Economy Watch

Retail Wriggle

Doug Steel -

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

Stephen Toplis -

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

Doug Steel -

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

Doug Steel -

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

Doug Steel -

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

Stephen Toplis -

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

Doug Steel -

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.

CPI Nothing to Write Home About

Stephen Toplis -

There was nothing in today’s CPI release that should have changed anyone’s view of the world. The 0.6% increase in the March quarter was bang on consensus as was the 4.0% annual reading. Sure, the numbers were greater than the RBNZ projected when it produced its February Monetary Policy Statement but, in our opinion, it’s not enough to spook the Bank.

Lost momentum

Doug Steel -

New Zealand’s services sector fell back into contraction during March, according to the BNZ – BusinessNZ Performance of Services Index (PSI).

The PSI for March was 47.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 5.1 points from February and well below the long-term average of 53.4 for the survey.

BusinessNZ chief executive Kirk Hope said that the drop back into contraction halted the momentum that the sector had experienced for the first two months of 2024. Both Activity/Sales (44.8) and New Orders/Business (48.3) fell back into contraction, although Employment (50.1) did manage to show the smallest amount of expansion since November 2023.

The proportion of negative comments from businesses rose to 63.0% in March, compared with 57.3% in February and 53.0% in January. A number of respondents noted the current recession, as well as ongoing inflationary/cost of living effects.

BNZ's Senior Economist Doug Steel said that "combining today’s weak PSI activity with last week’s similarly weak PMI activity, yields a composite reading that would be consistent with GDP falling below by more than 2%compared to year earlier levels. That is much weaker than what folk are forecasting”.

One step back

Doug Steel -

Activity in New Zealand’s manufacturing sector experienced stronger contraction during March, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for March was 47.1 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 49.1 in February and the lowest result since December 2023. The sector has now been in contraction for 13 consecutive months.

BusinessNZ’s Director, Advocacy Catherine Beard said that it was a case of two steps forward, one step back with improving activity levels for the first two months of 2024 being undone somewhat by the March result.

“The key sub-index results for New Orders (44.7) and Production (45.7) both experienced a noticeable drop, while Employment (46.8) was at its lowest level since October 2023. In addition, the proportion of negative comments increased to 65% in March, compared with 62% in February and 63.2% in January. A lack of orders was again mentioned by numerous respondents, along with the general economic slowdown".

BNZ’s Senior Economist Doug Steel said that “the PMI’s average for the first quarter of the year is consistent with manufacturing GDP posting another quarter that is below that of a year earlier”.

RBNZ Sticks To The Script

Doug Steel -

The RBNZ held its cash rate at 5.50% this afternoon. This was as we expected and expected by all and sundry. It was fully priced by the market. So, no surprise there. In fact, in the big picture there was no surprise whatsoever to us in the very short statement issued today.

Job ads still trending lower

Doug Steel -

Labour market conditions continue to show softening trends. Job ads eased 0.4% in March, to be down 27.2% on a year ago. There is more evidence of some moderation in the pace of decline, but still nothing to indicate any material improvement is likely any time soon.

QSBO Soft

Doug Steel -

A weak economy and broad disinflationary pulse were writ large across this morning’s NZIER Quarterly Survey of Business Opinion (QSBO). Inflation gauges themselves are generally heading in the right direction but remain higher than would be consistent with annual inflation at the RBNZ’s target midpoint.

Confidence rise stalls

Stephen Toplis -

The murmurings of our corporate customer base have had us questioning whether the recent upward trend in business confidence might have stalled. Enthusiasm for a change in government is one thing but new governments can do little to immediately impact the lagged effects of past policy measures (both fiscal and monetary), structural issues and cyclical momentum. And so it came as no surprise to us that today’s ANZ Business Survey reported a modest drop in business expectations.

