RBNZ to accelerate rate cuts
We have been increasingly pointing to the fact that October’s Monetary Policy Review could be a line ball call between a 50 basis point cut and a 25. Not cutting at all has never entered our minds. And a line ball call it is. We’d hoped that the ANZ Business Opinion Survey and today’s QSBO would deliver the same message, and in so doing settle the argument. But they haven’t, with the ANZ survey delivering a hawkish message and the QSBO a starkly dovish tilt.
Business survey questions RBNZ acceleration
If you were looking for a reason why the RBNZ should cut rates 50 basis points at its October meeting, this wasn’t it.
The September ANZ Survey of Business Opinion was unequivocally strong.
A net 45% of businesses now expect their activity to increase over the next 12 months. On a seasonally adjusted basis this was the strongest reading since August 2017 and is consistent with GDP growth approaching 4.0%.
Comparing Across the Ditch
While Australia’s economy faces headwinds, they pale in comparison to New Zealand’s. In Q2, NZ annual GDP contracted 0.5%, much weaker than annual growth of 1.0% across the ditch. While NZ is in the midst of a rolling recession, Australia’s economy has remained relatively more resilient. But, given the extent of the downturn, there is at least a lower hurdle rate for NZ to achieve positive growth as we head into 2025.
Return to Trend-Decline
Job ads in August are down 28.2% on a year earlier, and excluding Covid, are at their lowest level since 2013. They fell 1.3% in August, unwinding some of their 3.5% lift in July. The August outturn continues the general downwards trend of the last two years.
External deficit reduction stalls
The current account deficit stood at the equivalent of 6.7% of GDP in the year to June 2024. This is of a size that is likely to keep the external accounts on rating agency radars.
Today’s result was a larger annual deficit than the market (6.5%) or we (6.3%) expected, although a touch smaller than the 6.9% seasonally adjusted figure the RBNZ projected in its August MPS. For us, the known revisions to exports of services were offset by other factors and revisions.
Slow Crawl
Activity in New Zealand’s services sector inched its way higher during August, although still firmly in contraction territory, according to the BNZ –BusinessNZ Performance of Services Index (PSI).
The PSI for August was 45.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 0.3 points from July, but still well below the average of 53.2 over the history of the survey.
BusinessNZ’s Director, Advocacy Catherine Beard said despite two consecutive months showing a lift in activity levels, the key index value for Activity/Sales (43.9) remains lackluster, while New Orders/Business (46.6) dipped slightly from July. On a more positive note, Employment (49.2) lifted to its highest result since March.
The proportion of negative comments for August stood at 60.8%, which was down from 67.0% in both July and June. Respondents continued to note the high cost of living and general economic conditions as reasons for ongoing tough times.
BNZ's Senior Economist Doug Steel said that "smoothing through monthly volatility, the PSI’s 3-month average remains deep in contractionary territory at 43.9. The PSI has been in contraction for six consecutive months which is the longest continuous period of decline since the GFC”.
Incremental improvement
New Zealand’s manufacturing sector showed further signs of improvement during August, although still in contraction, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for August was 45.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 44.4 in July, but still significantly below the long term average of 52.6. The sector has now been in contraction for 18 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that the PMI is heading back in the right direction, but the pathway to eventual expansion after a year and a half being firmly in contraction mode means there is still some way to go.
“The key sub-index results for Production (46.3) and New Orders (46.8) were both the strongest they have been in a few months, with the former improving significantly from June. Employment (46.6) recovered somewhat from its June/July dip, while Finished Stocks (46.2) was all but unchanged from July".
Given the ongoing improvement in activity for August, the proportion of negative comments stood at 64.2% for the current month, compared with 71.1% in July and 76.3% in June. Negative comments typically focused on the general economic recession, including lack of demand and cost of living.
BNZ’s Senior Economist Doug Steel said that “while business confidence and building consent indicators have ticked up from their very low levels offering potential for improvement over the coming 12 months, the PMI is an indicator of outcomes and continues to show that current conditions remain challenging”.
Monthly Prices Affirm Q3 CPI View
Today’s selected prices data for August gives us no cause to alter our general thinking for Q3 CPI. There was a range of ups and downs in the details, which is usually the case for these wobbly monthly indicators, but the overall net result was close to our priors.
Relief
We thought there would be a bounce in economic confidence following the dovish tones, subsequent interest rate reduction and projection of more from the RBNZ. Today’s ANZ business confidence survey confirmed a bounce. It was sizeable.
Business confidence lifted to a 10-year high, punching up to 50.6 in August, from the 27.1 in July which was already up from a low 6.1 in June. It is interesting that the August business survey details suggest a bounce was well under way before the RBNZ cut the OCR at its August meeting. This suggests the confidence swing was well underway following the dovish pivot in July, as we suggested last month. In any case, it just goes to show what a difference a few months and some relaxation in tight monetary conditions can do following a period of tightness.
Retail Retreat Near Its End?
