Business expectations hold firm
The ANZ Business Survey continues to portray a positive economic outlook. Forward-looking indicators for growth, investment and employment were little changed in July and remain firmly optimistic. This buoyancy is a far cry from current conditions and is yet to show up meaningfully in actual economic outcomes.
BNZ & SEEK Employment Report: No joy in June
The trend in job ads has resumed its downward slide, declining another 1.2% in June. Labour demand has weakened further. After a year of relative stability, ads are again on a downwards trajectory.
Inflation to test the top of RBNZ target band
Today’s June Selected Price Indexes support our view that Q2 CPI inflation will print above the RBNZ’s MPS forecasts and sets up a further nudge higher in Q3.
Ongoing Contraction
New Zealand’s services sector displayed contraction for a fifth consecutive month, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for June was 47.3 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). Although this was 3.2 points up from May, it was still well below the average of 52.9 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that while the June result saw most of the sub-index results display a higher value than the previous month, it continued the theme of ongoing contraction in a sector that has only seen one month of minimal expansion over a 16-month period. For the sub-index results, the key results for Activity/Sales (44.5) and New Orders/Business (48.8) were still unable to show any expansion. Stocks/Inventories (50.6) did show expansion for the first time since November 2024, although Employment (47.2) remained firmly in contraction, which has now been the case for 19 months.
The proportion of negative comments for June (66.2%) was up from May (65.6%) and April (61.8%). Service sector businesses face weak consumer confidence, high living costs and economic uncertainty. Reduced spending, inflation, rising interest rates, and public sector cutbacks are key pressures, with winter and fewer tourists further dampening demand.
BNZ's Senior Economist Doug Steel said that "while the headline PSI measure did lift from 44.1 to 47.3, every month it remains below 50 suggests service sector conditions are getting worse not better. The timeline for New Zealand’s long-awaited economic recovery just keeps getting pushed further and further out".
Still in the red
New Zealand’s manufacturing sector continued to show contraction during June, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for June was 48.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). While this was up from 47.4 in May, it was not enough to see the sector climb out of contraction. The survey was also well below the average of 52.5 since it began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the positive start to the year is now being undone somewhat by manufacturers that are currently struggling to see expansion in most elements of their business.
“Four of the five main sub-index values were in decline. New Orders (51.2) improved the most from May to June to show some optimism for the months ahead, while Production (48.6) inched closer to the no-change mark of 50. However, Finished Stocks (46.9) dipped to its lowest value since December 2024 after five consecutive months of expansion, while Employment (47.9) remains in contraction after a sizeable drop in activity the month before."
The proportion of negative comments from respondents for June (65.5%) was almost identical to May (64.5%). Comments indicate that manufacturers report a major slowdown due to weak consumer demand, high living costs, and economic uncertainty. Falling construction activity, rising input costs, and global instability are reducing orders and cashflow, while supply chain issues add further pressure.
BNZ’s Senior Economist Doug Steel said that “looking across the PMI sub-indices, they all remain well below their historical averages. Despite talk of an economic recovery, conditions are still very tough".
Households under pressure
Stats NZ produces a quarterly update on the income, savings, assets and liabilities of the household sector. These releases are not followed that closely but we believe they contain a wealth of information. Granted the data are still a tad experimental in nature so should be treated with a modicum of caution especially with regard to levels. But we still think the direction of change provides great insight.
QSBO, and our RBNZ MPR Preview
We’ve been waiting for today’s QSBO to decide whether or not to maintain our view that the RBNZ will lower its cash rate at its July 9 meeting. To be completely honest all the QSBO has done is further muddy the waters. In the end, though, we have reached the conclusion that it will be hard for the RBNZ to cut at this meeting given that post the MPS it suggested market pricing would be a key driver of its decision. In some ways the RBNZ is in a comfortable spot. The market is not looking for a cut in July but still thinks another rate reduction is a done deal with the chance of more. The RBNZ thus will feel no need to rock the boat.
Job ads 50% below peak
New job ads dropped 2.1% m/m in May. The latest fall follows two consecutive monthly increases and is a timely reminder that the labour market is still soft. Taking a step back from month-to-month volatility, ads have been broadly flat for nearly a year now, following very large prior declines.