Recession Clocks Up Fifth Quarter

Doug Steel -

We were braced for weakness in today’s Q4 GDP figures. In fact, we were braced for it as far back as May 2022 when we first said ‘a recession seems difficult to avoid’ and ‘growth stalls completely in 2023’. That’s essentially what happened last year.
GDP fell 0.1% in Q4, to be down 0.3% on a year earlier. Cue more talk about NZ re-entering technical recession. Technical recession or not (who knows, it could get revised away), to us the bigger picture remains the same. The economy continues to bump along the bottom. It has struggled to grow for more than a year now, real per capita incomes have dropped sharply, and the unemployment rate is rising.

Large Deficit Shrinking

Doug Steel -

NZ’s external deficit is large, but it is narrowing. For the 2023 calendar year, the annual current account deficit stood at 6.9% of GDP. This is smaller than the 7.4% (revised from 7.6%) recorded for the year to September 2023 and a decent chunk narrower than the recent 8.8% peak recorded in calendar year 2022.
The annual deficit matched our expectations although was a tick smaller than market expectations of 7.0%. We expect further deficit narrowing ahead to around 5% in 2024 and near 4% in 2025.

Path of expansion

Stephen Toplis -

New Zealand’s services sector continued its path of expansion in February, according to the BNZ – BusinessNZ Performance of Services Index (PSI).

The PSI for February was 53.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 0.8 points from January and the highest level of activity since March 2023. However, it was still just below the long-term average of 53.4 for the survey.

BusinessNZ chief executive Kirk Hope said that three of the last four months has seen the sector in expansion, with the key sub-index results for both Activity/Sales (53.1) and New Orders/Business (56.0) remaining in positive territory for the current month. In fact, the latter was at its highest level of expansion since December 2022. Employment (49.1) remained in slight contraction, although the rate of contraction continues to decline.

The proportion of negative comments from businesses stood at 57.3% in February, compared with 53.0% in January and 58.7% for December. Respondents still saw the cost of living as the key determining factor on business activity, followed by difficult overall economic conditions.

BNZ's Head of Research Stephen Toplis said that "when we combine the PMI and PSI together to get an indicator of activity, there is a strong suggestion of growth returning later this year. The turnaround occurs a little stronger and earlier than we are forecasting but, whatever the case, it is a heartening sign”.

An inflation surprise

Stephen Toplis -

February’s selected price indicators have given us a lot to think about. As always, volatile monthly numbers ask more questions than they provide answers but the questions that today’s figures provide are very interesting indeed.

In a nutshell, you could describe the release as being good news for the average punter but highly challenging for the Reserve Bank.

Same old, same old

Stephen Toplis -

It’s a case of same old, same old. Labour market conditions continue to ease, and rapidly so. While there may be some suggestion of moderation in the pace of easing, there is nothing to indicate a likely improvement in conditions any time soon. Indeed, the data remain entirely consistent with very low employment growth and an increase in the unemployment rate to over 5% from its current 4%.

Earnings season highlights economic challenges

Jason Wong -

The latest corporate earnings season for NZX-listed companies has drawn to a close. The publicly available releases contain a rich source of information. We parsed the public releases and investor presentations of 39 company earnings releases through a macro lens to gather as much information as possible on the economic backdrop in NZ. This information can be timelier than official economic releases and thereby provides an added source of data to assess economic conditions.

Businesses See Some Improvement In Year Ahead

Doug Steel -

Today’s ANZ business survey contained little to change our view of the world. The outlook for activity over the coming year is somewhat better than it has been over the past year or so. Inflation is elevated and some pointers look a bit sticky, but they continue to suggest inflation is trending lower. Employment intentions is one area that does continue to raise some questions.

RBNZ Holds

Doug Steel -

The RBNZ held the cash rate at 5.50% this afternoon. The Bank also maintained its tightening bias, albeit somewhat watered down from its November statement.

This was very close to our expectations as detailed in our MPS preview. Our broad assessment is that the labour market is easing, spare capacity is growing, and inflation, both headline and core, is falling. And established measures of inflation expectations are falling. Hence there is no need to lift rates further.