Today’s retail sales figures essentially confirmed our suspicions – that sales are very weak and continued to decline in Q2. We thought when sales volumes bounced a touch in Q1 that it was more noise than any indication of change in trend at the time. Sales volumes fell 1.2% in Q2, taking sales 3.5% below on a year ago, and completing the third successive annual decline. Core (ex auto) sales volumes fell 1.0%.
Milk Price Outlook Improves
This morning’s GDT dairy auction was positive. Dairy prices posted a strong lift, with the GDT price index gaining 5.5%. It is the largest gain in a single auction since March 2021, although should be seen in the context of a large drop early last month. The price index is not far from recovering all that decline.
July Jump
Job ads rose 3.4% in July. It is the first monthly increase in job ads since a marginal increase back in January. But July’s gain needs to be seen in the context of an 8.0% slump the month before and a 4.8% decline the month before that. Gains have been few and far between in a very strong downtrend that started back in late 2022. The trend in job ads remains firmly downward. Jobs ads in July are down 28.6% on a year earlier.
Relative progress
Activity in New Zealand’s services sector for July showed some improvement after a horrendous June result, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for July was 44.6 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 3.9 points from June and the highest result since May. However, the PSI has only averaged 46.5 so far for 2024, compared with 53.2 over the history of the survey.
BusinessNZ chief executive Kirk Hope said that while the relative improvement in activity for July was a welcome sight, there's still a lot of work to go before the sector is back on track. The key index values for Activity/Sales (39.1) still remains under the 40-point mark, although New Orders/Business (45.3) did show a marked improvement compared with June, albeit off a very low base.
Stopping the Rot
Activity in New Zealand’s manufacturing sector showed some small signs of improvement, although still in contraction, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for July was 44.0 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 41.2 in June, but still significantly below the long term average of 52.6. The sector has now been in contraction for 17 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that while the July result showed some improvement from June, the numbers still told the story of a sector continuing to struggle.
“The key sub-index results for Production (43.4) and New Orders (42.5) both returned to figures above the 40-point activity level, although both still showing significant contraction. In contrast, Employment (43.1) continued to plunge further, as did Finished Stocks (46.5)".
Given the relative improvement in activity for July, the proportion of negative comments stood at 71.1% in July, compared with 76.3% in June. Negative comments outlined a lack of orders, customers and sales continuing recent trends.
BNZ’s Senior Economist Doug Steel said that “manufacturing activity will turn when the broader economy turns. Easing monetary conditions will help in this regard, but it will take time for the likes of a lower OCR to generate a general pick up in sales”.
Disinflating
This morning’s Selected Price Indexes support the notion of firm disinflation. It’s only one month, and a lot of components are volatile, but the direction of travel is clear.
RBNZ declares victory against inflation
After 15 long months of extremely tight monetary policy, the RBNZ has given the green light to progressively lower interest rates. Not only did it cut the cash rate 25 basis points to 5.25% today but it also published a rate track which implies a further three 25 point cuts by February next year on its way to an eventual low of 3.0%.
Labour Market Weakening
Today’s Q2 data shows the labour market continues to loosen, and we think it will loosen further. The unemployment rate rose to 4.6% in Q2 from the 4.3% initially published for Q1 (although the latter was revised up to 4.4% in today’s figures). The unemployment rate is now a full percentage point above its 3.6% level a year ago and we think a similar sized lift is likely over the coming 12 months or so.
August MPS Preview
The New Zealand economy is buckling under the pressure of extremely tight monetary conditions, slumping net migration, government cutbacks, rising unemployment, reduced investment activity and weak confidence.
Challenges remain amid relief
We wondered if today’s July ANZ business survey might show some signs of relief, perhaps from the recent change of tone from the RBNZ and recent sizeable fall in wholesale interest rates. Of course, it is always difficult to know precisely what drives confidence month to month but some easing in monetary conditions can’t have hurt.
CPI inflation to be within target range next quarter
There was considerable market focus on today’s Q2 CPI figures following the change of tone from the RBNZ in last week’s MPR. The market was looking for confirmation that interest rate cuts are imminent. In the event, there were mixed signals in that regard.
Sinking
Activity in New Zealand’s services sector sunk even further during June, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for June was 40.2 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 2.4 points from May and for the second month in a row the lowest level of activity for the sector for a non-COVID lockdown month since the survey began in 2007.
BusinessNZ chief executive Kirk Hope said that after a bad May result, the June figures simply got worse. The key index values for Activity/Sales (35.6) and New Orders/Business (38.3) were both the lowest for a non-COVID lockdown month. Employment (45.6) was at its lowest point since February 2022, while Supplier Deliveries (41.6) was the lowest since March 2022
The proportion of negative comments for June (67.0%), which was up on May (65.4%) and April (66.3%). Respondents continued to note recessionary aspects of the current economic downturn.
BNZ's Senior Economist Doug Steel said that "the Performance of Services Index has been well below average for more than a year. Moreover, the weakness appears to be accelerating”.
Freefall
Activity in New Zealand’s manufacturing sector dropped to its third lowest value for a non-COVID lockdown month, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for June was 41.1 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 46.6 in May, and significantly below the long term average of 52.6. It was the lowest non-COVID lockdown monthly level of activity since February 2009.