from last week’s visitor arrivals data suggests the services balance is not going to return to surplus as quickly as previously hoped, meaning current account deficits are likely to be wider for longer. This, combined with a weaker growth outlook and more persistent fiscal deficits adds to the risk that New Zealand’s rebalancing act with the rest of the world ends up requiring a more abrupt and painful correction in domestic demand than currently anticipated. High CPI inflation certainly isn’t the only symptom of an overheated, overstimulated economy through COVID, and the medicine is bitter.

May’s Selected Price Indexes (SPI) were weaker than our expectations. However, weakness reflected volatile components and there remains a risk of a reversal next month. Accordingly, our Q2 CPI forecast remains unchanged at 0.6% q/q (3.5% y/y) for now, though the risk profile is now skewed to the downside.

In other data this week, net migration figures confirmed the cycle has turned, with the annual net inflow coming in around 98.5k in April, down from almost 140k in October 2023. Perhaps the more consequential signal in this week’s travel data comes from short-term arrivals. April arrivals were weak, suggesting that the “shoulder season” for the likes of international tourism and travel-related services exports more broadly is shaping up to be a soft one.

Turning to next week, domestic focus will be on the Q1 GDP figures, released at 10:45am on Thursday. Our forecast is for a 0.2% q/q expansion in production GDP – the same as the RBNZ’s May MPS forecast (but we were there first). Median analyst expectations appear to be a little weaker than our pick, but we’re comfortable that risks are balanced around our forecast.

New Zealand’s merchandise terms of trade rose 5.1% q/q in Q1, a decent recovery, though not enough to unwind the sharp 7.8% q/q contraction in Q4.

The volume of building work put in place came in weaker than expected in Q1, down 4% q/q. This offsets some of the upside risk to our Q1 GDP pick of 0.2% q/q coming from the stronger retail trade release.

We have tweaked our Official Cash Rate (OCR) forecast and now expect the first OCR cut to come in February 2025, rather than May. We have been talking for some time about the risks towards cuts occurring earlier than May, and now have confidence to centralise those risks into our forecast.

Our ANZ Business Outlook survey for May made for grim reading. Business confidence fell and activity indicators highlighted weak domestic demand. More positively, inflation indicators showed progress.

Budget 2024 delivered on the Government’s campaign promise to provide tax relief and pay for it with lower spending. From a discretionary fiscal policy perspective, the overall stance of fiscal policy over the next few years looks broadly similar to that presented at the Half-Year Update. Meanwhile, a meaningful downgrade to the economic and tax outlook has delayed the return to surplus by another year to 2027/28.

As expected, the RBNZ left the Official Cash Rate (OCR) unchanged at 5.50% this week. However, in a shock to markets, the forecast peak OCR was raised from 5.60% to 5.65%, and the Summary Record of Meeting noted that a hike was discussed (though in the end a hold was a consensus decision). The RBNZ’s OCR projection shows that cuts are now pencilled in for August next year, 3-4 months later than in the February MPS. 

Our OCR forecast remains unchanged. We expect the RBNZ to remain on hold until May next year. However, despite the hawkish MPS this week, we still see the risks tilted towards cuts coming earlier rather than later, given the increasingly broad-based weakness in the economy. 

On Thursday next week, the Government will unveil its first Budget and Fiscal Strategy Report, and the Treasury will open up the Government’s books. The macroeconomic and fiscal backdrop for Budget 2024 is very challenging: the economy is anaemic and the labour market is loosening, but pro-cyclical fiscal policy in recent years means fiscal consolidation is now desperately overdue.

April’s Selected Price Indexes were overall stronger than our expectations. Given the volatility in these data, and the risk of reversal across the coming months, we initially left our forecast unchanged. However, a closer look at the details prompted us to revise up our Q2 CPI forecast 0.1%pts to 0.6% q/q (3.5% y/y) in our Quarterly Economic Outlook, owing to expectations of a stronger non-tradables pulse. That’s not enough to materially alter our outlook, but it does speak to the persistence of non-tradables that is challenging the RBNZ.

Our Quarterly Economic Outlook discusses the question of timing vs traction that is front of mind for policymakers currently. While there has been clear evidence of a deterioration in economic activity over the past year and the labour market is now firmly in disinflationary territory, that is yet to flow through to domestic inflation to the degree anticipated, suggesting that monetary policy lags this cycle are lengthier and/or tightening hasn’t quite gotten as much inflation fighting traction as previously assumed. 

Looking ahead to next week’s May Monetary Policy Statement, we expect the RBNZ to leave the OCR at 5.5%, reiterating that they remain in watch-worry-wait mode. The Q1 forecast miss on non-tradable inflation was the fourth in a row, and at 5.8% y/y, it’s a full 1.4%pts higher than the RBNZ thought it would be by now when they declared they were done hiking a year ago. But recent activity and labour market data have tilted to the softer side of expectations, and risks are growing that the economy could have a harder landing than anticipated. We expect that will keep the RBNZ’s tone balanced.

This week the New Zealand Treasury published interim Financial Statements of the Government for the 9 months ended 31 March. The details were a little mixed, but we remain comfortable with our previous back-of-the-envelope estimate that the bond programme could be lifted by $10-$12bn over the next four years come Budget on 30 May.

Turning to global events this week, the Reserve Bank of Australia delivered a hawkish pivot, but less so than we anticipated. That’s despite meaningful upwards revisions to the RBA’s inflation forecasts. We continue to favour November for the start of the easing cycle in Australia, although risks remain skewed toward that being delayed into 2025.

We’re often asked about how the New Zealand economy is tracking against Australia – not so much from a rivalry perspective, but more from the perspective of what’s different, and why. International observers often view both countries through the same lens, but right now, there are more differences than there are similarities!

The Q1 labour market data were slightly weaker than our and the RBNZ’s expectation, but not enough to shift the dial for the RBNZ. The unemployment rate lifted from 4.0% to 4.3%, while other measures of spare capacity reinforced our expectation that a moderation in wage growth and domestic inflation lies ahead.

With the Q1 labour market release not far from our expectation, our updated labour market outlook is largely unchanged. We continue to expect further deterioration, with labour demand weakening while labour supply growth continues. The unemployment rate is expected to breach 5% by year end, and rise to a peak of 5.5% across most of 2025.

In other news this week, the RBNZ’s Financial Stability Report (FSR) came and went with little fanfare. There was a possibility the RBNZ might have announced decisions relating to the easing of LVR restrictions and implementation of DTI limits, though this did not eventuate.

Farmers are currently struggling as incomes drop due to weak global markets while costs remain very high. Farmers in some regions have also had drought to deal with which is an added financial and mental burden. 

Global market conditions for our primary sector exports vary considerably between products and countries. In general, demand from western nations remains relatively robust, but demand from developing nations tends to be weak. 

Turning to next week, the Q1 labour market statistics are released on Wednesday. Broadly, we expect to see a further increase in spare capacity and a moderation in wage growth that will reinforce expectations that further disinflation lies ahead.

The RBNZ’s Financial Stability Report is also out next Wednesday and may provide confirmation of proposed changes to macroprudential policy settings. Our base case is that when changes are made, they will be as previously signalled. 

Annual inflation fell from 4.7% to 4.0% in Q1, in line with our forecast, but the details told a less convincing story of disinflation progress. Non-tradables inflation eased only marginally from 5.9% y/y to 5.8% y/y, above our forecast of 5.5% y/y and well above the RBNZ’s February forecast of 5.3% y/y. Domestic inflation pressures remain acute, particularly concentrated in services sectors.

All up, on their own the Q1 CPI data probably aren’t strong enough to demand a radical re-think by the RBNZ, but if they harbour fears that monetary policy settings aren’t tight enough, this data won’t give them any comfort. The domestic outlook does suggest disinflation lies ahead, but the Q1 data could test the RBNZ’s patience. We remain of the view that OCR cuts are not likely until 2025.

With the Q1 data in the bag, we’ve updated our inflation forecasts. Our outlook remains broadly similar, and we continue to expect that inflation will return to the RBNZ’s 1-3% target band in Q3 this year. Though the outlook is not without its risks.

The RBNZ left the OCR unchanged at 5.5% this week and maintained a similar tone to the February MPS, with the Committee agreeing that “interest rates need to remain at a restrictive level for a sustained period”.

The NZIER’s Quarterly Survey of Business Opinion suggests the post-election honeymoon is over and that the reality of a weak economy is back in the driver’s seat. Importantly, the survey suggests there is further disinflation in the pipeline. In particular, a further decline in labour as a limiting factor suggests pipeline labour costs are very unlikely to drive a reacceleration in domestic (non-tradable) inflation. But we still wouldn’t say these data guarantee the sustained period of disinflation that the RBNZ requires. 

The Q1 CPI is out next Wednesday. We think annual CPI inflation slowed to 4.0% (above the RBNZ’s forecast of 3.8% y/y). However, further progress across the suite of core measures alongside the broader data flow suggesting further disinflation is in the pipeline means the Q1 CPI may not shift the dial meaningfully for the RBNZ. We continue to expect cuts won’t be on the table until 2025.

In a quiet week for local data offshore developments took centre stage, with PMIs pointing to a rebound in the manufacturing sectors in China and hints of a re-emergence of commodity price inflation, starting to raise questions as to the sustainability of global disinflation.

Next Wednesday brings the RBNZ’s April Monetary Policy Review (MPR). We (along with everyone else) expect the OCR to be unchanged at 5.50%, with a reiteration of the key messages from the February MPS. Data since then has been mixed, but on net there has been nothing to move the dial. 

This week we released our Consumer Confidence and Business Outlook surveys, which showed a deteriorating economic landscape. Weakness in the economy is of course the RBNZ’s plan. But the fact that the adjustment is necessary doesn’t make it any easier for businesses and consumers. 

The Government’s 2024 Budget Policy Statement also landed this week. While the policy mix has certainly changed (ie tax and spending cuts), the signal from the BPS suggests that discretionary fiscal policy settings will be about par or perhaps mildly less expansionary than implied at December’s Half-Year Update. But future operating allowances are yet to be confirmed. The Government also introduced its new fiscal strategy, which overall signalled a mild tightening from the previous Government’s strategy. For the full details, we’ll have to wait until the May 30 Budget. 

The Q4 GDP release was a touch weaker than expected, but while there were a few overs and unders compared to our forecast, they certainly weren’t of a game-changing magnitude. In fact, a lot of the miss looks more like a timing story than a meaningful change in underlying economic conditions. Our updated outlook sees economic growth remain sub-par for a while yet. In calendar year terms, annual average growth came in at just 0.6% in 2023. Our forecast has this anaemic pace persisting over 2024 (+0.5%), before gradually accelerating in 2025 (1.5%) towards trend (2.5%) in 2026.

Meanwhile, the annual current account deficit narrowed 0.5%pts to 6.9% of GDP in Q4, narrower than our forecast of 7.1% of GDP, helped by historic revisions. While New Zealand’s external position is improving, it's still too far out of balance to call sustainable. Progress is expected to continue (we see narrowing to around 4.5% by mid-2026), but in the meantime, the economy will remain vulnerable to a wide range of possible shocks that could keep us in unsustainable territory for longer. Fiscal consolidation and restrictive monetary conditions still have a role to play in getting the economy back on to a more sustainable path.

Next week’s highlight will be the Government’s Budget Policy Statement. This will provide a signal on the Government’s proposed operating and capital allowances (for Budget 24), and the new Government’s fiscal strategy. The latter will give us a feel for the risks around fiscal policy going forward. We’re not expecting an update to bond issuance guidance nor to the fiscal outlook. We’re also not expecting the Government to back away from promised tax cuts, so in the face of a deteriorating economic outlook the Government may need to cut spending by more or let the forecast return to surplus get pushed out another year. But for a full update on all this, we’ll have to wait for May’s Budget.