New Zealand at a Glance
In theory the New Zealand economy should be on a sustainable upward path. But a weak starting point coupled with massive geopolitical uncertainty and a modicum of domestic political concerns is adversely impacting investment and hiring activity. In this environment the labour market will remain relatively weak for some time. We still think the positives will eventually outweigh the negatives but believe another nudge lower in interest rates would be beneficial even if short-term inflationary pressures look problematic. Even with lower rates it appears that medium-term inflation will be contained.
Growth Confirmed, Eyes Ahead
At one level, whatever today’s GDP data reported for the first quarter of the year it was always going to come with a caveat that it predates a lot of material change.
Recent developments include the global trade upheaval that US President Trump’s ‘Liberation Day’ kicked off and the associated rapid elevation of uncertainty; escalating geopolitical tension; and a material softening in timely domestic economic indicators for Q2.
Current Account Rapidly Improving
The external accounts continue to improve, with the current account deficit narrowing to 5.7% of GDP in the year to March 2025. This is well below its peak of 9.2% in December 2022, largely due to high commodity prices, strong primary production and the recovery in international tourism. We expect the deficit to continue narrowing towards 4% over the next year.
Annual CPI inflation to clear 3.0%?
May month selected price indices are unequivocally hawkish. On balance the monthly data has turned out to be more inflationary than we had expected. This has caused us to revise upwards our Q2 CPI pick to 0.8%, from 0.6% previously. Importantly, this is well above the RBNZ’s 0.5% estimate for the quarter.
Service with a slump
New Zealand’s services sector continued to show further decline in activity during May, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for May was 44.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 4.1 points from April and well below the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that after a return to small expansion in January, the sector has continually contracted month-on-month since then, reaching its lowest level of activity since June 2024. For the sub-index results, the key results for Activity/Sales (40.1) and New Orders/Business (43.2) were also the lowest since June 2024. Employment (47.2) fell back into further contraction, while Deliveries (45.7) remained unchanged from the previous month.
The proportion of negative comments for May (65.6%) was up from April (61.8%) and March (56.7%). Many businesses noted reduced demand and falling revenues due to rising costs, economic uncertainty and low consumer confidence. Comments noted customers spending less, delaying decisions, and responding cautiously to inflation, interest rates, and broader market instability.
BNZ's Senior Economist Doug Steel said that "the fall in the PSI follows the sharp decline in the Performance of Manufacturing Index (PMI) from 53.3 to 47.5. Together, they are consistent with the economy returning to recession. We’re a long way from forecasting this, but the data are a reminder of just how vulnerable the economy currently is".
Back in the red
New Zealand’s manufacturing sector fell back into contraction during May, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for May was 47.5 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 53.3 in April and a return to contraction after four consecutive months of expansion. The survey was also well below the average of 52.5 since it began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the May result was disappointing to see given the sector had appeared to have turned a
corner at the start of 2025 following a tough 2023-2024 period of contraction.
“Four of the five main sub-index values were in decline, with New Orders (45.3) showing the strongest level of contraction for May. Following healthy expansion from February-April, Employment (45.7) decreased 8.9 points to be at its lowest level of activity since July 2024".
The return to contraction also saw the proportion of negative comments from respondents increase to 64.5%, compared with 58% in April and 57.5% in March. Comments indicate that manufacturers are reporting a clear return to decline, driven by falling demand, weak orders, and low business confidence. Rising costs, economic uncertainty, and reduced consumer spending are compounding pressures, while forward orders and investment remain stalled.
BNZ’s Senior Economist Doug Steel said that “the New Zealand economy can claw its way forward over the course of 2025, but the PMI is yet another indicator that suggests an increased risk that the bounce in GDP reported for Q4, 2024 and Q1, 2025 could come to a grinding halt”.
Retail outlook on a knife edge
When economic cycles turn they invariably develop a self-fulfilling momentum that generates shifts in activity much greater than inherently conservative forecasters might contemplate. Until Master Trump arrived on the scene, we were developing growing confidence that we were at the start of a sustainable economic recovery. Now we are less certain.
ANZ Survey Surprisingly Robust?
With high frequency data front of mind for the Reserve Bank, today’s ANZ business opinion survey was front of mind for us.
At first glance the figures rolling across the screens looked simply awful. Business confidence down, activity outlook down, exports down, investment intentions down, residential construction down, commercial construction pummelled, employment down, profits pummelled.
