Budget Battles Inflation
OBEGAL returns to surplus, of 0.6% of GDP, in 2024/25. The deficit peaks at 5.2% of GDP in the June year 2022. A deficit of 1.7% is expected for the June year 2023.
Net core crown debt, measured the new way, is expected to rise to a peak of 19.9% in June 2024. Its trough was 1.8% in 2019. The impact of Covid is clear. Under the “old” measure net core crown debt peaks at 41.2% well below the Government’s new peak allowance of 50%.
RBNZ Monetary Policy Preview
The Reserve Bank’s task is clear. At its most basic level it has to get current annual inflation of around 7.0% down to 2.0% and it will require the unemployment rate, now 3.2%, to rise to around 4.5% to meet its maximum sustainable employment objective.
Evening out
Activity levels in New Zealand’s services sector during April were almost identical to March, according to the BNZ - BusinessNZ Performance of Services Index
(PSI).
The PSI for April was 51.4 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 0.1 points from March, and still below the long-term average of 53.6 for the survey.
BusinessNZ chief executive Kirk Hope said that while the April result remained in positive territory, the fickle nature of some of the key sub-index values means a consistent trend towards expansion at traditional levels still seems some way off.
“The two key sub-indexes of New Orders/Business (53.6) and Activity/Sales (52.7) both experienced a drop in expansion levels for April. While Employment (51.2) saw its first expansionary result since November 2021, Supplier Deliveries (40.1) remains entrenched in contraction.”
Despite a similar overall result to the previous month, the proportion of negative comments increased from 57.5% in March to 61.9% in April.
BNZ Senior Economist Doug Steel said that “for large parts of the service sector that have been through the ringer over recent times, we suspect any result above breakeven would be welcomed. But, on the other hand, April’s result also looks somewhat disappointing in the context of easing COVID restrictions (from Red to Orange) halfway through the month.”
Slow Grind
New Zealand’s manufacturing sector experienced a lower level of expansion during April, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for April was 51.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 2.5 points lower than March, and the lowest monthly result since August 2021.
BusinessNZ’s Director, Advocacy Catherine Beard said that after steady expansionary results over recent months, the April result highlighted the fickle nature of what manufacturers are currently experiencing.
“In terms of the main sub-indices, New Orders (56.0) continued its positive
stance, although Production (49.1) fell back into contraction. Employment (49.8) also contracted after two months of expansion, while Deliveries experienced its first level of contraction since November 2021.”
Manufacturers were in a more negative mindset during April, with the proportion of negative comments increasing from 64.2% in March to 70.3% in April. While COVID features strongly in discussion, skill/labour shortages and supply chain disruptions are also prevalent.
BNZ Senior Economist, Craig Ebert stated that “supply problems certainly featured extensively in respondents’ comments, including inferences that COVID, and related absenteeism, remains a big issue, even with recorded case numbers having peaked back in March. This provides valuable context to the negativity in the PMI’s jobs index.”
Recession Bells Are Tolling
The chances of the New Zealand economy moving into recession are rising by the day. New Zealand’s economic “imbalances” continue to be exposed at a time when the global economy is increasingly coming under duress. The policy measures taken to “fix” these issues are getting more and more aggressive. The chance of a soft landing is fading.
Still On The Up
If the 2.4% increase in March’s job advertising was about getting past the worst of Omicron’s spike, the 2.6% gain in April was an indication there is broader-based momentum at play now. And, yes, this marks a novel record high. Then again, this is consistent with employment intentions, from various business surveys, being solid, even with the recent economic challenges and the official news of rising wage inflation.
Very Tight Labour Market Fanning Wage Inflation
If there was a surprise in this morning’s Q1 labour market data, it was that they weren’t messed around by Omicron’s ferocious surge in the quarter. As they turned out, the results were very much in line with expectations, and widely drawn impressions, that New Zealand’s labour market remains exceptionally tight, and increasingly inflationary.
