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.
A faster pace of decline
A trend decline in job ads has been in play since late 2022. Since March, there have been signs of an acceleration in this downtrend, and there was more evidence of this in June.
Job ads fell 8.2%, the largest monthly fall since the lockdown-affected month of August 2021. Excluding lockdown volatility, job ads are now at their lowest level since October 2013.
New Zealand at a Glance
The New Zealand economy is struggling. Consumer and business confidence are extremely low and there is no obvious end in sight as activity is weighed down by very tight monetary settings and soon, tightening fiscal conditions to boot. Weakness in the economy is being reflected in a deteriorating fiscal balance, a reduced external deficit and a rising unemployment rate. It also means inflation, both core and headline, is in retreat. Eventually this will trigger a sharp drop in the cash rate but the RBNZ seems in no rush to move any time soon.
QSBO says inflation beaten
In our humble opinion, today’s Quarterly Survey of Business Opinion (QSBO) screams cut rates sooner rather than later. Indeed, this is our central view. But we still think the RBNZ will want to see inflation within its target band before it pulls the trigger and that could be some time away.
Some More Progress
Inflation indicators are generally moving in the right direction. But they need to fall further to be consistent with the RBNZ desires.
Firms’ inflation expectations in this afternoon’s ANZ business survey eased a bit further to 3.46% from 3.59% in May. More progress toward the inflation target band. These levels are consistent with annual CPI inflation printing in the 3s in Q2, as seems to be the consensus view (no official polls yet).
Economic Weakness Continues
The economy grew 0.2% in Q1, to be up 0.3% on a year ago. The quarterly rise was marginally above market expectations of +0.1%.
The positive sign on quarterly growth might excite some with headlines of the country lifting out of recession. We think that would completely miss represent the big picture. Economic weakness prevails.
Narrowing But Large
The current account deficit stood at the equivalent of 6.8% of GDP in the year to March 2024. This matched market expectations, although was a little larger than the 6.6% we anticipated.
The annual deficit is still a touch narrower than the 6.9% reading in the previous quarter and is meaningfully smaller than the 8.8% it peaked at in 2022. The deficit is smaller than it was, but it is still relatively large. We suspect that combined with weak economic growth, the deficit will remain on the radars of rating agencies.
Bottom of the Barrel
Activity in New Zealand’s services sector dropped to its lowest level of activity for a non-COVID lockdown month since the survey began, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for May was 43.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 3.6 points from April and 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 the May result was as bad is it can get for the sector, reaching contraction levels greater than during the Global Financial Crisis of 2008/09. While most of the sub-index values didn't reach their lowest ever levels, combined they led the May result well below the long-term average of 53.3. The key index values for Activity/Sales (40.9) and New Orders/Business (42.6) were both in significant contraction, while the Stocks/Inventories (42.4) activity level was the lowest recorded for a non-COVID month.
The proportion of negative comments for May (65.4%) was similar to April (66.3%). Given the overall result, respondents continued to note the typical aspects of the current economic downturn.
BNZ's Senior Economist Doug Steel said that "the speed of decline is as worrisome as its size over the past three months. There is weak and then there is very weak. Overall, this tells of a services sector in reverse, at pace”.
Lack of orders
Activity in New Zealand’s manufacturing sector experienced a drop in May and ongoing contraction of the sector, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for May was 47.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 48.8 in April, and means the sector has now been in contraction for 15 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that there was little in the May result to signal a positive turnaround in the sector is coming soon.
“The key sub-index result of New Orders (44.4) remains stubbornly in contraction, and a clear impediment to overall expansion in the sector. To put this into perspective, during the Global Financial Crisis of 2008/09 New Orders remained in contraction for 14 consecutive months. The current results are now a third more than that with New Orders now in contraction for 21 consecutive months. Production (44.5) reverted back to current trends after a surprise expansion in April, although Employment (50.6) did remain in expansion following the expansionary April result.
Despite the dip in the May result, the proportion of negative comments stood at 63.5%, which was down from 69% in April and 65% in March. The vast majority of negative comments focused on a general slowdown and the tough recessionary times at present".
BNZ’s Senior Economist Doug Steel said that “PMI readings to date this year are consistent with falling manufacturing GDP. We anticipate next week’s Q1 GDP figures to include a contraction in the manufacturing component. The latest PMI indicators suggests Q2 will also be weak and potentially weaker than we already anticipate”.