RBNZ: Delivers A Hawkish Cut
In its April Monetary Policy Review, the Reserve Bank Monetary Policy Committee said “As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate. Future policy decisions will be determined by the outlook for inflationary pressure over the medium term”. The Bank didn’t repeat these words in its May policy assessment but it remains the centrepiece of its thinking.
Retail Recovery From Weak Base
Retail sales volumes increased 0.8% in the March 2025 quarter. This was well above both our forecasts and market expectations for 0.0%. Combined with +1.0% in the previous quarter, it suggests retail sales volumes are growing at an annualised pace of 3.6%.
Signs of Stabilisation
New jobs ads increased 1.1% m/m in April. This is the second consecutive month they’ve lifted, which last occurred back in August 2022. While it is still too early to assume we’re at the beginning of an upturn, there are clear signs labour demand is at least stabilising. Nonetheless, any improvement would be coming off a very weak base with job ads still 9.6% below year earlier levels, and 48% below their mid-2022 peak.
NZ Budget 2025
Key forecasts
The Government expects a balanced budget in the year ended June 2029.
Deficit is projected to rise to 2.6% of GDP in fiscal 2026 from 2.3% this year.
Net core crown debt progressively edges higher from a current 42.7% of GDP to a peak of 46.0% of GDP in the June year 2028.
The fiscal forecasts are based on Treasury’s expectation that following a 0.8% contraction in GDP in the June year 2025 growth will bounce to average 2.9% per annum over the next four years.
Declining fortunes
New Zealand’s services sector showed further decline in activity during April, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for April was 48.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 0.4 points from March and well below the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said the sector has fallen back into a pattern of mild contraction. For the sub-index results, Activity/Sales (47.3) remained the same as March, although New Orders/Business (50.9) continued to buck the trend with its highest value since February 2024. Employment (48.2) fell back into contraction, while Deliveries (45.8) recorded its lowest level of activity since September 2024.
The proportion of negative comments for April (61.8%) was up from March (56.7%) and February (57.8%). Businesses noted being negatively impacted by a combination of weak consumer demand, high cost of living and interest rates, economic and geopolitical uncertainty, seasonal slowdowns and low business confidence.
BNZ's Senior Economist Doug Steel said that "for all the commentary around the economic recovery, the PSI is a good reminder that current conditions are extremely challenging. New Zealand’s PSI remains weaker than all our key trading partners. At 48.5, it’s consistent with a service sector still moving backwards".
Uptick in expansion
New Zealand’s manufacturing sector showed an uptick in expansion during April, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for April was 53.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 53.2 in March and the fourth month in a row showing expansion. The survey was also above the average of 52.5 since it began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the April result continued a consistent run of expansion for the sector during last three months.
“All of the sub-index values were in expansion during April. The key sub-index results for Production (53.8) and New Orders (51.4) were both in positive territory, while Employment (55.0) displayed its highest level of expansion since July 2021".
Despite the improvement in expansion during April, the proportion of negative comments from respondents increased slightly to 58% in April, compared with 57.5% in March, but still down from 59.5% in February. Negative comments during April saw some manufacturers facing a slowdown driven by high costs, global and local economic uncertainty. In terms of positive comments, other manufacturers reported modest growth, driven by rising demand, infrastructure projects, and strong niche markets, despite lingering caution from inflation and supply challenges.
BNZ’s Senior Economist Doug Steel said that “activity is not surging, but a manufacturing recovery seems to be underway with the PMI having improved substantially from its low of 41.4 last June. That said, there remain questions around how sustainable it is given uncertainty stemming from offshore”.
Prices Volatile But Upward Undercurrent
oday’s April Selected Price Indexes displayed a heap of volatility, as is often the case in these monthly indicators. Some caution is warranted before jumping to conclusions on what they collectively mean for Q2 CPI.
Budget 2025 Preview
At the Half-Year Economic and Fiscal Update, a small fiscal surplus was projected in the year to June 2029. Indications from Finance Minister Willis are that Budget 2025 will keep to this target. But the path back to surplus is likely to remain extremely challenging. It is being threatened by downgrades to economic growth forecasts and subsequently the Government’s ability to raise revenue.
Labour Market Loose
Today’s Q1 labour market statistics were always going to feel like old news from a market’s perspective, given the big changes to the global trade and growth outlook through April. But they do set the starting point for the labour market. It is loose and wage inflation is easing.