February’s Selected Price Indexes (SPI), despite some overs and unders, were overall in line with our expectation, with the balance of risks around our Q1 CPI forecast of 0.6% q/q (4.0% y/y) unchanged. Two of the big surprises were much stronger domestic airfares, and overseas accommodation costs, the latter likely reflecting Taylor Swift’s concerts across the ditch. The SPI are volatile month-to-month, and extracting signal from noise in these data has proven challenging. That said, it does strengthen our expectation that Q1 CPI inflation will surprise the RBNZ to the upside.

February’s REINZ housing data was directionless, with house prices eking out a 0.2% m/m gain after January’s 0.9% lift. We don’t see any implications for our housing market outlook from these data, and nor, we expect, will the RBNZ. We continue to expect the housing market will remain sluggish across the first half of the year but there are certainly a lot of moving parts.

Also out this week, net migration inflows dropped to 2,870 in January, as a surge in departures outweighed still very strong arrivals. However, December inflows were revised up over 3k. Short-term visitor arrivals (largely tourists) remain steady at about 80% of their pre-COVID level, with a muted recovery in visitors from China weighing. All up, while net migration and tourism are supporting economic activity, that is being offset by weak domestic demand, which next week’s GDP data expected is expected to confirm, particularly in per capita terms. We’ve pencilled in a 0.1% q/q lift in headline GDP, with the services sector expected to just keep growth positive.

The Q4 goods terms of trade dropped like a stone in Q4 (-7.8% q/q), with ex-fuel import prices up 1.1%, suggesting there may be a little more global inflationary pressure in the pipeline than the RBNZ was anticipating. Meanwhile, trade volumes paint a very weak picture for domestic demand (imports were down 7% q/q), which alongside a 2.6% lift in exports suggests Q4 expenditure GDP will see a strong positive contribution from net exports – albeit one that’s likely to be at least partially offset by changes in inventories.

Other Q4 GDP partials have been soft. Building work put in place fell 0.1% q/q, and manufacturing volumes fell 0.6% q/q. Excluding food and petrol, manufacturing is very weak. Our GDP Preview will be published next week. 

Next week also brings the February Selected Price Indexes. We’ve pencilled in a 0.1% m/m fall in food prices and a 0.4% m/m increase in rents. Fuel prices rose last month, with MBIE’s weekly fuel price monitoring suggesting a rise of around 5% m/m. We’ve pencilled in further modest falls in airfares after January’s sharp declines. Given the volatility in this series, there is a large range of possible outcomes in both directions.

The RBNZ left the Official Cash Rate (OCR) unchanged at its February meeting. We had anticipated a hike, and failing that, for the RBNZ to up the ante on hikes with a higher forecast OCR peak. But that was not the case. In fact, the RBNZ revised down its forecast OCR peak by 9bp to 5.60%. 

The RBNZ’s comfort that “risks to the outlook for inflation have become more balanced since the November 2023 Statement” clearly increase the threshold for the evidence required to recommence tightening, and accordingly we are no longer expecting hikes. That said, we continue to see OCR risks tilted to the upside and have pushed out the timing of easing to mid-2025, and a more gradual easing cycle is now expected.

Household inflation expectations data this week were in the ‘concerning’ bucket for the RBNZ. Households now believe that inflation in five years’ time will still be outside the RBNZ’s 1-3% target band at 3.6%, above their well-anchored 2.1% expectations in last quarter’s survey.

We expect the RBNZ to hike the OCR to 5.75% next week, and to publish an OCR track that gives a decent hat-tip to the possibility of a follow-up hike in April (with a peak of perhaps 5.85%).

The OCR isn’t anywhere close to its 2008 peak (8.25%), unlike policy rates in the US, the UK, or the euro area. And that’s even though non-tradable inflation is still more than a percent higher than where it peaked in that business cycle, and household debt relative to income is lower than it peaked in 2008 (and falling). Even with our two extra hikes we forecast the household debt servicing burden will peak around 11% of income, compared to a peak of over 15% in 2008.

This week brought an update on inflation in the form of Stats NZ’s January selected price indexes. Broadly, the release was weaker than we had anticipated and suggests downside risk to our Q1 CPI forecast of 0.7% q/q (RBNZ: 0.6% q/q). But downside risk stems from the tradables side of the basket. 

The RBNZ’s Q1 Survey of Expectations showed progress. Importantly, 5yr and 10yr ahead expectations both eased back toward 2% after a concerning tick up in Q4. However, survey respondents continue to expect a more gradual return of inflation to target than the RBNZ’s own forecasts.

We’ve updated our labour market forecasts. The relatively resilient labour market picture presented in the Q4 data has caused us to reassess the near-term outlook, with a more gradual rise in the unemployment rate over 2024 expected. Our medium-term outlook remains unchanged: the labour market continues to loosen, largely driven by supply-side expansion, with the unemployment rate now expected to rise to a peak of 5.5% in 2025.

We are now forecasting 25bp hikes in both February and April, taking the OCR to 6%. Inflation is looking sticky and we think the recent series of small, but meaningful upside surprises will be enough to push the RBNZ into taking further action, given how impatient the Committee sounded in November.

The Q4 labour market data came in stronger than we or the RBNZ were anticipating. The unemployment rate rose 0.1%pt to 4.0%, below our forecast of 4.3% and the RBNZ’s forecast of 4.2%.

The RBNZ warned in November that “If inflation pressures were to be stronger than anticipated, the OCR would likely need to increase further.” We don't think the RBNZ Committee will feel confident that they've done enough to meet their inflation mandate. The buck stops there.

The January ANZ Business Outlook survey was mixed. Forward-looking activity indicators were little changed (with the exception of a sharp fall in expected residential building activity, but it’s volatile). On the inflation side, inflation expectations eased by 0.3%pts, but cost and price expectations are still holding up, including for retailers.

ANZ-Roy Morgan Consumer Confidence rose 1 point in January to 93.6, with perceptions of current conditions lifting 4 points, but confidence about the future falling 3 points. The wide gap between the current and forward-looking questions in the survey is starting to close. It’s early days, but such a pattern is typical as an economy recovers after a recession.

The Q4 labour market statistics are released next Wednesday, the last major piece of data before the February MPS. We’re anticipating that the labour market remained on a loosening trajectory in Q4, with the unemployment rate rising from 3.9% to 4.3%, a touch above the RBNZ’s November forecast of 4.2%.

Annual CPI inflation decelerated from 5.6% to 4.7% y/y in Q4, in line with our forecast, but non-tradables inflation came in at 5.9% y/y, above our and the RBNZ’s forecast of 5.7% y/y. If seasonally adjusted headline inflation were to continue at its current rate over the next four quarters, inflation would be back in the RBNZ’s 1-3% band by year end – just, at 2.9%. 

The recessionary economy should take the remaining heat out of domestic inflation. In our updated forecasts we have revised down medium-term non-tradables to reflect the weakness in economic activity seen last year. We expect annual headline inflation to be back within the RBNZ’s 1-3% target band by Q3, putting the RBNZ in a position to cut the OCR from August.

In other news this week, the RBNZ proposed introducing debt-to-income (DTI) limits from the second half of this year. The accompanying slight easing in LVR restrictions may provide modest support to house prices, given the DTI limits are unlikely to be binding for some time.

We now expect the RBNZ to deliver a steady sequence of 25bp OCR cuts starting in August, taking the OCR to 3.5% over 12 months. Over the next six months, a strong supply recovery, previous weakness in economic activity and a deteriorating labour market should result in rapid disinflation for domestically driven CPI components.

The RBNZ’s February Statement is still a long way away, but on 30 January Chief Economist Paul Conway will deliver a speech that will include “brief comments on domestic data developments” since the hawkish November MPS. The market is divided about what the message might be. Some seem to believe it will be a mea culpa smoothing the path to a much more dovish February MPS. We don't think that is at all likely.

Next Wednesday brings the release of the Q4 CPI data. We’re expecting some good news, with annual headline inflation expected to decelerate sharply from 5.6% to 4.7% y/y (0.6% q/q), below the RBNZ’s November forecast of 5.0% y/y (0.8% q/q). But all of the downside surprise to the RBNZ’s forecast is driven by weaker tradables inflation. We expect the all-important non-tradables inflation measure to print in line with the Reserve Bank’s forecast of 5.7% y/y, down from 6.3% y/y in Q3.

2024 will bring winners and losers as the big forces buffeting the economy (monetary, fiscal, global and demographic) play out. We see the unemployment rate continuing to rise. While it may so far be a fairly soft landing in GDP terms, the per capita story is bruising.

The RBNZ won’t be able to let the economy off its short leash until inflation is looking more convincingly beaten than it is now. Progress thus far has been slower than they might’ve liked, but inch by inch the RBNZ is winning the war on inflation.

We are expecting more evidence of cooling activity, easing labour shortages and declining inflationary pressures in next week’s QSBO. The big story will likely be whether these indicators are falling quickly enough for the RBNZ to be comfortable endorsing OCR cuts this year.

15 December 2023: Sinking feeling (PDF 540KB)
The New Zealand economy contracted 0.3% q/q in Q3. GDP per capita has shrunk 3.0% over the last year, with headline GDP down 0.6% y/y. The difference: rapid population growth, fuelled by the 129,800 new net migrants that arrived in NZ over the last year. We’ve updated our outlook for economic activity. In one line: economic momentum is softer than previously.

Meanwhile, in the Q3 balance of payments release the annual deficit was unchanged as a share of GDP at 7.6%. Our updated forecast has the deficit narrowing to 5.1% of GDP come Q4 2025, but downside risks (eg drought, weaker global demand) are front of mind. 

This week also brought the selected price indexes for November. Overall, these were broadly in line with our expectations, outside of food prices, confirming downside risks to our Q4 CPI forecast of 0.6% q/q are building (RBNZ: 0.8% q/q).

 

8 December 2023: Overs and unders (PDF 620KB)
There’s a lot of data for RBNZ to digest over the watch-worry-wait summer and there is no one piece of data that shouts “likely game changer”. The first major data for the RBNZ is Q3 GDP, out next Thursday; this week brought a slew of partial indicators.

New Zealand’s goods terms of trade fell 0.6% in Q3. Fonterra has upgraded its milk price forecast for this season to $7.50/kg MS, slightly below our forecast for a $7.70/kg MS dairy payout. Global shipping costs are rising, which will add cost pressures to our supply chains, but falling oil price could provide an offset.

The Treasury will publish the Half-Year Economic and Fiscal Update on 20 December. The big unknown is how much government spending will eventually get cut. After adjusting for the rapidly rising cost of delivering public services, the PREFU showed around $15-20bn more real Government expenditure in the outlook per year, compared to pre-pandemic (2019) levels.

 

1 December 2023: Willing to hike further (PDF 556KB)
As expected, the RBNZ left the Official Cash Rate (OCR) unchanged at 5.50% on Wednesday. However, in a surprise to the market, the forecast peak OCR was raised from 5.59% to 5.69%. The RBNZ pencilled in cuts for the first half of 2025, a little later than before.

ANZ Business Outlook lifted another 8 points to +31 in November. Expected own activity rose 3 points to +26 and inflation measures fell glacially. In our consumer confidence survey, headline confidence improved but is still subdued, rising 4 points to 91.9.

The incoming Government announced that their first bill to pass into law will be to remove the labour market objective from the Reserve Bank Act 2021, with passage expected late next week and an updated remit issued thereafter. We don’t expect this to change RBNZ decisions significantly.

