Uptick in Activity
New Zealand’s services sector experienced a second consecutive improvement in expansion levels, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Maximum Sustainable Employment Breached?
We’ve been saying it for some time now. How can the RBNZ seriously contemplate cutting its cash rate (from its present record low) when the economy is in a position of maximum sustainable employment? That’s the view we had when the unemployment rate was 4.4%. Following today’s labour market data it now sits at 3.9%.
NZ Construction Outlook
We remain hopeful the current growth phase in construction can be extended for some time. The expansion is likely to be dominated by residential building, in particular, multi-unit dwellings. Nonetheless, the headwinds are growing and capacity constraints are becoming more binding both of which will limit the pace of the future expansion. And for those trying to make money in the sector, frustration will grow further as staffing issues become more problematic and cost pressures increase.
Disconcerting Undertones
There was enough in today’s data to support our view that the New Zealand economy will hang together despite the headwinds that it is facing. But there is gathering evidence that those headwinds are blowing relatively strongly and, in some cases, from unexpected directions. This will leave us pondering the prospect that the wheels might fall off, particularly were we to be hit by either some form of external shock or a very dry summer. Nonetheless, now is not the time for the RBNZ to react to those risks by cutting interest rates, particularly when pricing data suggest a diametrically opposite course of action.
CPI Target Achieved
Our central forecasts still have rate increases penciled in for the second half of next year. We won’t thump the table on this as any number of things could upset the apple cart between now and then. Nonetheless, we will continue to push the message that the hurdle for a rate cut is much higher than many care to believe, and those who are quick to dismiss there being any chance of a rate hike do so at their peril.
Soft Service
New Zealand’s services sector experienced a slight increase in expansion during September, although still below its long run average, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Hanging On
New Zealand’s manufacturing sector remained within a tight and low level of expansion for September, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
Robertson Rightly Plays Down Fiscal Fillips
The Half-year Economic and Fiscal Update (HYEFU). This is due to be published around mid-December. To our mind, it’s still shaping up to be a difficult balancing act, conscious of the fact the 2017/18 accounts were not quite as buffed as they looked.
Meat and Milk Volumes Influencing Prices
It’s a good time of year to think about the meat and dairy export volume outlook for the coming 12 months, as the new season gets going. What is happening on farm now will have a large influence on the quantity sold ahead. Meantime, we nudge our 2018/19 milk price forecast down to $6.30 (from $6.60) having discussed the downside risks for some time.
QSBO Highlights Rising Cost Pressures
Today’s Quarterly Survey of Business Opinion was a lot better than it could have been. Fears were building that business confidence may have been on an unstoppable slide ultimately resulting in much lower GDP growth, a weaker NZD and a cut in the cash rate. Instead, the data seem to suggest that the trough in business expectations might be behind us.
RBNZ Keeps Its Options Open on the OCR
While the RBNZ has retained its low and steady view on the cash rate, right out to 2020, practically much still depends on where GDP growth, and CPI inflation, goes over the coming year. Also bear in mind the relevance of labour market data to OCR judgements.
NZ Confidence Consistent With National Income Growth
We are on record as saying that we do not believe the economy will slump in the manner that business sentiment has been suggesting. We have also said that inflationary pressures are likely to be sustained even as growth moderates. On this basis, you would have thought that we would have jumped at today’s lift in business confidence and pricing intentions as a validation of our view. To an extent we do but, we have to say, that, at the same time, we are astounded by some of the exaggerated commentary suggesting that rebounding business confidence would remove concerns about the economy.
GDP Strengthens Our Case Against OCR Easing
It is really important to note that the RBNZ stressed that the main reason it became more dovish when it released its August MPS was that GDP had surprised on the downside (to the tune of 0.6%), which saw the Bank’s excess demand measure (the output gap) reduced by the same amount. Now, GDP has surprised by an equivalent amount to the other side. So, in theory at least, the Bank will need to revise up its estimate of the output gap quite a bit too.
Economy Watch - External Imbalance Widens Further
• Current account deficit rises to 3.3% of GDP
• Deterioration in net export volumes to blame
• Terms of trade decline will add more pressure
• NZD negative at the margin
• Nothing in the data to dent our Q2 GDP forecast
New Zealand’s external accounts have continued their trend deterioration, which began in 2017. Back in December 2016 the current account deficit hit a low of 2.2% of GDP. That has now climbed to 3.3% of GDP and, by our expectation, will be through 4.0% by mid 2019.
Lacking Service
New Zealand’s services sector continued to exhibit lower levels of expansion during August, according to the BNZ - BusinessNZ Performance of Services Index (PSI).