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.
New Zealand’s services sector continued to exhibit lower levels of expansion during August, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
While New Zealand’s services sector experienced an increase in expansion levels during July, there were mixed results when looking beyond the main figure, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
New Zealand’s manufacturing expansion continued its downward trend, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
RBNZ Stridently Dovish
The new regime has clearly revealed its spots with today’s Monetary Policy Statement. The question going into it was would the Governor be more concerned about the weakening growth indicators or would he be more bothered by the upward trend in both core and headline inflation? The answer is now there for all to see – weak growth won the day. Inflation forecasts were, on balance, little changed but this was not enough to prevent the RBNZ lowering its interest rate track.
Labour Market Soldiers On
The New Zealand labour market remains robust. Employment is expanding, unemployment is low, and wages are rising. A lift in the minimum wage boosting the latter. It is no one-off. Overall, the labour market looks in line with RBNZ thinking. Activity indicators support a bounce in Q2 GDP. Looking ahead, we expect employment growth to slow as labour supply struggles to maintain past momentum while there are question marks around future labour demand. Wage inflation is expected to edge higher.
Still Not Happy
Corporate New Zealand is in a funk. Whether it is uncertainty around government policy, concern around global trade tensions, or ongoing angst regarding the disease Mycoplasma bovis, businesses are not happy. Margins are under pressure from rising costs. This is clouding the growth outlook as employment and investment intentions are reined in, but at the same time seeing inflationary pressure build as more firms intend to raise prices.
Economic Expansion Maturing
Economic cycles always come to an end. We can say that with certainty. We think the current cycle has further to run but we caution that the expansion is already very mature, cracks are developing and it feels as if a tipping point is not far away. Whatever the case, we believe the operating environment for businesses and investors alike is becoming more difficult to navigate.
Can We Really Be Headed To Negative Rates?
Something about recent Reserve Bank forecasts continues to niggle us. That is, their inference of a near-zero Official Cash Rate (OCR) in real terms, right the way out to 2021. Yet the Bank has also inferred, by way of other material, that New Zealand’s neutral real cash rate is in the vicinity of 1.50%*. We are having trouble reconciling these two things, especially as the Bank is forecasting a positive output gap.
Inflation Provides No Drama
There was more than usual interest in this morning’s Q2 CPI figures. Markets were cagey, sensing the possibility of a downside shock. In the event, there was no such drama. Sure, the 0.4% q/q and 1.5% y/y inflation rates were a tick under market expectations but not materially so given the general fear of something softer. Meanwhile, core measures of inflation generally edged higher. On balance, nothing to change the RBNZ outlook.
New Zealand’s services sector experienced a decrease in expansion levels during June, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
New Zealand’s level of manufacturing expansion experienced a dip in June, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
Dairy Prices Drop
Dairy prices slumped at the GDT auction overnight. There are many factors in play including a usual downward seasonal influence as GDT volumes rise. It is still early days in the dairy season, but there is now downside risk on prevailing milk price forecasts. There are some clear negatives circulating, but not all indicators are pointing downward with a lower NZD and recently underwhelming world milk supply growth chief among those on the price supportive side.
Outlook for Borrowers: Post-June OCR Review
At the June OCR Review, the RBNZ kept the OCR on hold at 1.75%, as universally expected. There were some subtle changes in language however. The RBNZ said the OCR will remain at 1.75% “for now”, in the May MPS the wording used was “for some time”. The RBNZ also said the next move could be a rate cut or rate hike, but removed the previous reference to the risks being equally balanced.
RBNZ Will Move Rates Sooner
The RBNZ is closer to moving interest rates. That is the key message from today’s OCR review. What is less clear is in what direction. Be that as it may, we stick with our view that the cash rate is more likely to rise than fall and that the Reserve Bank will be bringing forward that rate hike, from its previously published early - 2020, in due course.
Easing Talk Premature As Confidence Slumps
A number of the indicators in today’s ANZ Survey have slipped to levels not seen since the global financial crisis. Unsurprisingly, this has got a number of folk talking about the prospect of near–term rate cuts in New Zealand. But we still think that such talk is premature, as CPI inflation is set to move back to the mid-point of the RBNZ’s target range within six months.