 

24 November 2023: Bumpy landing (PDF 520KB)
Either a fall or a lift in the OCR track could be justified by the data flow at the RBNZ’s November Monetary Policy Statement on Wednesday, depending on judgements. The simplest would be to maintain the peak in the OCR track at 5.59%, publishing a very similar track to August. 

If the RBNZ Monetary Policy Committee interprets the data more dovishly, they may lower the OCR track back to 5.5% and/or potentially move cuts forward. If they’re hawkish they could choose to raise the track to signal up to 50/50 odds of another hike and/or remaining high for longer.

Our October Truckometer was released this morning. Overall it’s consistent with weakening per capita activity.

 

17 November 2023: On track, but a long way from the finish line (PDF 520KB)
We’ve changed our OCR forecast. Our central forecast no longer includes a resumption of hiking, though we still see this as a real risk. We have pushed out our expectation for cuts by one quarter (to February 2025), with our terminal forecast at 4.75%, still considered contractionary.

We expect the RBNZ to hold the OCR unchanged at 5.5% at its MPS on 29 November, and to publish an OCR track that is very similar to August (with a peak of 5.59% but potentially later cuts). Either a fall or a lift in the OCR track could be justified by the data flow, but strategic considerations to avoid monetary conditions easing over the summer will be important, given the market is itching to price cuts more aggressively. As a result, we have revised our full suite of interest rate forecasts.

We’ve revised our Q4 headline CPI forecast from 0.9% q/q to 0.6% q/q and our non-tradables inflation forecast from 1.1% q/q to 0.9% q/q after softer than expected monthly price indexes. That’s still above the RBNZ’s August MPS forecast of 0.8% q/q, but the miss is now expected to be much smaller.

 

10 November 2023: Not so fast (PDF 576KB)
This week’s RBNZ survey of inflation expectations showed progress, but they remain well above where they need to be and much higher than the RBNZ’s own August forecasts. Businesses and professional forecasters think it’ll take about a year longer to get inflation back under 3%, implying four years of inflation above the target band.

PMI data for October made for grim reading, with the lowest outturn since 2009 (lockdowns aside). It certainly makes sense that manufacturers are experiencing tougher times, given their exposure to construction and the primary sector, both of which are under pressure currently. The contrast with the relative optimism evidence in the Business Outlook survey manufacturing responses is likely due to the different framing of the questions: the PMI asks about the last month, while the ANZBO questions are forward looking.

The current El Niño cycle is expected to be one of the strongest New Zealand has experienced, raising the risk of drought conditions occurring this summer, depressing milk volumes but bolstering meat production in the near term as farmers destock. A drought this summer could have a larger-than-usual economic impact given farmers are already under pressure from soft returns at a time of intense cost pressures.
 

3 November 2023: Further to go (PDF 556KB)
The Q3 labour market release had a slightly softer underbelly than both we or the RBNZ expected. In big picture terms, the Q3 data hinted that the imbalance between labour supply and demand is perhaps resolving a little faster than we had previously thought.

While this isn’t a game changer for the November MPS (where a hold is unanimously expected), it does shift the risk profile around a February hike a little. We’d say our call for a hike in February is now pencilled in a shade lighter than previously (but pencilled in nonetheless). 

We remain comfortable with our prior assessment that the next move is more likely to be a hike than a cut. Indeed, a lot still needs to go right before the RBNZ can confidently declare victory over domestic (and potentially sticky) inflation, which has barely budged from its recent peak.

 

27 October 2023: Too hot to hold (PDF 580KB)
This week Australia’s inflation for Q3 printed at 5.4%, only marginally below New Zealand's rate of 5.6%. Inflation in both countries is looking like it will hang around longer than either central bank is comfortable with because core inflation continues to be far too high. We now expect both the RBA and RBNZ to hike their policy rates further.

New Zealand and Australia have a shared labour market to some extent and so have a shared services inflation problem, since citizens from either country can work in the other one. It will be challenging for the RBNZ to fully resolve persistent core inflation until Australia’s labour market and services inflation cools.

Next week brings Q3 labour market data. We expect the unemployment rate lifted 0.3%pt to 3.9% in Q3, the private sector Labour Cost Index lifted 1.0% q/q (4.2% y/y), and private sector average hourly earnings (ordinary time) rose 2.0% q/q (7.1% y/y).

 

19 October 2023: Break in the clouds (PDF 556KB)
Annual inflation decelerated from 6.0% to 5.6% in Q3 (RBNZ: 6.0%). The downside surprise is certainly welcome news for the RBNZ, even though all of it was due to weaker tradables inflation, over which the RBNZ has limited influence.

It's a high bar for the RBNZ to restart hikes. Following the CPI data, we don’t expect there will be enough evidence to get the RBNZ over the line in November, as things are still heading in the right direction. But we think the RBNZ will need to revise its output and domestic inflation forecasts higher in November, as they did in the August MPS. Continued upward revisions will naturally raise the question of whether an OCR of 5.50% is enough. We think the RBNZ’s next move will be a hike, but now see that occurring in February.

We’ve revised our inflation forecasts. Despite the lower starting point, our inflation outlook remains broadly unchanged. A faster normalisation in tradables inflation is mostly offset by sticky domestic inflation. 

 

13 October 2023: Holding pattern (PDF 508KB)
The September REINZ release this week saw the House Price Index (HPI) level off, with house prices flat on a seasonally adjusted basis. Sales fell 1.9% m/m sa, partially unwinding their 6.4% rise last month, and remain below their historical average. Meanwhile, days to sell remain slightly above the historical average of 39, printing at 40 (August: 41). 

Inbound migration is still near record levels. This week’s data showed that 110,200 people (net) moved to New Zealand over the last year – record numbers. All those migrants need a place to live and we are not consenting and building enough new dwellings to keep pace.

Stats NZ will release CPI inflation figures for the September quarter next Tuesday (17 October). We anticipate the report will highlight that the inflation problem has by no means been solved, and that there are still real question marks around whether an OCR of 5.50% is sufficient to get inflation sustainably back to target in an acceptable timeframe.

 

6 October 2023: Patience is a virtue? (PDF 536KB)
As universally expected, the RBNZ left the OCR unchanged at 5.5% on Wednesday. The Committee acknowledged the risk that activity and inflation does not slow as much as needed in the near term, and that “interest rates may need to remain at a restrictive level for a more sustained period of time”. 

We got a slightly less hawkish signal than we were expecting, but the October Review was still a notch higher on the hawk-o-meter than the August Monetary Policy Statement. Our OCR forecast remains unchanged: we expect a 25bp hike in November. However, it’s fair to say a near-term hike is now a little more conditional, and the Q3 reads on both the CPI and labour market will take on even more importance.

Meanwhile, we need to keep a watchful eye on global economic developments, The US labour market is likely too tight to be consistent with price stability and the stabilisation of China’s economy has lifted export prices, albeit from low levels. We agree with the RBNZ that over the medium term “downside risks around the outlook for global growth remain”, but we don’t think these global risks are all one-sided.

 

29 September 2023: Softening? (PDF 568KB)
Business confidence broke into positive territory in September in our Business Outlook survey, rising 6 points to +2. Despite the lift in headline confidence, the survey is best described as ‘mixed’, with small falls in many activity indicators. Pricing intentions and cost expectations lifted, but only a smidgen, and inflation expectations eased slightly with the first sub-5% read since December 2021.

Our consumer confidence survey this week paints a weak picture for retailers, with a net 32% of consumers reporting it’s a bad time to buy a major household item. Meanwhile, headline consumer confidence lifted slightly, but remains very low. 

We expect the RBNZ to keep the OCR on hold next week, remaining in ‘watch, worry and wait’ mode. However, we’re expecting the MPR to have a bit more ‘worry’ in it than the relatively sanguine August MPS. The neutral OCR is rising and the RBNZ’s mean assumption is that the OCR is 160bp into contractionary territory. That is over 100bp less contractionary than in 2007, while core inflation today is around 300bp higher. We’re expecting the RBNZ to return to the hiking table with a 25bp hike in November.

 

22 September 2023: Q2 GDP strong, but outlook still soggy (PDF 480KB)
The New Zealand economy bounced out of recession in Q2, lifting 0.9% q/q from an upwardly revised flat read in Q1 (see our Review for details). Importantly, these data alone don’t provide much indication of how much inflation pressure is still in the pipeline, so we don’t think they are a game changer for the October Monetary Policy Review (we continue to expect a hold). But they do increase the likelihood of the October statement having a hawkish tilt and support our view that a hike is likely in November. 

After accounting for the Q2 starting point, our medium-term GDP outlook is little changed from that presented in our August Quarterly Economic Outlook. The economy is expected to continue its post-pandemic normalisation, with services exports (chiefly international tourism and education) continuing to recover. Meanwhile, domestic demand is expected to remain soft as restrictive monetary conditions weigh.

Also this week, the annual current account deficit narrowed more than expected in Q2 to 7.5% of GDP, helped by some historic revisions. While the narrower starting point is welcome news, the external accounts remain severely out of balance. At these levels, the current account remains a key vulnerability for the economy.

 

15 September 2023: Best case scenario (PDF 484KB)
The Treasury’s Pre-election Update showed more debt, more bonds and more deficits – and all this hanging off a relatively optimistic economic outlook. There is very little wiggle room in these forecasts to allow future Governments to loosen fiscal settings while still consolidating the fiscal position before the next inevitable shock comes along.

We think downside risks to the Treasury's economic forecasts are likely to materialise before the books are back in surplus. In short, the current forecast return to surplus has a ‘best-case scenario’ look about it.

New Zealand’s GDP figures will be released at 10:45am next Thursday and are expected to show the economy bounced out of recession in Q2. We’ve pencilled in a 0.4% q/q economic expansion, unchanged from our previously published forecast, and a touch below the RBNZ’s August MPS forecast of 0.5%. Given 0.6% q/q population growth in Q2, our forecast would be consistent with a continued contraction in per capita GDP.

 

8 September 2023: Show me the money (PDF 652KB)
The Global Dairy Trade (GDT) auction finally delivered some positive news! Whole milk powder (WMP) prices lifted 5.3% to trade at an average price of USD2,702/MT. We need to see further positive results to reach our current milk price forecast of $7.15/kg MS for the 2023-24 season.

Q2’s terms of trade rose 0.4% in Q2, stronger than we expected. Both import and export prices fell sharply, as ongoing softening in energy prices pushed import prices down 1.0% q/q, while export prices slipped a further 0.6% q/q.

The Treasury will open up the Government’s books on 12 September in the Pre election Economic and Fiscal Update – check out our preview. There is no hiding from the fact that the fiscals are in a much weaker position than forecast at Budget in May, with tax revenue for the 11 months to May 2023 running more than $2bn below forecast. That’ll need to be baked into the outlook.

 

1 September 2023: I’m still standing (PDF 576KB)
Thursday’s ANZ Business Outlook (ANZBO) showed good news all round. Business confidence lifted another 9 points in August to -4, the highest read since mid-2021. Expected own activity also jumped 10 points, to +11 and all activity indicators lifted, but remain subdued – hanging in there! 

Consumers are a less happy bunch. This morning’s ANZ Consumer Confidence survey rose one point to 85, with the lift driven by an increase in the question of whether it’s a good time to buy a major household item, which rose from -39% to -31%. Consumer confidence is still below its readings in the GFC, as households navigate their way through rising prices, a softening labour market, and the highest mortgage rates in a decade.

Q2 terms of trade data are out next week. We’re picking a 0.6% q/q fall in the goods terms of trade. Our export prices are reliant on China’s economy, which is weakening rapidly, while import prices are not falling as quickly. 

 

25 August 2023: Economy slowing, but is it enough? (PDF 520KB)
This week’s Q2 retail trade data (-1% q/q, core spending -1.8% q/q) highlighted that the economy is clearly slowing. The weakness in spending suggests cost-of-living pressures are well and truly biting for households.

