Job ads 50% below peak
New job ads dropped 2.1% m/m in May. The latest fall follows two consecutive monthly increases and is a timely reminder that the labour market is still soft. Taking a step back from month-to-month volatility, ads have been broadly flat for nearly a year now, following very large prior declines.
New Zealand at a Glance
In theory the New Zealand economy should be on a sustainable upward path. But a weak starting point coupled with massive geopolitical uncertainty and a modicum of domestic political concerns is adversely impacting investment and hiring activity. In this environment the labour market will remain relatively weak for some time. We still think the positives will eventually outweigh the negatives but believe another nudge lower in interest rates would be beneficial even if short-term inflationary pressures look problematic. Even with lower rates it appears that medium-term inflation will be contained.
Growth Confirmed, Eyes Ahead
At one level, whatever today’s GDP data reported for the first quarter of the year it was always going to come with a caveat that it predates a lot of material change.
Recent developments include the global trade upheaval that US President Trump’s ‘Liberation Day’ kicked off and the associated rapid elevation of uncertainty; escalating geopolitical tension; and a material softening in timely domestic economic indicators for Q2.
Current Account Rapidly Improving
The external accounts continue to improve, with the current account deficit narrowing to 5.7% of GDP in the year to March 2025. This is well below its peak of 9.2% in December 2022, largely due to high commodity prices, strong primary production and the recovery in international tourism. We expect the deficit to continue narrowing towards 4% over the next year.
Annual CPI inflation to clear 3.0%?
May month selected price indices are unequivocally hawkish. On balance the monthly data has turned out to be more inflationary than we had expected. This has caused us to revise upwards our Q2 CPI pick to 0.8%, from 0.6% previously. Importantly, this is well above the RBNZ’s 0.5% estimate for the quarter.
Service with a slump
New Zealand’s services sector continued to show further decline in activity during May, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for May was 44.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 4.1 points from April and well below the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that after a return to small expansion in January, the sector has continually contracted month-on-month since then, reaching its lowest level of activity since June 2024. For the sub-index results, the key results for Activity/Sales (40.1) and New Orders/Business (43.2) were also the lowest since June 2024. Employment (47.2) fell back into further contraction, while Deliveries (45.7) remained unchanged from the previous month.
The proportion of negative comments for May (65.6%) was up from April (61.8%) and March (56.7%). Many businesses noted reduced demand and falling revenues due to rising costs, economic uncertainty and low consumer confidence. Comments noted customers spending less, delaying decisions, and responding cautiously to inflation, interest rates, and broader market instability.
BNZ's Senior Economist Doug Steel said that "the fall in the PSI follows the sharp decline in the Performance of Manufacturing Index (PMI) from 53.3 to 47.5. Together, they are consistent with the economy returning to recession. We’re a long way from forecasting this, but the data are a reminder of just how vulnerable the economy currently is".
Back in the red
New Zealand’s manufacturing sector fell back into contraction during May, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for May was 47.5 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 53.3 in April and a return to contraction after four consecutive months of expansion. The survey was also well below the average of 52.5 since it began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the May result was disappointing to see given the sector had appeared to have turned a
corner at the start of 2025 following a tough 2023-2024 period of contraction.
“Four of the five main sub-index values were in decline, with New Orders (45.3) showing the strongest level of contraction for May. Following healthy expansion from February-April, Employment (45.7) decreased 8.9 points to be at its lowest level of activity since July 2024".
The return to contraction also saw the proportion of negative comments from respondents increase to 64.5%, compared with 58% in April and 57.5% in March. Comments indicate that manufacturers are reporting a clear return to decline, driven by falling demand, weak orders, and low business confidence. Rising costs, economic uncertainty, and reduced consumer spending are compounding pressures, while forward orders and investment remain stalled.
BNZ’s Senior Economist Doug Steel said that “the New Zealand economy can claw its way forward over the course of 2025, but the PMI is yet another indicator that suggests an increased risk that the bounce in GDP reported for Q4, 2024 and Q1, 2025 could come to a grinding halt”.
Retail outlook on a knife edge
When economic cycles turn they invariably develop a self-fulfilling momentum that generates shifts in activity much greater than inherently conservative forecasters might contemplate. Until Master Trump arrived on the scene, we were developing growing confidence that we were at the start of a sustainable economic recovery. Now we are less certain.
ANZ Survey Surprisingly Robust?
With high frequency data front of mind for the Reserve Bank, today’s ANZ business opinion survey was front of mind for us.
At first glance the figures rolling across the screens looked simply awful. Business confidence down, activity outlook down, exports down, investment intentions down, residential construction down, commercial construction pummelled, employment down, profits pummelled.
