CPI Inflation Firming Up
Overall, there was plenty in this morning’s CPI report to keep RBNZ/OCR downside ruminations at bay for the foreseeable future, even stir thoughts of eventual OCR upside. Having said this, we are also conscious of things that could yet challenge GDP growth, thus undermining the case for strengthening (core) inflation.
No Xmas cheer
New Zealand’s manufacturing sector fell back into contraction for the last
month of 2019, according to the latest BNZ - BusinessNZ Performance of
Manufacturing Index (PMI).
From our perspective, the QSBO will provide no pressure either way for the RBNZ to awaken from its slumber. To us it delivers further evidence that the Bank can sit on its hands for a long time yet. For now the economy seems uncannily stable and boring.
Which Santa Delivered GDP Gift?
New Zealand’s economy grew a very solid 0.7% in the third quarter of 2019. More importantly, GDP proved to be yet another indicator suggesting the economy has, for now at least, successfully negotiated an environment that threatened to push the country into recession.
Dynamics More Interesting Than Deficit
New Zealand’s current account deficit came in at 3.3% of GDP for the year to September 2019. This was marginally lower than market (and our) expectations of 3.4%, although this seemed as much to do with a small downward revision to history as anything fundamental.
It would be a stretch to suggest that businesses in New Zealand are optimistic about their lot but it is fair to say they are getting less pessimistic by the day. This being the case, the need for extra “help” from either the fiscal or monetary authorities can be considered to be in decline.
2 Steps Back
New Zealand’s services sector experienced a dip in expansion levels during November, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Ebbs and flows
New Zealand’s manufacturing sector experienced slower expansion levels in November, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
Q3 GDP: Steadying Growth, From a Much Stronger Base
What if we were to say next Thursday’s September quarter GDP will print near 2% higher than many people figure on? That’s where our analysis is getting to, as substantial upward revisions to historical GDP data also come to pass. Sure, this will still leave a picture of a slowing economy, since a point of (increased) strength back in 2017/18. However, there is also a sense that the slowdown is now basing. Reflective of this, we anticipate a 0.5% (2.3% y/y) expansion in Q3 GDP.
BNZ/SEEK Employment Report
September’s big jump in job advertising has been followed by softer months that have essentially given up those gains, with November’s print falling a seasonally adjusted 0.8%, after easing back 0.3% in October. This has all but flattened off the trend measure. This advanced just 0.1% in November. Flatness was also indicated by its annual rate of increase subsiding to -1.0%, while the seasonally adjusted index was down 0.8% compared to November 2018.
Government delivers infrastructure boost
The Government reports an estimated fiscal surplus of 2.4% for the year ended June 2019, substantially greater than the 1.2% estimated at Budget time.
The budget balance will move into deficit this financial year (0.3% of GDP). It is forecast to return to surplus (0.5% of GDP) in the year to June 2022. It rises to 1.5% of GDP by June 2024.
Net core crown debt will rise from 19.0% of GDP to 21.5% in June 2022. It is then forecast to fall to 19.6% of GDP by June 2024.
Treasury forecasts GDP growth of 2.2% for the year ended June 2020. Growth of 2.8%, 2.7%, 2.5% and 2.4% are then expected in the years ended June 2021, 2022, 2023 and 2024 respectively.
The bond tender programme for the three years ended June 2022 is unchanged. An extra $2.0 billion will be issued in 2022/23 raising that year’s offering to $8.0 billion. In 2023/24 the bond tender programme will be $6.0 billion.
RBNZ Capital Review Not So Scary
The “best” news from today’s announcement is that the uncertainty around bank capital requirements is now largely behind us. Knowing the lie of the land – even if you don’t like the look of it – is usually so much better than not knowing it. And, in this case, the certainty is significantly better than once feared. At the margin, this should lift confidence reducing our downside fears for growth and the probability of further interest rate reductions.
Business Clouds Lighten
We are sure we weren’t alone in sniffing an improvement in this afternoon’s ANZ Business Outlook survey. But we certainly didn’t expect as big a bounce as it posted. Importantly, own-activity expectations shot up to +12.9, from the -3.5 level they sank to last month. While they are still clearly below their long-term norm (of +26.5) they are now much less confronting to our view that GDP growth will trundle along at around 2% per annum, close to trend.
Retail Trade Trending Steadily Higher
Our feel for consumer spending is that it’s trending steadily higher. So today’s reported 1.6% increase in September quarter retail trade volumes, for an annual expansion of 4.5%, likely overstates the case.
The NZ milk price outlook continues to improve. Dairy prices have been firm in 2019 and have pushed higher over recent auctions. Indeed, today’s 1.7% gain in the GDT Price Index is the fifth consecutive increase taking the cumulative gain to 8.3% since the most recent trough in early September. GDT prices are heading toward the top of a trading range that has held them since 2014 and are now a chunky 26.4% higher than a year earlier. Price gains have occurred as solid demand has bumped up against docile global supply.
Path to improvement
Expansion in New Zealand’s services sector climbed above its long term average level of activity, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Back in black
October brought some much needed relief to the manufacturing sector with the Performance of Manufacturing Index (PMI) jumping back into expansion mode. There were widespread gains across various segments including regions, industries, and firm sizes. To be sure, at 52.6 overall, the PMI is hardly what you would call strong. But it is certainly much better than the previous three months where the index languished below 50 which indicated a sector going backwards.
BNZ/SEEK Employment Report
The jump we saw in September’s job advertising has been somewhat nipped in the bud by October’s result.
MPS Preview: Nervous Nellie Edges Steady Eddie
For next week’s RBNZ Monetary Policy Statement, the OCR committee will probably feel the case for another rate cut is finely balanced – in the least not obvious. After much toing and froing, however, it will probably err on the side of a 25 basis point cut. This is even though we think there is no overwhelming basis for it, at this juncture.
Labour Market Revealing Its Inflationary Teeth
This morning’s labour market data were broadly in line with market expectations. However, the results might have the Reserve Bank wondering if the jobs market is more inflationary than it has judged.