This week also brought further evidence of deteriorating external demand, with a trade deficit of $1.1bn in July. As we noted last week, global dairy prices have plummeted at recent Global Dairy Trade auctions, suggesting further export weakness ahead. China’s slowdown is certainly taking its toll, with the value of New Zealand’s exports to this destination down 24% y/y. 

A challenging path lies ahead for the economy. Both we and the RBNZ are forecasting the economy is in recession (starting from Q3). But what remains highly uncertain is how much the economy must slow to get inflation back to target. We think RBNZ will eventually need to do more to get on top of inflation, but we are closely watching China’s slowdown, which could do the job for it.

 

18 August 2023: Domestic tailwinds meet external headwinds (PDF 544KB)
This week’s dataflow confirmed the dynamic we noted in our Quarterly Economic Outlook: the economy is facing risks in both directions. Weakening external demand will spill over into domestic consumption and investment. But for the time being, those risks are outweighed by tailwinds to domestic demand from net migration and a turning housing market. 

As expected, the RBNZ left the Official Cash Rate unchanged at 5.50%, with a balanced tone. However, it unexpectedly lifted its OCR projection slightly (by 9bps), adding a hawkish tilt to the Monetary Policy Statement. While the Governor was at pains to downplay this as any kind of signal as to the likelihood of future moves, that’s what the OCR track is, at the end of the day, and it was a small but clear step towards our view that the RBNZ will hike again in time. 

 

11 August 2023: What to expect when they’re expecting (PDF 604KB)

The RBNZ’s latest Survey of Expectations released this week showed gradual progress with regard to inflation expectations. Aside from a surprising tick up in the 2-year ahead measure from 2.79% to 2.83%, expectations fell across the curve. 1-year ahead inflation expectations fell 11bps to 4.17%, while the 5-year and 10-year ahead measures declined slightly to be 2.25% and 2.22% respectively, still above the 2% midpoint of the target band. 

Other measures of inflation expectations such as in our own Business Outlook and Consumer Confidence surveys have been trending down in recent months, but remain higher than the RBNZ’s survey of professional forecasters. Also bucking the trend, 2-year ahead inflation expectations in the ANZ-Roy Morgan consumer confidence survey jumped from 4.3% to 4.7% in July, coinciding with the end of fuel excise and other transport subsidies. In the RBNZ’s own survey of households, inflation expectations have not yet budged from a peak north of 7%. 

While we think the RBNZ can take some comfort in the gradual downtrend in inflation expectations in recent months, it’s too soon to call mission accomplished.  Measures remain well in excess of target and more progress will be needed for the RBNZ to be confident that rates are sufficiently restrictive.

Next week is all about the RBNZ’s August Monetary Policy Statement (MPS). We expect the RBNZ will keep the OCR unchanged at 5.50%, and reiterate their “watch, worry and wait” stance. 

 

4 August 2023: Onward to November (PDF 556KB)

The RBNZ will take some comfort from the Q2 labour market report, but there was still plenty to be concerned about in the details. For the RBNZ, easing capacity pressures and wage growth off its peak are good news, though the labour market remains far beyond sustainable levels.

Both we and the RBNZ are expecting the labour market to loosen from here, but where we diverge is how quickly that will occur. At the May MPS, the RBNZ forecast that the unemployment rate would rise as steeply as it did during the Global Financial Crisis across the second half of this year, reaching 4.6% in Q4. While rising unemployment and underutilisation indicate that the labour market is indeed turning, it doesn’t feel that fast.

The themes of this week’s Q2 labour market statistics were in line with our expectation, and we’ve revised our forecasts only at the margin. We expect the unemployment rate to rise to 3.9% in Q3, below the RBNZ’s May MPS forecast of 4.1% and still solidly in inflationary territory. While stronger labour supply growth is helping to increase the slack in the labour market and thereby reducing wage pressures, we now expect stronger employment growth to offset that in the near term.

Ultimately, labour demand will slow; it cannot remain immune to slowing momentum in the economy indefinitely. Weak labour demand combined with persistent strength in labour supply (reflecting current high levels of net migration) is expected to see the unemployment rate lift sharply, peaking at 5.2% in 2025.

What matters for the RBNZ is pace of that increase, and therefore guiding the labour market out of inflationary territory. The longer the labour market remains beyond sustainable levels, the more oxygen is given to inflation through persistent labour cost inflation finding its way into consumer prices. We don’t expect that the labour market will transition to an outright disinflationary state until Q1 2024, meaning more persistent domestic-driven inflation and more work for the RBNZ to do.

 

28 July 2023: The tale of two 6’s (PDF 496KB)

The downside surprise to Australian CPI was welcome news on Wednesday, supporting our call that the RBA will take an extended pause, leaving the cash rate at 4.1%. Here in New Zealand, we remain unconvinced that the RBNZ has done enough to get inflation sustainably back to target.

Australia’s quarterly inflation impulse from non-tradables and services both decelerated markedly, and trimmed mean inflation came in below the RBA’s expectation. In New Zealand, in contrast, while headline inflation declined, non-tradables and the suite of core measures showed worrying persistence.

Next week brings the release of the key Q2 labour market statistics. We expect the data to show a relatively looser picture than Q1, but in an absolute sense the labour market remains intensely inflationary. We expect the unemployment rate ticked up 0.1ppt to 3.5%, as 0.6% q/q growth in employment absorbed almost all of the new supply capacity from the migration-driven 0.7% q/q expansion in working age population.

 

21 July 2023: Q2 CPI points to sticky situation for RBNZ (PDF 548KB)

While headline inflation was in line with the RBNZ’s May MPS forecast, the details of the release were on the more worrying side with some evidence to suggest inflation could be ‘normalising’ above the RBNZ’s 2% target midpoint – which is ultimately the RBNZ’s biggest fear.

Sticky domestic inflation risks are going to remain a big worry for the RBNZ for as long as the labour market is unsustainably hot, with high labour cost inflation passing through to consumer prices. The Q2 labour market data is published 2 August – we’ll get our preview out next week. We now expect annual inflation to decline only slightly in Q3, from 6.0% y/y in Q2 to 5.8% y/y (previously 5.6%).

In other news this week, we have revised down our farmgate milk price forecast for the 2023-24 season by 50c to $7.75/kg milksolid. Global demand for dairy products has been impacted by deteriorating economic conditions affecting consumer demand, particularly in China. Our forecast for 2022-23 remains at $8.20/kg milksolid. We have also introduced a new publication: ANZ NZ Merchant and Card Spending, a monthly chartpack showing the annual change in nominal merchant spend using ANZ data.

 

13 July 2023: RBNZ holds, next up Q2 CPI (PDF 520KB)

As universally expected, the RBNZ left the OCR unchanged at 5.5% this week, and confirmed it remains comfortably on hold while it waits to see the impacts of the rapid tightening thus far. We maintain our OCR forecast and continue to pencil in a 25bp hike in November.

There have been a few unders and overs in the data flow since the May MPS, but the hurdle for deviating from what’s a very fresh ‘on-hold’ strategy was always high.

Interestingly, the RBNZ acknowledged that the house price forecasts presented in the May MPS were too pessimistic – we agree and the June REINZ release does too.

The Q2 CPI is the next cab off the ranks (out next Wednesday). We expect annual inflation to decline to 5.9% in Q1 2023, below the RBNZ’s February MPS forecast of 6.1%. The bulk of the decline in annual headline inflation reflects an anticipated sharp fall in annual tradables inflation from 6.4% to 5.3%, as the price increases seen in the wake of the war in Ukraine fall out of the annual calculation. We expect annual non-tradables inflation is also past its peak, falling from 6.8% to 6.4%, close to the RBNZ’s forecast of 6.3%, but still roughly twice the level consistent with their target.

All up, the Q2 CPI release is expected to show things moving in the right direction. But that doesn’t necessarily mean the RBNZ has done enough to get on top of medium-term sticky domestic inflation risks. It’s very unlikely these data will give the RBNZ enough of a signal to challenge their watch, worry, and wait strategy, but the market may well disagree with that assessment on the day.

 

7 July 2023: Take the wins (PDF 520KB)
The messages out of the Q2 Quarterly Survey of Business Opinion were somewhat mixed. While confidence and experienced trading activity improved, expectations of future activity fell back towards Q4’s lows. Pricing and cost indicators remain elevated, but positively, expected costs and selling prices both fell.

Most importantly, supply-side constraints eased further. The biggest news was a surprisingly sharp fall in capacity utilisation from 94.0% to 87.1% – not far off the low seen during the GFC. That will be welcomed by the RBNZ, as it should help to cool inflation pressures.

We expect the RBNZ to keep the OCR unchanged at 5.5% at next week’s Monetary Policy Review. The RBNZ made it clear at the May Monetary Policy Statement that they are firmly in “watch, worry and wait” mode, as they are optimistic that they have done enough to bring inflation sustainably back to target. That remains to be seen, of course, but the data flow since May has broadly printed in line with RBNZ expectations.

 

30 June 2023: Cautious optimism (PDF 580KB)
Business and consumer sentiment both improved in June, following the RBNZ calling time on rate hikes in the May Monetary Policy Statement. While still very much subdued, the improving mood signals demand may prove a little more resilient across the second half of the year than the RBNZ is expecting, risking core inflation proving more persistent.

The improving tone of our consumer and business surveys doesn’t exactly resonate with the RBNZ’s efforts to engineer a slowdown, but it’s too early to say whether the optimism will persist. The improvement is conditional on inflation obediently falling back to target. Falling inflation expectations are a great start, but we suspect that an underlying inflation impulse will linger, tied to a relatively resilient labour market. We think the RBNZ will be forced to crash this somewhat sombre party by November.

This week we published our Property Focus. May’s data supports our assessment that the housing market has indeed found a base, with house prices on the cusp of lifting. We are forecasting house prices to claw back just a 3% lift across the second half of the year, but recent data suggests our forecast may be on the conservative side.

 

23 June 2023: Getting the balance right on the ETS (PDF 528KB)
The review of the Emissions Trading Scheme (ETS) moved to the public consultation phase this week. Under the current settings the ETS is expected to drive large-scale exotic afforestation but will not deliver a sufficiently high carbon price to incentive significant reductions in gross emissions.

It’s crucial that the Government keeps the purpose of the ETS front and centre in its deliberations. Welfare impacts on households can and should be addressed separately. The ETS will only work if the relative price of fossil fuels is allowed to rise.

Next week brings the monthly employment indicators for May and our consumer and business confidence surveys. These are important for getting a timelier gauge of where the economy is heading, and we’ll be watching for signs of resilience.

 

16 June 2023: A cyclone-driven recession (PDF 912KB)
The economy contracted 0.1% q/q on a seasonally adjusted basis in Q1. That was weaker than our expectation of +0.2% q/q, and the RBNZ’s +0.3% q/q, but broadly in line with the median market expectation.

Migration-induced population growth is bolstering demand for goods and services and adding to the supply of labour, and both will be a positive influence on headline GDP growth. But per capita GDP growth at -0.7% q/q shows economic conditions are quite soggy out there. High inflation and higher interest rates are certainly taking their toll.

Given the degree of noise in the GDP data at present, uncertain cyclone impacts, and sticky CPI inflation risks, we don’t think the GDP data will knock the RBNZ off its ‘watch, worry and wait’ course. A slowdown is unfortunately part of the plan.

Further, while the starting point for GDP may be weaker than our expectation, new economic tailwinds are now emerging before annual non-tradables inflation has even turned a corner. We see upside risks to growth momentum over the second half of the year due to both strong net migration and fiscal stimulus. Now we have Q1 GDP data, we’ve today updated our macroeconomic outlook for these significant developments.