When It All Starts to Get Too Much
We might have expected some better confidence and activity readings to be poking through in today’s ANZ business survey, after the initial shock and awe from Omicron’s skyrocket back in February. It didn’t really occur, with net confidence essentially unchanged at -42 in April and own-activity expectations up to just +8, from +3 in March. Still, the survey’s inflation gauges remained broadly extreme.
Small Mercies in Q1’s High Inflation
Today’s headline Q1 CPI wasn’t quite as inflationary as anticipated. However, it’s far too early to read this as the calculus starting to settle down, from the latest heights that inflation has scaled. And certainly not in a core sense. Still, the result suggests the RBNZ will feel it can at least take stock, as it gauges the extent to which it will need to barrel on with its tightening cycle, in order to bring inflation right back down.
In the black
After seven months in contraction, activity levels in New Zealand’s services sector saw expansion in March, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for March was 51.6 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 2.7 points from February, but still below the long-term average of 53.6 for the survey.
BusinessNZ chief executive Kirk Hope said that after a difficult period for many businesses in the services sector, a return to overall expansion was welcomed. However, the underlying results show there is still some way to go to return to what many would consider business as usual.
“The two key sub-indexes of New Orders/Business (60.1) and Activity/Sales (53.8) both continued their upwards momentum. However, Employment (48.5) and Supplier Deliveries (40.1) remain in contraction. In addition, the proportion of negative comments stands at 57.5%, although this is down from 61.5% in February.”
BNZ Senior Economist Craig Ebert said that “despite some horribly weak components, the PSI supported the idea that GDP is on track to recover in Q2, after a flat-to-negative performance in Q1.”
Pros and Cons
New Zealand’s manufacturing sector saw another, albeit slight, improvement in its level of expansion, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for March was 53.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 0.2 points higher than February, and above the long-term average of 53.1 for the survey.
BusinessNZ’s Director, Advocacy Catherine Beard said that the March result was another encouraging step towards getting the sector back on track.
“In terms of the main sub-indices, New Orders (61.0) continued its healthy momentum upwards, although Production (50.9) did fall back to its level of expansion experienced in January. Employment (52.4) rose to its highest level since September 2021, while Finished Stocks (53.5) also picked up to its highest result since October 2021.”
Comments from manufacturers were still firmly in negative territory (64.2%), although down from 69.9% in February. Unsurprisingly, COVID dominates discussion, with supply chain disruptions one of the key outcomes.
BNZ Senior Economist, Doug Steel stated that “Omicron’s impact may not be as harsh as the first 2020 COVID lockdown or last year’s Delta lockdown, but it’s there. Production has struggled, with the index slipping to 50.9 in March and a bit further below its long-term average.”
A Dovish Hike
The world continues to get more bizarre by the day. We had never contemplated using the phrase a “dovish-hike” to describe a 50 basis points rate increase (the largest rate hike in 22 years!). But that is exactly what appears to be the case today.
Squeezed into submission!
Inflationary pressures are high and rising, the labour market is extremely tight, supply issues are horrendous, profits are under pressure, growth is getting thumped by all of the above (and Omicron) and confidence is shattered.
Looking Up
Job advertising kept increasing in March, to a fresh record high. This is fundamentally encouraging, given the peak in Omicron cases that transpired during the month. Businesses, it would seem, are thinking it through, and thinking ahead.
RBNZ MPR Preview
The cash rate is going up and it will probably continue doing so until it’s well through neutral. This much we can be relatively sure of. What is less sure is the what the Reserve Bank should, or will, do at next Wednesday’s Monetary Policy Review.
Confidence Lifts Off Its Lows
Today’s March ANZ business survey was less downbeat than February’s edition. Meanwhile, a hefty bounce in employment intentions and even more pressing inflation indicators reinforce the need for the RBNZ to press on with lifting the Official Cash Rate (OCR).
