Solid, But Cracks Appearing
A focal point for us in today’s April ANZ business survey was to see if the recent global trade angst has had any impact on NZ firm’s expectations for the way ahead. In short, the headlines looked good but there are clear worries in the details.
At face value, there didn’t look to be much change. The headline figures still look robust with business optimistic.
Job ads still subdued
New job ads remain subdued. They have been relatively stable over the last 10 months, albeit at a very weak level. Job ads increased 0.4% m/m in March but are still at levels last seen in 2013 (excluding Covid). Since 2013, the total labour force has grown by nearly 30%. This means far more people competing for an already scarce number of openings.
Inflation Accelerates
Given the mayhem occurring offshore and the uncertainty it puts around the economic outlook, local data continue to command less than usual market interest.
It was no surprise to us that inflation came in a touch above market and RBNZ expectations. And, equally, it was no surprise to us that there was very little market reaction to the news. There are simply much bigger issues circulating. But we shouldn’t ignore current inflation readings altogether. The starting point for inflation is worth noting.
A 0.9% quarter lift in Q1 CPI saw annual inflation lift to 2.5%, from 2.2% in Q4. This matched our expectations but was a tick higher than both the market and RBNZ picks.
Today’s figures confirm our view that annual inflation is creeping higher, and we think that will extend a bit further in the near term, before easing next year.
Further Price Pressure Revealed
Today’s Selected Price Indexes support our view that annual inflation will push higher in Q1, from Q4’s 2.2%. The focus of today’s Selected Price Indexes for March was to see if they collectively altered estimates for Thursday’s Q1 CPI. In short, they did, at the margin.
Continued softness
New Zealand’s services sector continued to show slight contraction during March, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for March was 49.1 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 0.1 points from February but still well below the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that after a brief lift into minor expansion during January, the PSI now lies below the no change mark. For the sub-index results, Activity/Sales (47.4) fell a further 1.7 points, although New Orders/Business (50.8) recovered to record its highest value since February 2024. In addition, Employment (50.2) recorded its highest value since November 2023, ending 15 months of consecutive contraction.
The proportion of negative comments for March (56.7%) was down from February (57.8%) and January (61.9%). Businesses outlined reduced activity driven by economic uncertainty, high interest rates, inflation, and weak consumer and client confidence. Added pressures included global tariffs, rising costs and seasonal or weather-related downturns.
BNZ's Senior Economist Doug Steel said that "combing together the PSI and the Performance of Manufacturing Index (PMI), the Composite Index (PCI) suggests a modest economic recovery. The extent of growth implied by our indicator has been dampened by the softer PSI readings".
Holding its own
New Zealand’s manufacturing sector continued to show expansion for a third consecutive month, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for March was 53.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 54.1 in February, although still above the average of 52.5 for the survey since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the March result represented a full quarter of expansion for a sector that has experienced tough times over 2023 and 2024.
“The sub-index values were mostly in expansion during March. The key sub-index result for Production (54.2) was at its highest result since December 2021, although New Orders (49.6) returned to slight contraction. Employment (54.7) continued to lift with expansion levels at its highest since July 2021, while Finished Stocks (56.3) was at its highest since December 2021".
The proportion of negative comments from respondents stood at 57.5% in March, compared with 59.5% in February and 57.7% in January. Negative comments during March continued to see a number of manufacturers face a tough economic environment, with persistent weak demand, fewer new orders, and ongoing uncertainty across domestic and export markets.
BNZ’s Senior Economist Doug Steel said that “the PMI supports the notion that manufacturing GDP has increased in early 2025. The open question is what lies ahead given recent extreme volatility on global markets following rapidly evolving US-driven trade policy changes. Risks to the global and NZ growth outlook are downward”.
RBNZ more dovish
Who’d want to be a central banker making a decision today? The pessimist could easily conclude that the tariff war will have much greater negative implications for the global economy than currently understood and that central banks should ease very aggressively as soon as possible. Conversely, it could be argued that supply driven inflationary pressures counsel tighter monetary conditions irrespective of the growth implications. After all, the control of inflation, not growth, is the number one objective of the central banking community.