In this week's special topic, we explore the implications of New Zealand’s wide current account deficit for the Kiwi.

 

9 June 2023: China's slowdown could exacerbate NZ's (PDF 500KB)
As the debate over whether central banks have done enough to quell inflation in advanced economies goes on, China’s experience stands out as markedly different, with the economy facing the risk of deflation as growth momentum weakens. With China New Zealand’s largest trading partner by far, it matters.
China’s PMI readings for May suggested that the contraction in the manufacturing sector accelerated both domestic and external demand softened, with excess capacity putting downward pressure on prices and dragging on profits. While the recovery in the services sector was ongoing in May, it stepped down in pace. Consumer sentiment is languishing, weighed down by weak wage growth and deteriorating labour market conditions. Weaker confidence is driving precautionary saving and weighing heavily on property sales.

On the plus side, weaker growth in China is supporting ongoing global goods disinflation. However, weaker growth in your biggest trading partner can only ever be at best a mixed bag. The flipside is New Zealand’s export prices haven’t experienced the anticipated boost from China’s reopening either. Reflecting concerns about China’s growth outlook, this week we revised down our 2023/24 season farmgate milk price forecast 25c to $8.25/kg MS.

Looking ahead, next week brings a blockbuster data flow, chief among them Q1 GDP (released on Thursday). We’ve pencilled in a 0.2% q/q expansion, as strong population growth more than offsets disruption from Cyclone Gabrielle. While the economy is certainly slowing in response to higher interest rates, we think part of the weakness in GDP growth can still be explained by lingering supply constraints.

On Wednesday, Balance of Payments data are also released. We’re expecting the annual current account deficit narrowed to 8.7% of GDP from the record-wide 8.9% of GDP in Q4. While a narrowing in the deficit is good news, the level remains far too high.

 

2 June 2023: Resilience evident (PDF 452KB)
This week we revised up our house price forecast, calling the floor and expecting prices to lift a bit over 3% over the rest of the year. Recent data suggests a turn. House prices were flat in April, and auction clearance rates in Auckland have risen quickly. Sales volumes remain very weak, but with new listings also weak, inventory levels are tightening. A surge in Barfoot & Thompson sales in May highlights the direction of risk.

This week’s ANZ Business Outlook survey also gently challenged the RBNZ’s narrative of widespread sogginess across the economy, with most activity indicators off their lows and rising. While most indicators are still at weak levels, the direction of travel doesn’t suggest things are rolling over rapidly. Positively, most inflation indicators eased, although only gradually. While inflation is on its way down, we’re not convinced the job is 100% done. We expect the RBNZ will be back at the hiking table by the end of the year.

By November, the RBNZ expects the economy to be in a demand-driven recession, with the unemployment rate to have lifted to 4.1%, house prices to still be falling and non-tradables inflation to be down to 5.7% y/y. We will wait for Q1 GDP data to update our forecasts and incorporate the Budget and migration news. But in short, we think the data will tell a more resilient story on balance, warranting a further hike and risks of another. November is a long time away, and our call may well look wrong before it comes right.

 

26 May 2023: On pause … until November (PDF 524KB)
As expected, the Reserve Bank raised the OCR 25bp to 5.5% this week, but the tone of the MPS was much less hawkish than either we or the market were expecting.

Last week’s Budget didn’t seem to concern the RBNZ, despite their warnings in April that it was an upside risk to inflation. It’s true that inflation is hitting the Government too, meaning the Government is using less of the economy’s capacity for the same nominal spend. But an injection of 1.4% of GDP next fiscal year in an economy that continues to run up against capacity constraints seems likely to culminate in stronger inflation pressures.

Then there was the migration puzzle. After identifying it as an upside risk to medium-term activity and inflation in April, the RBNZ sounded far more unsure this month. The RBNZ has tripled its assumption for annual net migration (working age) for 2023 to 75,200. While that’s likely to ease constraints in the labor market and put downward pressure on wages, we are wary of the impacts on general demand and house prices and rents in particular, just as the housing market is showing signs of life.

Given these upside risks, we still think further hikes are on the table, but it’s a high hurdle for the RBNZ to recommence tightening having called a pause now. Looking at the key incoming data before the next few meetings, we don’t see it as being enough to sway the RBNZ from holding rates at 5.50%. But we expect these demand effects will continue to build, and by November the case for further hikes will be clear.

By November, we’ll have Q2 GDP, which we expect to show a bounce-back from cyclone-induced weakness in Q1. We’ll have more survey data (QSBO, ANZBO, HLFS) on whether capacity is opening up as rapidly as the RBNZ requires, and the election will be out of the way. We’ll have more data on wages and CPI that will reveal how fast inflation pressures are dissipating. We’ll also know whether the housing market is trending up, down or sideways.

In past tightening cycles the Reserve Bank has paused before hiking again. In 2005 it paused for six months before hiking twice, then went on hold for over a year before hiking four more times. A pause is not necessarily a peak; the data will dictate. We expect by November the data will show inflation still sticky, and we see the risk of a further follow-up hike. We’ve pushed back our expectations of cuts a little, to start at the very end of 2024.

 

19 May 2023: Awaiting RBNZ's take on a big Budget (PDF 572KB)
Budget 2023 is another big budget with a focus on the cyclone rebuild and the cost of living. Responding to the cyclone is absolutely the right thing to do, but current macroeconomic conditions mean that because this isn’t going be paid for with higher taxes or more significant reprioritisations, it implies more macroeconomic stimulus, more pressure on CPI inflation, and therefore upside risk to the OCR outlook.

Spending (both operational and capital) is higher. After accounting for reprioritisations and the usual reshuffling of Government spending between fiscal years (owing to delays etc), Budget 2023 injects a little more than $5bn of additional spending (opex and capex) into the economy in the very near term (year to June 2024) compared to the Half-Year Update. That’s about 1.4% of GDP over the next year for the RBNZ to consider next week.

The current macroeconomic context is not conducive to further fiscal expansion, particularly in the near term. A near record-low unemployment rate shows there is currently little spare economic resource to accommodate additional demand. The Treasury’s own report states “Our rule of thumb for the impact of fiscal policy on inflation and interest rates is that an additional fiscal stimulus equal to 1% of GDP would cause the OCR to rise by an additional 30 basis points”. That’s something the RBNZ will be considering next week.

We expect the RBNZ will raise the Official Cash Rate (OCR) 25bp to 5.50% at its Monetary Policy Statement (MPS) next Wednesday. Clearly a pause is now a very unlikely scenario, and the odds of another 50bp hike have risen. We’d now put the chance of a 50bp lift as high as 40%. We’d also put greater odds on the May MPS showing a higher OCR forecast peak than our 5.7% expectation. A 6-handle can’t be ruled out.

We have built one more 25bp hike in July into our own OCR forecast, which would take the OCR to 5.75%. The (relatively) happy place to sit and “watch, worry and wait” keeps inching just out of reach.

 

12 May 2023: Budge up and the Budget  (PDF 600KB)
The REINZ House Price Index was unchanged on a seasonally adjusted basis in April. Coupled with a 7.1% m/m (sa) increase in sales (albeit from very low levels), and no change in the number of days to sell, the outturn was consistent with a housing market that’s nearing a turn. While it’s only one month of data, it adds upside risk to our recently updated house price forecast (an 18% peak-to-trough decline, from 22% previously). While we’re not expecting house prices to take off again, the boost to demand from surging migration does pose some upside risk. Net migration continued to surge in March, with a net inflow of 12,100 new migrants, and revisions to Stats NZ’s historical data adding an extra 1000 migrants in the last year. The annualised rate for the first three months of the year is nearly 130k – well in excess of the highs we saw pre-COVID, and adding upside risk to our activity, labour supply and house price forecasts, as we all budge up. The impact on inflation, however, is ambiguous. All else equal, greater labour supply will ease capacity constraints in the tight labour market and reduce wage pressures. But wages tend to respond with a lag, and new migrants entering the country add to demand in other areas, particularly the housing market. The overall inflation impact of migration will partly depend on the composition of new migrants, but our gut feel is that it’s an upside risk to the OCR.

 

5 May 2023: Q1 labour market data not a game changer for RBNZ  (PDF 644KB)
Wednesday’s labour market data offered little to suggest that momentum turned meaningfully south in Q1. The unemployment rate gave away no secrets, being unchanged at 3.4%, but underlying that were strong details. Bumper employment growth of 0.8% q/q outpaced migration-driven growth in the working age population of 0.5% q/q, seeing the employment rate rise 0.2%pts to a fresh record high of 69.5% (and 80.4% for those aged 15-64, which for comparison, is 3%pts higher than Australia). However, in terms of the unemployment rate, this was offset by a lift in the labour force participation rate to a fresh record high of 72.0%. If participation had held at its previous level, the unemployment rate would have fallen to 3.1%. The strength of employment thus in part reflects an improvement in labour supply, and there’s likely an element of ‘catch up’ occurring, with previously unmet labour demand now being worked through. So, it would be a mistake to read the data as a sign that labour demand is gaining fresh momentum. Nonetheless, it’s clear that labour demand remained strong in Q1. Wage growth accelerated, although annual growth in the private sector Labour Cost Index at 4.5% came in lower than expected by both us (4.8%) and the RBNZ (4.7% y/y). This will be welcomed by the RBNZ, given the importance of wage inflation to the outlook for non-tradables inflation. All up, we don’t see the outturn as a game changer for the RBNZ. Although the starting point for the labour market is broadly tighter than they expected in February, there are lots of moving parts on the supply side; this is very much a look in the rear-view mirror; and forward-looking indicators do signal waning labour market pressures over the rest of the year. The themes of this week’s Q1 labour market statistics were in line with our expectation, and we’ve only revised our forecasts at the margins. Weaker demand as supply continues to improve is expected to cause the unemployment rate to rise from 3.4% currently to 5.4% by the end of 2024. Lower wage inflation (than we were expecting) does add some downside risk to our non-tradable inflation forecast, all else equal. But to put it in context, the LCI still remains at a record high, and we’re still expecting non-tradables inflation to prove persistent across the second half of the year. As noted above, disinflationary wage impacts from stronger labour supply could be more than offset by the inflationary impacts of associated stronger demand. Decision time is looming for the RBNZ. Markets are worried about a potential 50-pointer after strong Q1 labour market data, and the RBA’s surprise hike this week. But blasting through the previously announced expected OCR peak would be an aggressive move that just doesn’t strike us as necessary when ‘new news’ has been mixed, and rates are there or thereabouts.

 

28 April 2023: LVR restrictions to ease; Q1 unemployment to fall (PDF 652KB)
The Reserve Bank announced this week that they are proposing an easing of the ‘speed limits’ on high loan-to-value (LVR) restrictions from 1 June. The decision looks startling on the face of it, but it’s important to note, however, that financial stability tools and monetary policy are separate. It’s monetary policy’s job to respond to the consequences of macro-prudential policy settings, whatever they may be. It is difficult to quantify the impacts of the proposed LVR changes, given the uncertainty around the outlook for the housing market. While banks are currently pretty much filling their high LVR-lending allotments, it’s not a given that the proposal will see banks lend up to the new limit. We’ll be watching lending data closely in the coming months to see how much unmet demand for higher LVR lending is being unmet and what the consequences of unleashing it will be. Next week sees the release of NZ Q1 labour market data. As we note in our Preview, the New Zealand labour market remains exceptionally tight. Unemployment is forecast to dip 0.1ppt to 3.3%, driven by a 0.5% q/q (1.9% y/y) lift in employment. We expect wage growth accelerated, with finding labour still the biggest problem facing firms in Q1 according to our Business Outlook survey, tourism demand keeping the pressure on, and inflation expectations elevated. We expect QES private sector average hourly earnings (ordinary time) to rise 2.1% q/q (8.3% y/y), and the productivity-adjusted private sector labour cost index to lift 1.2% q/q (4.8% y/y). This week we also published out latest Property Focus. In it, we upgraded our house price forecasts, and now expect a peak-to-trough decline of 18% (from 22% previously). This has been driven by slightly stronger than expected housing market data of late, falls in some fixed mortgage rates, and a proposed easing of high-LVR lending restrictions.