RBNZ: Delivers A Hawkish Cut
In its April Monetary Policy Review, the Reserve Bank Monetary Policy Committee said “As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate. Future policy decisions will be determined by the outlook for inflationary pressure over the medium term”. The Bank didn’t repeat these words in its May policy assessment but it remains the centrepiece of its thinking.
Retail Recovery From Weak Base
Retail sales volumes increased 0.8% in the March 2025 quarter. This was well above both our forecasts and market expectations for 0.0%. Combined with +1.0% in the previous quarter, it suggests retail sales volumes are growing at an annualised pace of 3.6%.
Signs of Stabilisation
New jobs ads increased 1.1% m/m in April. This is the second consecutive month they’ve lifted, which last occurred back in August 2022. While it is still too early to assume we’re at the beginning of an upturn, there are clear signs labour demand is at least stabilising. Nonetheless, any improvement would be coming off a very weak base with job ads still 9.6% below year earlier levels, and 48% below their mid-2022 peak.
NZ Budget 2025
Key forecasts
The Government expects a balanced budget in the year ended June 2029.
Deficit is projected to rise to 2.6% of GDP in fiscal 2026 from 2.3% this year.
Net core crown debt progressively edges higher from a current 42.7% of GDP to a peak of 46.0% of GDP in the June year 2028.
The fiscal forecasts are based on Treasury’s expectation that following a 0.8% contraction in GDP in the June year 2025 growth will bounce to average 2.9% per annum over the next four years.
Declining fortunes
New Zealand’s services sector showed further decline in activity during April, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for April was 48.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 0.4 points from March and well below the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said the sector has fallen back into a pattern of mild contraction. For the sub-index results, Activity/Sales (47.3) remained the same as March, although New Orders/Business (50.9) continued to buck the trend with its highest value since February 2024. Employment (48.2) fell back into contraction, while Deliveries (45.8) recorded its lowest level of activity since September 2024.
The proportion of negative comments for April (61.8%) was up from March (56.7%) and February (57.8%). Businesses noted being negatively impacted by a combination of weak consumer demand, high cost of living and interest rates, economic and geopolitical uncertainty, seasonal slowdowns and low business confidence.
BNZ's Senior Economist Doug Steel said that "for all the commentary around the economic recovery, the PSI is a good reminder that current conditions are extremely challenging. New Zealand’s PSI remains weaker than all our key trading partners. At 48.5, it’s consistent with a service sector still moving backwards".
Uptick in expansion
New Zealand’s manufacturing sector showed an uptick in expansion during April, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for April was 53.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 53.2 in March and the fourth month in a row showing expansion. The survey was also above the average of 52.5 since it began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the April result continued a consistent run of expansion for the sector during last three months.
“All of the sub-index values were in expansion during April. The key sub-index results for Production (53.8) and New Orders (51.4) were both in positive territory, while Employment (55.0) displayed its highest level of expansion since July 2021".
Despite the improvement in expansion during April, the proportion of negative comments from respondents increased slightly to 58% in April, compared with 57.5% in March, but still down from 59.5% in February. Negative comments during April saw some manufacturers facing a slowdown driven by high costs, global and local economic uncertainty. In terms of positive comments, other manufacturers reported modest growth, driven by rising demand, infrastructure projects, and strong niche markets, despite lingering caution from inflation and supply challenges.
BNZ’s Senior Economist Doug Steel said that “activity is not surging, but a manufacturing recovery seems to be underway with the PMI having improved substantially from its low of 41.4 last June. That said, there remain questions around how sustainable it is given uncertainty stemming from offshore”.
Prices Volatile But Upward Undercurrent
oday’s April Selected Price Indexes displayed a heap of volatility, as is often the case in these monthly indicators. Some caution is warranted before jumping to conclusions on what they collectively mean for Q2 CPI.
Budget 2025 Preview
At the Half-Year Economic and Fiscal Update, a small fiscal surplus was projected in the year to June 2029. Indications from Finance Minister Willis are that Budget 2025 will keep to this target. But the path back to surplus is likely to remain extremely challenging. It is being threatened by downgrades to economic growth forecasts and subsequently the Government’s ability to raise revenue.
Labour Market Loose
Today’s Q1 labour market statistics were always going to feel like old news from a market’s perspective, given the big changes to the global trade and growth outlook through April. But they do set the starting point for the labour market. It is loose and wage inflation is easing.
Solid, But Cracks Appearing
A focal point for us in today’s April ANZ business survey was to see if the recent global trade angst has had any impact on NZ firm’s expectations for the way ahead. In short, the headlines looked good but there are clear worries in the details.