QSBO Suggests Almost Zero Inflation
At one level, whatever today’s Quarterly Survey of Business Opinion (QSBO) reported it was going to come with a caveat that it predates the recent financial market carnage set off by a major policy shift in the US. But it does outline the state of play before that. All responses came in by the end of March, ahead of President Trump’s ‘Liberation Day’.
Trump’s Terrifying Tariffs!
The actions of one President Donald Trump simply beggar belief. In a matter of days one man has almost single-handedly knocked the world economy off its pedestal. Disruptors are a necessary part of both economic and social evolution. They are invaluable at leading change when society is stuck in the status quo. But what we are witnessing right now is simply something else!
April MPR Preview
“If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025”. These were the final words of the policy assessment contained in the February Monetary Policy Statement (MPS). In our opinion, the expected evolution has been sufficiently met. The Reserve Bank should cut its cash rate 25 basis points to 3.5% at the April 9 Monetary Policy Review (MPR). And the parting words of the February MPS should be repeated leaving the door wide open to further 25 point cuts in May and July.
Job ads slip in February
Job ads declined 1.8% m/m in February, acting as a reality check after their 4.0% lift in January. Job ads are down 16.8% compared to a year ago. The labour market is still deteriorating, albeit the pace of decline is slowing. The Prime Minister recently noted the areas of the economy which he expects to support growth. We take a brief look at job ads in three of these sectors below.
Recovery begins
The NZ economy finished an abysmal 2024 with a lift in the final quarter. That was the main message from today’s Q4 GDP figures.
GDP grew 0.7% in the final quarter of last year. That was much stronger than expected. The market consensus was looking for 0.4%, we had 0.2%, and the RBNZ had 0.3%.
Confidence shattered, external accounts not so
Today’s economics note was meant to be all about the positive aspects of a rapidly reducing current account deficit. But any positive thoughts about our economy have been completely drowned by the release, this morning, of Westpac’s Consumer Confidence reading, which was simply awful.
Ups and downs
New Zealand’s services sector slipped back into contraction during February, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for February was 49.1 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 1.3 points from January and further away from the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that unlike its sister survey in the manufacturing space that kicked on in terms of expansion during February, the PSI reverted back to what the services sector had experienced from March to December. For the sub-index results, Activity/Sales (49.2) fell 4.6 points after displaying the highest sub-index value for the previous month. New Orders/Business (49.4) slipped back to the same level of activity that was seen in December, although Employment (48.9) did display its highest value since August, albeit still in contraction.
Despite a return to contraction, the proportion of negative comments for February (57.8%) was down from January (61.9%), although still up from 57.5% in December and 53.6% in November. The overall tough economic climate remained the key observation from comments made.
BNZ's Senior Economist Doug Steel said that "while one might have hoped that the PSI would move higher again, we know that economic turning points can be messy. The brief foray above 50 in January remains the only month in the last year the PSI hasn’t been in contraction".
Fuel Prices Sticky
Weighting together the range of selected prices released this morning from Stats NZ shows their annual inflation pulled back to 1.6% in February, from 2.6% in January.
On the face of it, this looks encouraging for further easing in overall CPI annual inflation. However, we do not believe this to be the case. Prior to today’s data we thought annual CPI inflation would push higher over coming quarters including in Q1. Today’s data adds to the case.
Lift off
New Zealand’s manufacturing sector displayed its highest value for expansion since August 2022, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for February 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 51.7 in January and the highest level of expansion since August 2022. The February result is also above the average of 52.5 for the survey since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the February result was a welcome sight to see with the result building on the return to expansion in January.
“All sub-index values were again in expansion during February. The key sub-index results for both Production (52.4) and New Orders (51.5) were both the highest values recorded since August 2022. Employment (54.0) rose a further 3.2 points from January and at its highest value since September 2021. In addition, both Finished Stocks (54.1) and Deliveries (56.2) experienced notable improvements in expansion, with the latter displaying the strongest level of expansion of the sub-index values for February".