 

21 April 2023: Weaker than expected CPI, but still way too high (PDF 628KB)
The Q1 CPI surprised to the downside versus our forecast, but this was a volatile tradables inflation story. Non-tradables came in as expected, accelerating to a new high of 6.8% y/y. Under the hood, some measures of ‘sticky’ inflation continued to accelerate in Q1, suggesting the RBNZ still has plenty to worry about. Annual non-tradables inflation was 0.3% points below the RBNZ’s forecast. But while a weaker non-tradables inflation starting point reduces the risk of the OCR needing to go higher than the 5.5% peak we are forecasting, there are offsets: there could be more fiscal stimulus to lean against come Budget day, and the RBNZ may yet have more cyclone-related inflation to bake into their outlook (as signalled in the April Monetary Policy Review). After accounting for the starting point, our inflation outlook is little changed from previously. We have retained previous cyclone impact assumptions, and still see plenty of underlying inflation pressures stemming from the too-tight (but loosening) labour market. We continue to expect a 25bp hike at next month’s MPS. The Q1 CPI data is likely not going to be seen by the RBNZ as warranting a pause, but it should rule out another 50bp hike. In other news, REINZ housing data for March and net migration data for February present fresh upside risks to our outlook for housing and GDP. But that begs the question: is the RBNZ ready to tolerate that?

 

14 April 2023: All about CPI (PDF 564KB)
We’ve decided to wait until Monday’s March food and rents data before publishing our Q1 CPI Preview. While these data only represent about 10% of the Q1 CPI, there is plenty of scope for cyclone impacts to be larger or smaller than our working assumption. And this could be the difference between annual inflation accelerating or decelerating from Q4. Assuming a 1% m/m rise in the March FPI and a 0.4% m/m rise in rents, our data monitoring suggests headline CPI inflation will come in 0.1 percentage points weaker than our current published forecast of 7.3% y/y. At the current juncture, it looks like the hurdle for an upwards surprise to the RBNZ’s non-tradable inflation forecast in Q1 is pretty high – but we’ll never say never given the recent tendency for these data to surprise. The million-dollar question is whether weaker non-tradable inflation in Q1 than the RBNZ’s forecast will warrant a change in monetary conditions. That’s how the market is likely to interpret the data, but we’re not so sure. The RBNZ did signal a potential upgrade to its inflation outlook in the April Monetary Policy Review, and that suggests that a weaker starting point for non-tradable inflation may not be a game changer for overall policy settings. The RBNZ needs inflation and inflation expectations to fall, and the output gap to turn negative to be confident that a peak OCR of 5.5% is restrictive enough. A higher inflation outlook, further increases in inflation expectations, or another supply shock could all mean the OCR will need to be more restrictive than otherwise. Taylor Rules demonstrate this risk.

 

6 April 2023: Another 50 (PDF 620KB)
The RBNZ hiked 50bp this week, defying both market and analyst expectations for a 25bp hike. We’ve updated our OCR call, banking the 25bp surprise in April and maintaining our expectation for a 25bp follow-up in May (which will take the OCR to a peak of 5.5%). We’ve also pencilled in three cuts for late 2024. The RBNZ also announced this week that it intends to add a new financial stability tool to its tool belt: debt-to-income restrictions, which could come into force from March 2024. The NZIER’s Quarterly Survey of Business Opinion showed capacity and price pressures are on the right trajectory, but the overall level of these indicators suggest the RBNZ hasn’t got the economy back into balance just yet. Government financial statements show downside economic and upside interest rate risks to the Treasury’s Half-Year Update forecasts are materialising.

 

31 March 2023: To 5% and beyond (PDF 604KB)
Global markets tentatively stabilised this week. At 0.4% m/m, filled jobs growth in February points to upside risk to our Q1 employment forecast. Our Business Outlook remained stable at generally pessimistic levels, suggesting the RBNZ is getting traction. February’s 9% fall in building consents suggests traction is real too. Labour productivity recovered sharply in the year to March 2022 as the COVID-induced shackles loosened. We expect the RBNZ to hike 25bp next week, and keep a follow up in May on the table.

 

24 March 2023: A more cautious Fed (PDF 596KB)
With a very light data calendar this week, all eyes were on how the US Federal Reserve would react to recent issues in the global banking sector. On the day, they hiked the federal funds rate 25bp to a range of 4.75%-5.0%, but softened their forward guidance, and acknowledged tighter credit conditions could weigh on inflation. The Ministry for the Environment announced a review of the Emissions Trading Scheme to assess changes required to encourage emitters to reduce CO2 emissions, rather than just offsetting polluting activities by planting trees. RBNZ Chief Economist Paul Conway delivered a speech yesterday titled “The path back to low inflation in New Zealand”. The speech hammered home some of the key messages from the February Monetary Policy Statement, but didn’t contain any new news.

 

17 March 2023: Volatility (PDF 620KB)
Financial market volatility lifted sharply this week in the wake of bank collapses in the US and as contagion later spread to Switzerland. Q4 GDP data showed the economy shrank 0.6% q/q in Q4, while the current account deficit expanded further to -8.9% of GDP (a fresh record). We published a Forecast Update, refreshing our macroeconomic forecasts and extending them to include 2025. Our OCR call (for a 5.25% peak by May 2023) is unchanged.

 

10 March 2023: Powell hawks it up (PDF 680KB)
Hawkish comments from Fed Chair Jerome Powell, combined with ongoing strength in US labour market data, saw market expectations for the fed funds rate take another leg higher this week. The domestic data flow was mixed, with the volume of building activity falling 1.6% q/q in Q4, after Q3’s upwardly revised 5.3% bounce. We’ll be releasing our Q4 GDP Preview later today. Our latest Insight note takes a look at how inflation pressures are rotating away from goods prices and into sticky services prices. The feedback loop between a super-tight labour market and surging services inflation will be a key determinant of how far (and how quickly) the RBNZ will raise interest rates.

 

3 March 2023: Mixed bags and second winds (PDF 632KB)
We released the latest edition of our Property Focus this week. House prices have fallen 15% from their November 2021 peak, and we continue to forecast a 22% peak-to-trough decline. Activity indicators were a mixed bag. Q4 retail sales volumes fell 0.6% q/q, while our February Business Outlook survey showed another incremental improvement in business confidence and the activity outlook. Timely indicators point to a more resilient labour market than expected over the first half of this year.

 

17 February 2023: Devastation (PDF 564KB)
The scale of Gabrielle’s destruction is hard to fathom. It will have economic reverberations for years to come. The rebuild effort will increase resource stretch in the economy, and will be inflationary. Targeted fiscal policy is a better tool than blunt monetary policy to provide disaster relief. Deferring OCR hikes could do more harm than good, and we continue to expect a 50bp hike next week. But the RBNZ can help by scaling back or suspending quantitative tightening to facilitate funding the fiscal response.

 

10 February 2023: A higher minimum (PDF 528KB)
This week we released our first Quarterly Economic Outlook of 2023. We expect the RBNZ will join other central banks in dialling back the pace of interest rate hikes at their first meeting of 2023, on 22 February, delivering a 50bp OCR hike (to 4.75%). We see risks on both sides of our call for a 5.25% peak in the OCR. There are plausible scenarios where the RBNZ could end up delivering a series of further ‘top-up’ hikes over 2023 and 2024, or could find themselves cutting rates aggressively if spending and employment deteriorate by more than they anticipate. The Government announced the minimum wage will be increased by $1.50 to $22.70/hour from 1 April 2023. The announcement will likely cause overall wage (and CPI) inflation to be marginally higher than otherwise. But unless that bleeds through into higher inflation expectations, it’s unlikely to influence the RBNZ’s decision.

 

3 February 2023: A tough week (PDF 608KB)
The unprecedented rainfall and flooding across parts of the North Island have seen lives lost, homes and businesses destroyed, and infrastructure damaged. The economic cost is, as yet, unknown. Our initial view is the floods are unlikely to be a game changer for the economic outlook, but they will likely be inflationary. Q4 labour market data this week portrayed conditions the RBNZ would no doubt still assess as being ‘beyond maximum sustainable employment’. But in a similar theme to last week’s Q4 CPI report, the data just weren’t as strong as the RBNZ expected back in November, reinforcing our expectation that the RBNZ will downshift to a 50bp hike at their 22 February meeting. We have updated our labour market forecasts for the Q4 data. We expect the labour market to soften over 2023 and 2024 as higher interest rates see the domestic economy contract. Unemployment is forecast to lift from Q4’s still-low 3.4% to a peak of 5.4% in 2024, with wage growth slowing over this period. The Government has announced an extension to the cost of living support measures introduced last year (including the 25 cents/litre reduction in fuel excise duty). These are now due to finish at the end of Q2 (previously Q1). We have updated our CPI forecasts to account for this, and estimate it will shave 0.5ppt off our annual CPI inflation forecast in Q2, but add 0.5ppt in Q3. We have also attempted to factor in the inflationary impacts of the flooding on CPI components like fruit and vegetables, insurance, and used cars.

 

27 January 2023: A slower pace (PDF 624KB)
This week’s CPI report showed inflation in New Zealand remained far too strong at 7.2% y/y in Q4. But the details were much better than the RBNZ feared back in November. The RBNZ then expected inflation to re-accelerate to 7.5% (it was stable at 7.2%) with non-tradables inflation lifting to hit a fresh record high of 7.0% (instead, it was also stable at 6.6%). We have subsequently changed our OCR call, and now expect the RBNZ to hike the OCR 50bp in February (previously 75bp), followed by two more 25bp hikes, bringing the OCR to a peak of 5.25% by May (previously 5.75%). The RBNZ’s inflation battle is far from over, and there are still aspects of the CPI data that are concerning. But having updated our inflation outlook to incorporate the Q4 data, we think non-tradables inflation will come in significantly below the RBNZ’s forecast over the next two years, and combined with deteriorating activity indicators, we think there’s a strong argument for the RBNZ to dial back some of the additional hawkishness it added in November. Next week will bring the Q4 labour market report – another key release ahead of the RBNZ’s February meeting. We expect the data will echo the relentless strength seen in the labour market over 2022, with unemployment picked to dip 0.1ppt to 3.2%, and private sector wage growth likely to accelerate further as well. But that’s old news to some extent, with timely indicators of labour demand pointing to a significant softening in the labour market over 2023.

 

20 January 2023: No respite from high inflation (PDF 640KB)
The Q4 QSBO, surveyed after the RBNZ’s hawkish November MPS, reiterated the risk that economic momentum may slide further and faster than the RBNZ is intending. But with labour market capacity measures still far too high, and cost and price measures also increasing, it’s not clear the RBNZ will feel they have the flexibility to ease back on the aggressive pace of OCR hikes anytime soon. December food price inflation did nothing to quell inflation fears, with food prices up 1.1% m/m (11.3% y/y). They are usually flat/falling in December. The housing market ended 2022 on another soft note, with prices falling 1.2% m/m in December (ANZ seasonal adjustment). Prices are now down 15% relative to their November 2021 peak. Stats NZ release Q4 CPI data next week, and we anticipate annual CPI inflation remained high at 7.2% y/y. That’s a touch lower than the RBNZ’s November MPS forecast for 7.5%, but with non-tradables inflation forecast to accelerate to 6.9% y/y (6.6% previously, RBNZ picking 7.0%) we’d be hesitant about celebrating too soon. The indicators point toward inflation falling over 2023, but the RBNZ may need to see it in the data to believe it.