GDP To Get Bumpy (But No Less Inflationary?)
Today’s Q4 GDP report seems as dated as fish and chip paper. Especially now, with the economy facing into the severe disruption that Omicron’s rapid spread through the community is causing. However, that’s not to say the Q4 results are unimportant.
And Bigger It Gets
New Zealand’s annual current account deficit has exploded over the past 12 months. Today’s figures for calendar 2021 show a deficit equivalent to 5.8% of GDP. In 2020, the annual deficit was a mere 0.8% of GDP. That is a very big change in a short space of time. The deficit is now the largest it has been since 2009.
Difficult times
Activity levels in New Zealand’s services sector saw a continuation of contraction for the second month of 2022, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for February was 48.6 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). While this was up 2.6 points from January, it was still well down on the long-term average of 53.6 for the survey.
BusinessNZ chief executive Kirk Hope said that the ongoing trend of contraction was expected given the current restrictions and interference many businesses in the services sector are experiencing at present.
“It was encouraging to see the key sub-indexes of New Orders/Business (53.6) and Activity/Sales (50.7) both return to positive territory. However, Employment (45.0) dropped to its lowest result since May 2020, while Supplier Deliveries (34.4) was at its lowest point since August 2021.”
BNZ Senior Economist Doug Steel said that “February marks the PSI’s seventh consecutive month below the breakeven 50 mark. Pain is accumulating. While there were some overs and unders in the components, all remain below their respective long-term averages.”
Pros and cons
New Zealand’s manufacturing sector saw a lift in the level of expansion for February, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for February was 53.6 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 1.3 points higher than January, and above the long-term average of 53.1 for the survey.
BusinessNZ’s Director, Advocacy Catherine Beard said that there were certainly some positive signs with the February result. However, this needed to be balanced with the wider spread of Omicron potentially affecting business plans in the months ahead, as well as comments from manufacturers still firmly in negative territory (69.9%).
“In terms of the main sub-indices, New Orders (58.2) increased to its highest level since July 2021, while Production (52.1) did experience a slight improvement, although still at its second lowest value since September 2021. Employment (51.7) rose back into expansion, while Finished Stocks (50.0) dropped to its lowest result since November 2021.”
BNZ Senior Economist, Craig Ebert stated that “underlying unease will certainly be piqued by the sustained high COVID case numbers as we go into March. The next PMI result may also see fallout from the Russia/Ukraine conflict, whose global impacts will be felt far and wide.”
Holding Up Around Record High
There was a strong sense of resilience in February’s job advertising with SEEK. Not only did numbers hold very close to the record high they achieved in January, but they did so in the face of the parabolic rise in COVID-19 community case numbers during February. This could reflect businesses wanting and/or needing to take on more staff, as a buffer to the absenteeism that Omicron’s spread brings. However, the heights in advertising also suggest firms are taking a view on the labour market out past the near-term impacts of the virus.
Retail Sales Pulled Every Which Way
There was always going to be a big bounce in today’s Q4 retail sales, as restrictions were progressively relaxed from the severity of a Delta-driven-lockdown during Q3. Stats NZ measured sales volumes up 8.6% on a seasonally adjusted basis in the quarter. More than the market (or we) expected, although still not quite enough to get back to prior levels before Q3’s 8.2% sales slump. Sales volumes in Q4 were 4.4% higher than a year earlier.
RBNZ Turns More Hawkish
The Reserve Bank appears to be setting the market up for a 50 basis point increase in its cash rate at the May 2022 MPS. It clearly wasn’t ready to pull the trigger now given the uncertainties that abound. But “the committee also affirmed that it was willing to move the OCR in larger increments if required over coming quarters”. With Omicron exploding across New Zealand, we doubt the RBNZ will have enough certainty to become more aggressive at the April OCR review. But with the full suite of data available, more clarity about Omicron’s impacts (which should have peaked), and it being an MPS, makes May a very live meeting for a 50 point hike.