At face value, there didn’t look to be much change. The headline figures still look robust with business optimistic.
Job ads still subdued
New job ads remain subdued. They have been relatively stable over the last 10 months, albeit at a very weak level. Job ads increased 0.4% m/m in March but are still at levels last seen in 2013 (excluding Covid). Since 2013, the total labour force has grown by nearly 30%. This means far more people competing for an already scarce number of openings.
Inflation Accelerates
Given the mayhem occurring offshore and the uncertainty it puts around the economic outlook, local data continue to command less than usual market interest.
It was no surprise to us that inflation came in a touch above market and RBNZ expectations. And, equally, it was no surprise to us that there was very little market reaction to the news. There are simply much bigger issues circulating. But we shouldn’t ignore current inflation readings altogether. The starting point for inflation is worth noting.
A 0.9% quarter lift in Q1 CPI saw annual inflation lift to 2.5%, from 2.2% in Q4. This matched our expectations but was a tick higher than both the market and RBNZ picks.
Today’s figures confirm our view that annual inflation is creeping higher, and we think that will extend a bit further in the near term, before easing next year.
Further Price Pressure Revealed
Today’s Selected Price Indexes support our view that annual inflation will push higher in Q1, from Q4’s 2.2%. The focus of today’s Selected Price Indexes for March was to see if they collectively altered estimates for Thursday’s Q1 CPI. In short, they did, at the margin.
Continued softness
New Zealand’s services sector continued to show slight contraction during March, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for March was 49.1 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 0.1 points from February but still well below the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that after a brief lift into minor expansion during January, the PSI now lies below the no change mark. For the sub-index results, Activity/Sales (47.4) fell a further 1.7 points, although New Orders/Business (50.8) recovered to record its highest value since February 2024. In addition, Employment (50.2) recorded its highest value since November 2023, ending 15 months of consecutive contraction.
The proportion of negative comments for March (56.7%) was down from February (57.8%) and January (61.9%). Businesses outlined reduced activity driven by economic uncertainty, high interest rates, inflation, and weak consumer and client confidence. Added pressures included global tariffs, rising costs and seasonal or weather-related downturns.
BNZ's Senior Economist Doug Steel said that "combing together the PSI and the Performance of Manufacturing Index (PMI), the Composite Index (PCI) suggests a modest economic recovery. The extent of growth implied by our indicator has been dampened by the softer PSI readings".
Holding its own
New Zealand’s manufacturing sector continued to show expansion for a third consecutive month, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for March was 53.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 54.1 in February, although still above the average of 52.5 for the survey since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the March result represented a full quarter of expansion for a sector that has experienced tough times over 2023 and 2024.
“The sub-index values were mostly in expansion during March. The key sub-index result for Production (54.2) was at its highest result since December 2021, although New Orders (49.6) returned to slight contraction. Employment (54.7) continued to lift with expansion levels at its highest since July 2021, while Finished Stocks (56.3) was at its highest since December 2021".
The proportion of negative comments from respondents stood at 57.5% in March, compared with 59.5% in February and 57.7% in January. Negative comments during March continued to see a number of manufacturers face a tough economic environment, with persistent weak demand, fewer new orders, and ongoing uncertainty across domestic and export markets.
BNZ’s Senior Economist Doug Steel said that “the PMI supports the notion that manufacturing GDP has increased in early 2025. The open question is what lies ahead given recent extreme volatility on global markets following rapidly evolving US-driven trade policy changes. Risks to the global and NZ growth outlook are downward”.
RBNZ more dovish
Who’d want to be a central banker making a decision today? The pessimist could easily conclude that the tariff war will have much greater negative implications for the global economy than currently understood and that central banks should ease very aggressively as soon as possible. Conversely, it could be argued that supply driven inflationary pressures counsel tighter monetary conditions irrespective of the growth implications. After all, the control of inflation, not growth, is the number one objective of the central banking community.
QSBO Suggests Almost Zero Inflation
At one level, whatever today’s Quarterly Survey of Business Opinion (QSBO) reported it was going to come with a caveat that it predates the recent financial market carnage set off by a major policy shift in the US. But it does outline the state of play before that. All responses came in by the end of March, ahead of President Trump’s ‘Liberation Day’.
Trump’s Terrifying Tariffs!
The actions of one President Donald Trump simply beggar belief. In a matter of days one man has almost single-handedly knocked the world economy off its pedestal. Disruptors are a necessary part of both economic and social evolution. They are invaluable at leading change when society is stuck in the status quo. But what we are witnessing right now is simply something else!