 

13 January 2023: Finally getting traction (PDF 672KB)
The risk profile around future monetary policy moves is evolving. Inflation in New Zealand is far too high and looking well entrenched, but early signs are that the shock value of the November Monetary Policy Statement could have been very significant. We see downside risks to our OCR call (a peak of 5.75%), but upcoming Q4 CPI data will be key. Stats NZ released monthly filled jobs data for November, which showed ongoing resilience in the Kiwi labour market. Filled jobs were up 0.2% m/m in November, matching October’s upwardly revised 0.2% lift. But storm clouds are building for the labour market over 2023, with employment intentions and job ads falling in recent months. In an encouraging development, annual US CPI inflation dropped to 6.5% in December (down from a peak of 9.1% in June). But services inflation is still rising on an annual basis, and combined with a still-solid labour market, we think that will see the Fed deliver two more 25bp rate hikes, bringing the ceiling of the fed funds rate corridor to 5%.

16 December 2022: GDP booms, but 2023 recession looms (PDF 656KB)
This week brought a swath of economic data for New Zealand. In the month of November the REINZ house price index was down around 14% from its November 2021 peak, food price inflation rose to 10.7% y/y (10.1% previously), and rent price inflation remained high at 4.0% y/y (4.1% previously). Q3 GDP came in hot, with the economy expanding a whopping 2.0% q/q as services exports continue to bounce back (but household consumption fell 0.1% q/q). The Half Year Economic and Fiscal Update provided another look at the Government’s books, with a surplus still forecast for 2024/25 as the Government focuses on reprioritising spending. With Q3 GDP data under our belts, we’ve incorporated these data, and the impacts of our recent OCR call change (for a peak of 5.75%) into our outlook for economic activity. We forecast the economy will enter recession in Q2 2023, with economic activity declining 1.3% between Q2 2023 and Q1 2024 as the RBNZ works to extinguish the inflation inferno.

 

9 December 2022: Busy week ahead (PDF 672KB)
Data on building work put in place showed the volume of building activity lifted an impressive 3.8% q/q in Q3, after an upwardly revised 4.6% gain in Q2. However, timely consents data for October and construction intentions for November, both point to a considerable softening in construction activity in coming months. We also released our initial farmgate milk price forecast for the 2023-24 season this week, which currently stands at NZD9.00/kg MS. Next week brings the Half Year Economic and Fiscal Update. Inflation is driving up the cost of delivering government services, which could see the Government decide to increase spending allowances. However, in this inflationary environment, they may also look to reprioritise spending instead, which would be less inflationary. From a macroeconomic perspective, it’s time for fiscal policy to “cool the jets”.

 

2 December 2022: Taking stock after the MPS (PDF 720KB)
With the November MPS now under our belts we’ve taken the opportunity to update some of our key macroeconomic forecasts. As we noted in our latest Property Focus, we now expect a 22% peak-to-trough fall in house prices relative to their November 2021 peak (-18% previously) given our expectation that the OCR will rise to 5.75% by May next year. We expect CPI inflation to fall to 7.0% in Q4 (versus 7.2% in Q3) before bouncing to 7.3% in Q1 2023, which is also when we assume temporary supports like the fuel excise tax cut will be reversed. The re-acceleration in inflation expectations, as well as strong monthly prints for food and rent prices, imply a stronger and more persistent inflation pulse than when we last updated our forecasts. But given our higher OCR forecast, we still anticipate inflation will fall away a touch faster than the RBNZ projects. With the RBNZ explicitly aiming to cause a “shallow” recession next year to beat inflation, we anticipate the labour market taking a bit more of a hit than previously. Our forecast has unemployment rising to 5.3% by end-2024 (4.9% previously), from 3.3% at present. In the near term, inflation and inflation expectations are looking more robust than expected, and we anticipate that will flow through into a stronger wage outlook. But beyond that, aggressive monetary tightening will take its toll.

 

25 November 2022: Engineering a recession (PDF 616KB)
The RBNZ hiked the OCR 75bp to 4.25% this week. That was widely expected. The surprise was just how hawkish the Monetary Policy Statement was, forecasting a 5.5% peak in the OCR (versus 4.1% in the August Statement), a recession in 2023, and unemployment rising all the way to 5.7% (3.3% currently). When asked if the RBNZ was trying to cause a recession, the Governor responded “I think that is correct”. The gloves are off in the fight against inflation. Given the RBNZ’s hawkish stance, we have revised up our forecast OCR track, adding to our existing 75bp hike in February a 50bp hike in April and a 25bp hike in May, which would take the OCR to a peak of 5.75% (5.0% previously expected). A key reason for the RBNZ’s upgrade to their OCR forecast is they’ve estimated that the rise in short- and medium-term inflation expectations means the neutral OCR is likely much higher than the 2% estimate implied by longer-run inflation expectations. The upshot of this is the MPC thought they’d been pumping the brakes on inflation, but their updated analysis suggests all they had done in lifting the OCR to 3.5% by October was ease off the accelerator. With the OCR now at 4.25%, they’re estimating that only now is the OCR in contractionary territory.

 

18 November 2022: Stepping up the pace (PDF 528KB)
REINZ house price data for October confirmed that the housing market is continuing to soften. House prices fell another 1.0% m/m (ANZ seasonal adjustment), and are now down around 12% from their November 2021 peak. Monthly net migration data strengthened, with a larger monthly gain in September than we had pencilled in. It now looks like annual net migration will be back in positive territory by the end of this year (previously we assumed mid-2023). But data revisions are significant, so a decent read of the migration pulse will be delayed until the dust has settled (at least three months after the initial release of the data). Next week brings the RBNZ’s November MPS. We expect the Monetary Policy Committee will lift the OCR 75bp to 4.25% – well on the way to the 5.0% peak that we’re forecasting will be reached in February next year. With upside inflation surprises continuing to bombard the RBNZ, they can’t afford to go easy on inflation, even though global growth risks remain elevated.

 

11 November 2022: Expecting more inflation (PDF 660KB)
This week we released our latest Quarterly Economic Outlook. Our view of the outlook hasn’t really changed, with growth expected to slow over 2023, the labour market set to soften, and inflation forecast to gradually return to target as a result. But we think it’ll take a 5.0% OCR to do the trick (versus 4.0% back in August), and we still see risks that the OCR will peak higher still. The RBNZ released their Review and Assessment of the Formulation and Implementation of Monetary Policy, which reviewed monetary policy decisions made from 2017 to mid-2022. While it’s a ‘pass’, the RBNZ does highlight areas for improvement. We released an insight earlier in the week outlining some of the many records broken by the New Zealand labour market in Q3, including for employment, participation, hours worked, and wage growth (to name a few). The RBNZ’s Q4 Survey of Expectations showed inflation expectations rising across the curve, despite survey respondents also anticipating a much higher OCR. Measures of inflation expectations remain high across multiple different surveys, highlighting the challenge that still remains for the RBNZ as they raise interest rates to drive inflation back to 2%.
 

4 November 2022: Dairy dip (PDF 572KB)
Global dairy commodity prices have fallen 30% since March 2022, but depreciation in the NZD versus the USD has provided some offset in local currency terms. The ANZ milk price forecast for the 2022-23 season is $8.75/kg milksolid, but further declines in dairy commodity prices could pose downside risks to the outlook for farm-gate milk prices. Q3 labour market data broke multiple records this week, including for wage growth, employment and participation rates, and the quarterly fall in not in the labour force numbers. Unemployment remained extremely low at 3.3%. A big jump in the participation rate meant that even a very solid 1.3% q/q lift in employment was insufficient to reduce the headline unemployment rate. We’ve updated our labour market forecasts in the wake of Q3’s labour market data. Unemployment is expected to remain very low at 3.3% in coming quarters, before rising over 2023 and 2024 as monetary policy tightening slows down the domestic economy. Private sector average hourly earnings growth is set to accelerate further, and is likely to peak north of 9% y/y (versus 8.6% in Q3).

 

28 October 2022: A slightly larger fall (PDF 760KB)
With the OCR now forecast to reach 5% in February 2023, we’ve downgraded our house price outlook. An 18% peak-to-trough decline in prices is expected (-15% previously), but that still only represents a partial unwind of the recent run-up in prices. Stats NZ released the Q3 household living-costs price indexes, which show how inflation is impacting different households. In a reversal of historical trends, the cost of living is rising fastest for the highest income households due to the rapid rise in the cost of interest payments (a cost that is not counted in the CPI). But the concentration of inflation in food, housing costs, and transport (ie essentials) means the burden of inflation will be particularly tough for those on lower fixed incomes. Q3 labour market data are released next week. We’ll be releasing our Preview once this morning’s September filled jobs data are under our belts.

 

21 October 2022: Updating our inflation outlook (PDF 644KB)
This week’s CPI inflation report for Q3 was grim. After hitting a multi-decade high of 7.3% in Q2, we had expected annual CPI inflation to ease to 6.6% in Q3 (consensus expectations were for 6.5%, and the RBNZ’s August MPS forecast was for 6.4%). Instead, it barely budged, down 0.1ppts to 7.2% y/y. And in the details of the data, it was clear that large price rises continue to become more common, not less. We changed our OCR call in the wake of the data, and now expect 75bp rate hikes in November and February, sending the OCR to a peak of 5.0% in February (previously 4.75% in May). We’ve updated our CPI inflation forecasts in the wake of the new data and our revised OCR call. We continue to expect that inflation has peaked (with CPI inflation picked to fall 0.3ppts to 6.9% y/y in Q4), but it looks like 2023 is more likely to be where we really start to see the inflation-dampening impact of the monetary policy tightening seen to date.

 

14 October 2022: Core troubles (PDF 644KB)
This week the US released their September inflation report, and the news wasn’t good, with annual core inflation lifting 0.3ppts to 6.6% (a 40-year high). That’s seen markets price 80bps into the Fed’s November meeting, essentially locking in market expectations for a fourth consecutive 75bp Fed funds rate hike, with a small nod towards the risk of a 100bp hike. Next week brings New Zealand’s Q3 CPI data, and we expect annual CPI inflation eased to 6.6% y/y, versus 7.3% in Q2. The primary driver of lower inflation is expected to be a roughly 8% fall in the NZD retail price of petrol over the quarter. But core domestic inflation pressures are likely to remain far too strong to give the RBNZ much comfort, and should keep them on track to deliver a sixth consecutive 50bp OCR hike at the November MPS.

 

7 October 2022: RBNZ hikes 50, capacity indicators still dire (PDF 632KB)
This week the RBNZ delivered their fifth 50bp rate hike in a row, bringing the Official Cash Rate (OCR) to 3.5%. The global picture continues to deteriorate, but the RBNZ clearly sees the domestic inflation situation as being serious enough to warrant continued large rate hikes. We retain our forecast for one further 50bp hike to 4.0% in November, followed by three 25bp hikes in the first three meetings in 2023, bringing the OCR to a peak of 4.75% in May next year. Domestically, the data flow since the August MPS has done nothing to assuage the RBNZ’s concerns about domestic inflation risks. The Q3 Quarterly Survey of Business Opinion showed capacity pressure indicators either still increasing, or falling far too slowly. Next week brings an array of monthly indicators for New Zealand, including September food and rent price data. These will be the final pieces of the puzzle ahead of Q3’s CPI data on 18 October. While recent falls in petrol prices mean a reduction in headline CPI inflation is likely, ongoing strength in food and rent prices highlights that the period of elevated inflation we’re living through is far from over.