Despite the lift in expansion, the proportion of negative comments from respondents stood at 59.5% in February, compared with 57.7% in January. It was also up from 59% in December and 56% in November. Negative comments during February focused on an ongoing issue around a lack of orders for some manufacturers, as well as sluggish sales.
BNZ’s Senior Economist Doug Steel said that “the sustained improvement is a welcome change. It is one of several indicators that suggests the broader economy is turning for the better. Indeed, it indicates the pickup may be a bit faster than we are currently forecasting”.
Tracking the Tourism Recovery
Increasing international visitor numbers back to 2019 levels is an immediate Government focus in its endeavour to support economic growth. As tourism is NZ’s second largest export industry (after dairy), its progress is vital to New Zealand’s economic success. With this in mind, we take a step-back to assess just how the international tourism recovery is tracking at the moment.
Trans-Tasman Comparison
Last week, the RBNZ reduced the official cash rate by 50 basis points to 3.75% as widely expected. In the details, the accompanying statement noted lower net migration in NZ was “partly in response to subdued labour market conditions relative to Australia.” We take a brief look at employment in both countries below.
RBNZ Cuts Another 50
The Reserve Bank of New Zealand lopped another 50 basis points off its cash rate today, reducing it to 3.75%. And projected more easing ahead.
This was very much as we and the market expected. We went into this meeting with three broad expectations. First, the Bank would lower the OCR by 50 basis points. Second, it would significantly bring forward its projected low point in its forward rate track. And third, it would maintain that low point near 3%. It did all three.
Over the line
After 10 consecutive months of contraction, New Zealand’s services sector exhibited slight expansion during January, according to the BNZ –BusinessNZ Performance of Services Index (PSI).
The PSI for January was 50.4 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 2.3 points from December but still well below the average of 53.1 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that like its sister survey, the PSI has also waited an extended period of time to get back into expansion mode. For the sub-index results, Activity/Sales (54.0) led the way in January with its highest value since March 2023. Although New Orders/Business (50.0) showed no change for January, it was still its highest value since February 2024. In contrast, Employment (47.1) and Supplier Deliveries (47.8) remained in contraction during the month.
The proportion of negative comments for January stood at 61.9%, which was up from 57.5% in December and 53.6% in November. The economic downturn and uncertainty featured heavily amongst respondents.
BNZ's Senior Economist Doug Steel said that "the PSI is consistent with stabilisation rather than elevation, but its latest move upwards is encouraging”.
Food and Fuel Prices Higher in January
The balance of January’s selected price indices suggests a bit more upside to Q1 CPI calculations. The monthly prices are heavy on tradeable goods and that is what drove the generally firmer looking outcome.
Expansion
New Zealand’s manufacturing sector displayed expansion for the first time in 23 months, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for January was 51.4 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 46.2 in December and the highest level of expansion since September 2022. However, the January result is still below the average of 52.5 since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that after the longest continued period of contraction, the manufacturing sector has finally broken the trend and started 2025 on a positive note.
“All sub-index values were in expansion during January. The key sub-index results for both Production and New Orders both stood at 50.9, with the latter at its highest level of activity since August 2022. Employment (50.2) rose 2.5 points from December, while Finished Stocks (51.9) recorded its highest level of activity since May 2024.
The proportion of negative comments from respondents stood at 57.7% in January. This was down from 59% in December, but still up from 56% in November and 53.5% in October. Negative comments during January focused on the holiday break, as well as the ongoing effects of the soft economy. Positive comments displayed no strong pattern, with many focusing on specific business opportunities.
BNZ’s Senior Economist Doug Steel said that “it’s a positive start to 2025, with the manufacturing sector shifting out of reverse and into first gear. While the PMI still sits below its long-run average of 52.5, the improvement is welcome news for manufacturers after a very challenging two years”.
Unemployment continues its climb
New Zealand’s labour market continues to deteriorate. As anticipated by most, the unemployment rate rose to 5.1% in the December quarter from 4.8% a quarter earlier. This is now the highest unemployment reading since December 2016, if you exclude the COVID blip.