Trend Decline Extends
There has been no respite in the trend decline in job ads. Job ads fell 4.8% in May. This follows a similar sized drop in April, taking job ads’ annual decline to 30.5%. Aside from Covid lockdown periods, job ads are at their lowest level since February 2016.
Painful
Most interest in today’s ANZ business survey was in its inflation gauges. Inflation expectations have been steadily and consistently falling each month for well over a year, but firms’ pricing intentions had become a bit sticky. Both eased in May.
Inflation expectations fell to 3.59% from April’s 3.76%. This is at a level consistent with annual CPI inflation falling into the mid-3s in Q2. Indeed, a further decline in the final month of the quarter would raise some downside risk to the RBNZ’s (and our) current Q2 CPI inflation forecast of 3.6%.
Retail Wriggle
It has not been seen for more than two years. A lift in real quarterly retail sales. The lift might surprise a few or at least have them wondering how sales can increase in the current economic climate. It’s noisy data. The retail sector remains under significant duress.
RBNZ Hawkish
The Reserve Bank of New Zealand has today delivered a clear warning it is still thinking about raising rates. We don’t think this will happen, but a shot has been clearly fired across the bow.
The RBNZ left the cash rate at 5.5% at today’s Monetary Policy Statement but, contrary to popular opinion, raised its modelled cash rate track. And, in the summary record of meeting, the tone was unequivocally hawkish. Indeed, it was noted that the Monetary Policy Committee contemplated raising rates at this meeting. To cap things off, the rate track has a peak of 5.65% implying there is a greater than even chance of a rate hike.
Struggle street
New Zealand’s services sector continued to contract further in April, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for April was 47.1 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 0.1 points from March and the lowest level of activity for the sector since January 2022.
BusinessNZ chief executive Kirk Hope said while the April result was all but the same as March, the sub-index results outlined a difficult time for the sector as a whole. Although Activity/Sales (46.5) improved slightly, New Orders/Business (47.1) continued to fall backwards, while Employment (47.1) dropped to its lowest result since February 2022. Supplier Deliveries (47.6) also dropped to its lowest point since November 2022.
The proportion of negative comments from businesses continued to march upwards over April (66.3%), compared with 63.0% in March and 57.3% in February. A noticeable proportion of respondents noted the current difficult economic times, along with lingering inflationary issues.
BNZ's Senior Economist Doug Steel said that "combining today’s weak PSI with last week’s PMI yields a composite reading that would be consistent with GDP tracking below year earlier levels into the middle of this year. That is what we expect and, if anything, the combined index suggests some downside risk to our forecasts”.
Another fall
Job ads fell 4.4% in April. It extends the downtrend that started in mid-2022. The trend measure itself suggests the rate of decline has slowed over recent months. Job ads are 29.6% lower than a year ago. Aside from Covid lockdown periods, job ads are at their lowest level since April 2016.
To and Fro
Activity in New Zealand’s manufacturing sector experienced a pick up during April, although still remained in contraction, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for April was 48.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 46.8 in March, although still lower than the 49.1 recorded in February. The sector has now been in contraction for 14 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that despite ongoing contraction in the sector, there were a few positive aspects to the April result.
“The key sub-index result of Production (50.8) returned to expansion for the first time since January 2023, as well as Employment (50.8) and Finished Stocks (50.4) also both returning to slight expansion. In contrast, New Orders (45.3) remained firmly in contraction, although showing a slight improvement from March. Despite the small improvement in April, the proportion of negative comments again increased to 69%, compared with 65% in March and 62% in February. An overall lack of sales and orders was the dominant theme in comments, along with a struggling economy".
BNZ’s Senior Economist Doug Steel said that “the PMI this year to date is consistent with manufacturing GDP trailing year earlier levels. However, the details were a bit more mixed in April, rather than uniformly weak as has been the case over recent months”.
Labour market softens
In totality, today’s labour market data were a smidgen softer than we anticipated. The 4.3% unemployment rate for the March quarter was bang on our expectations but both employment (-0.2%) and the participation rate (71.5%) surprised to the low side. Capping things off, the underutilisation rate rose to 11.2% from 10.7% to be more than two percentage points higher than where it stood this time last year.
Growth Optimism Unwound
This afternoon’s ANZ business survey had two key messages. First, the previous post-election bounce in real activity is rapidly unwinding and is outright weak, if not negative. Second, inflation indicators are mixed.