 

30 September 2022: RBNZ expected to hike 50bps next week (PDF 660KB)
Next week brings the RBNZ’s October Monetary Policy Review. We anticipate another 50bp hike will be delivered, bringing the Official Cash Rate (OCR) to 3.5%. Back in the August Monetary Policy Statement the RBNZ made it clear that they intended to raise the OCR by 50bps at the October and November meetings, and there have been no significant data surprises that would provide a compelling reason for the RBNZ to diverge from that path. Global interest rate market volatility ratcheted up sharply this week. The first signs of stress emerged when the Bank of England (BoE) confirmed late last week that it would start actively selling bonds to unwind QE. That was followed the next day by a mini-budget that included a whopping GBP161bn of additional fiscal spending and tax cuts. Markets buckled, sending UK 10yr gilt yields soaring from 3.3% to around 4.6%. The BoE initially brushed off the move, saying it was “monitoring developments” and would meet as usual at its next scheduled meeting. But as yields continued to push higher, its hand was forced and the BoE ultimately suspended plans for bond sales and instead said it would buy long end bonds under the auspices of financial stability. In the chaos that ensued, global bond yields corrected sharply lower. But as we go to print, NZ and US bond yields are still higher than they were a week ago, and we remain alert to them rising further over coming months.

 

23 September 2022: Higher OCR required (PDF 560KB)
We’ve changed our OCR call, adding another 75 basis points to our previous expected peak, taking the OCR to 4.75% come mid-2023. That’s two more 50 basis point hikes this year (as before), followed by three 25 basis point “top up” hikes in each of the first three meetings of 2023. There are risks on both sides of our call. Monetary policy acts with long and variable lags, and there absolutely is a plausible scenario where a 4% OCR is all it will take to squeeze households enough to drive inflation lower (eg it just needs a little more time to filter through the mortgage fixing channel). Conversely, if wage inflation remains stronger for longer, the OCR may need to go higher than 4.75%. Our updated OCR call better balances these risks. It has been another volatile week in global interest rate markets, with US bond yields leading the way higher into this week’s Fed decision (which saw a third 75bp hike), only to correct lower in its immediate aftermath, before resuming rising again. The yield on the bellwether US 10yr Treasury is currently at a post-COVID high of 3.7%.

 

16 September 2022: GDP noise turned up to 11 (PDF 596KB)
Q2 GDP was much stronger than expected, but it’s not a momentum story. The data remain plagued by noise related to the closed border, suggesting there will be some payback over the coming summer. We have downgraded our quarterly growth forecasts for the near term, leaving our broader economic outlook unchanged. Looking through the noise, domestic demand is expected to slow on the back of tightening monetary conditions, it’s just a question of how high the OCR needs to go to achieve this. Risks remain skewed towards something higher than 4%. New Zealand’s sharply widening current account deficit came in as expected in Q2, with an unadjusted deficit of -$5.2bn (pushing the annual deficit from 6.8% of GDP to 7.7%). The deteriorating external position shows that too-high CPI inflation isn’t the only headache that’s resulted from too much fiscal and monetary stimulus. While border settings are a big part of the story, over-stimulated domestic demand has also added to the imbalance, pushing up demand for imported goods.

 

9 September 2022: Inflation; too high for too long? (PDF 604KB)
A number of central banks lifted their policy rates this week, including the RBA (50bps), the ECB (75bps) and the Bank of Canada (75bps). Fighting inflation remains the priority, and risks are tilted towards inflation remaining high for longer (despite recent commodity price falls). Q2 GDP data is out next week. We have pencilled in a 0.4% q/q increase, versus Q1’s 0.2% fall. The data are still extremely noisy, and with the economy remaining acutely capacity constrained, the RBNZ is unlikely to view weaker GDP as a sign that they need to hike rates by any less. This week we released a pair of insights looking at how we got to 7.3% inflation, and the outlook from here (ie the journey back to 2%). Risks are firmly tilted towards inflation remaining too high for too long, which would require higher interest rates than currently expected.

 

2 September 2022: Sending hawkish messages (PDF 628KB)
Market moves were dominated by global developments this week, in the wake of Fed Chair Powell’s hawkish speech at the Jackson Hole symposium (last Friday night NZ time), and comments from some ECB officials that they support a 75bp rate rise at next week’s meeting. Data out of the US this week showed there are still almost two job openings for every unemployed person in the US, indicating their labour market remains extremely tight, and supporting Powell’s hawkish message. Domestically, the data flow was reasonably resilient, with activity measures improving in our August Business Outlook survey, filled jobs rising 0.5% m/m in July, and residential consents lifting 5% m/m also in July. At the margin, the data suggests people may be keeping calm and carrying on a little more than the RBNZ would like, given their goal of slowing down the domestic economy to tame surging inflation pressures.

 

26 August 2022: A small tweak to the end of our OCR forecast (PDF 620KB)
We are increasingly seeing signs that high inflation is becoming embedded in wage- and price-setting behaviours in the economy. As such, we’ve removed the OCR cuts we had previously pencilled in for H2 2024. We continue to see the RBNZ hiking the OCR to 4% by year-end, but now see the OCR remaining at that level for the rest of our forecast horizon (which ends in Q4 2024), given the increased persistence of high inflation. Strong inflation is feeding into expectations and wage-setting behaviour, and there is a risk that the neutral OCR has increased. With wages now adjusting rapidly to high inflation, it takes the edge off the debt-servicing burden imposed by higher interest rates. So there is an increasing chance that a higher OCR than expected may be needed to deliver the necessary tightening to get inflation back down. Downside growth risks continue to accumulate, with Q2’s 2.3% decline in retail sales volumes raising the risk of a technical recession in New Zealand. But with a mix of supply and demand factors at play, it remains unclear how disinflationary that would be.

 

19 August 2022: Inflation remains the focus for the RBNZ (PDF 632KB)
The RBNZ released the August Monetary Policy Statement (MPS) this week. Overall it was a hawkish document, with a 50bp OCR hike to 3.0% being delivered, and the RBNZ’s new OCR forecast peaking at 4.1%, 15bps higher than the May MPS projection. Markets are actually pricing policy rate cuts from the RBNZ, the US Federal Reserve, and other central banks over 2023 and beyond, reflecting market concerns about the risk of recession. In this context, it’s important to remember that central banks don’t target GDP growth. They’re focussed on reducing inflation – since low and stable inflation is a prerequisite for sustaining economic growth and low unemployment. How high will the OCR need to go to bring inflation back to the 2% midpoint of the RBNZ’s target range? We’re forecasting 4% (and the RBNZ 4.1%). But with high inflation becoming embedded in wage- and price-setting behaviour, there’s a risk that an even higher OCR could be needed to return inflation to target in an acceptable timeframe.

 

12 August 2022: Not over until it’s over (PDF 680KB)
This week we released our latest Quarterly Economic Outlook. Domestic inflation and wage growth have both intensified in recent months. That should see the RBNZ on track to lift the OCR to 4% by year-end – despite a deteriorating growth outlook for the domestic economy. A rapidly tightening Australian labour market is expected to add further pressure to the Kiwi labour market over the next year. The July REINZ property report showed house prices have now fallen 8.1% from their November 2021 peak. And, we’ve now seen prices decline on an annual basis for the first time since 2011. With the economy forecast to slow significantly in 2023, the housing market is likely to continue softening over the next year. The RBNZ’s August Monetary Policy Statement (MPS) is next week, and another 50bp OCR hike to 3.0% is widely expected. Domestic interest rates have followed global wholesale interest rates lower in recent months. Easing financial conditions are the last thing the Monetary Policy Committee wants to see when core inflation measures currently range from 4.8-6.1%. We expect a hawkish tone in the MPS, sending the message that the battle to bring down surging inflation is far from over.

 

5 August 2022: Absolute strength (PDF 760KB)
Unemployment increased slightly to 3.3% in Q2 (3.2% previously), versus expectations it would fall to a new record low. But 3.3% unemployment is still extremely low, and the labour market remains incredibly tight. That’s reflected in private sector wages, which rose 7.0% y/y – almost catching up to inflation (7.3%). The next major domestic macroeconomic event in New Zealand will be the RBNZ’s August MPS. We’ve seen nothing in the recent inflation and labour market data that will dissuade the RBNZ from delivering another 50bp OCR hike to 3.0%, and we expect the OCR to reach 4% by year-end. The neutral OCR is clearly lifting as the economy inflates (in 2006, with similar household debt/income levels and much lower CPI and wage inflation, the RBNZ's estimate of neutral was low-5%s!). Accordingly, the risk is that 4% may not be the end of it for the OCR, for all that we fully expect momentum to turn soggy by year-end.

 

29 July 2022: Dual concerns (PDF 644KB)
The Q2 Household Living-costs Price Index showed how inflation is impacting different households differently. In a change from normal patterns, the top 20% of households by income have seen the largest increase in living costs as the cost of interest payments surges. In our latest Property Focus earlier this week we took the opportunity to update our house price outlook to account for our higher OCR forecast of 4%. We’re now expecting to see a 15% fall in house prices from peak to trough, versus 12% previously. But uncertainty remains high. Next week brings the labour market report for Q2. We’ve pencilled in a further fall in unemployment to 2.8% (3.2% in Q1), but given the volatility inherent in the data, there’s scope for surprise. However, we expect the overall details of the data will confirm what surveys, timely indicators and anecdotes have already told us – the labour market likely tightened further in Q2 2022.

 

22 July 2022: Inflation in focus (PDF 664KB)
We learned this week that annual CPI inflation in New Zealand hit 7.3% in Q2 – higher than the RBNZ’s May MPS forecast of 7.0%, and our own forecast of 7.1%. The real news in the CPI data was the surge in domestic and core inflation measures. Annual non-tradables inflation hit a new record high of 6.3%, and core inflation indicators range between 4.8% and 6.1%. It’s a stronger and more persistent domestic inflation pulse than expected, and prompted us to revise up our OCR forecast. We’re now expecting the OCR to peak at 4% by year-end (versus 3.5% previously). We have updated our inflation forecasts in the wake of Q2’s data. While it’s looking like headline inflation may have peaked in Q2, inflation is likely to remain very high for quite some time. We are forecasting inflation will only drop below 3% at the end of next year. There’s still work to do for the RBNZ.

 

15 July 2022: Riding global waves (PDF 732KB)
It may have been an OCR decision week this week, but global moves dominated market action. US CPI inflation came in at another multi-decade high of 9.1% y/y, while the Bank of Canada surprised most economists by hiking their policy rate by a full percentage point (100bps). Here in New Zealand, the RBNZ hiked the OCR by 50bps for the third time in a row. The move was widely anticipated – and the RBNZ struck a very similar tone to the May MPS. Next week we get the numbers for Q2 CPI inflation. We’re expecting annual CPI inflation lifted to 7.1% y/y (versus 6.9% in Q1). It’s unlikely to deter the RBNZ from a fourth 50bp rate hike in August – and any upside surprises only increase the odds of further 50bp hikes beyond August.

 

8 July 2022: Inflation makes 50bps a shoo-in (PDF 660KB)
Data continue to show inflation and labour market pressures remaining intense, while downside growth risks are building. The QSBO for Q2 highlighted that labour remains a critical constraint for many firms – and expected costs and prices are far too high. With inflation surging and interest rates on the rise, it’s no surprise that consumers are pessimistic – even in the face of record low unemployment. Our latest insight takes a deep dive into consumer confidence, why it’s so low, and what it means for the economic outlook. Next week brings the RBNZ’s July Monetary Policy Review. A third 50bp OCR hike to 2.5% is widely anticipated. With inflation pressures showing no signs of easing, the RBNZ need to carry on with aggressive rate hikes – for now at least.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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