RBNZ: On the way to neutral
Today the RBNZ raised its cash rate 0.25% to 0.75%. More importantly, it confirmed it will progressively raise that cash rate until monetary conditions are on the tighter side of neutral. And this will be achieved before the end of next year. To cap things off, the Bank also suggests the peak in the cash rate will eventually be between 2.50% and 2.75%.
Retail Spending: Less Down, Less Up
The 8.1% fall in September quarter retail trade wasn’t quite as much as we (and the market) anticipated. However, its details didn’t perturb our view on matters macroeconomic, even alter our estimate for Q3 GDP, which remains for a decline of around 7%.
Milk Price Record Beckons, But Mind Costs
We noted a couple of months ago that the balance of risks to domestic milk prices had swung upwards. Since then dairy product price outcomes have added to the case. This includes the latest GDT auction overnight where prices rose 1.9%, with gains across all major product groups.
New Zealand’s services sector stepped further into contraction during October, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for October was 44.6 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 1.9 points from September, reversing some of the 11.1 point increase from August to September.
BusinessNZ chief executive Kirk Hope said that it was disappointing that the gains in September did not also flow through to October.
“The key sub-indexes of Activity/Sales (43.7) and New Orders/Business (46.4) still clearly remain in contraction, while Employment (50.0) remains unchanged. With Auckland taking another recent step towards opening up, this will hopefully provide greater ability for a number of service sector businesses in New Zealand’s largest city to lift their activity levels and prepare more fully for the Xmas period ahead.”
BNZ Senior Economist Doug Steel said that “the ongoing weakness in services overall – in contrast to the improvement we saw in last week’s Performance of Manufacturing Index – fits with our thinking that any bounce in Q4 GDP will be modest, especially in comparison to the decline in Q3.”
New Zealand’s manufacturing sector saw further steps into expansion for October, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for October was 54.3 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 2.7 points higher than September.
BusinessNZ’s Director, Advocacy Catherine Beard said that the increased activity for October was fairly evenly spread across the sub index values.
“The key sub-indices of Production (54.0) and New Orders (53.9) were both in positive territory for the first time since July. Like the last national lockdown, Deliveries (59.9) led the way towards catching up on activity, although Employment (52.1) fell back to its lowest result since February.”
“In addition, the proportion of negative comments from respondents dropped to 55.4% for October, compared with 71% in September and 78% in August.”
BNZ Senior Economist, Doug Steel stated that “even though October’s reading is above average, we’d classify it more in the realm of some recovery from a large hit rather than an indication of outright strength.”
Maximum unsustainable employment
There was a very high chance the Q3 labour market data, released today, would be outlandish. And so it proved to be. But no-one expected the data to verge on the ridiculous in the manner they did. This is not to question the validity of the data but to express concern that what we are witnessing may not be sustainable.
New Zealand’s services sector remained in contraction during September, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for September was 46.9 (A PSI reading above 50.0 indicates that the service sector is generally expanding; Below 50.0 that it is declining). This was up 11.5 points from August as the country moved down alert levels during September, freeing up some businesses for increased activity.
BusinessNZ chief executive Kirk Hope said that despite the improvement in the overall result for September, current restrictions still mean business as usual for most of the country is still a ways off yet.
“COVID-19 and its associated lockdown/restrictions still completely dominate comments from respondents, while the key sub-indexes of Activity/Sales (45.3) and New Orders/Business (47.5) remain in contraction. At what point the PSI returns to expansion will largely depend on any upcoming changes to alert levels in the weeks ahead.”
BNZ Senior Economist Doug Steel said that “subdued new orders warn against expecting too much of a bounce in coming months. Of course, the spread of COVID, vaccination rates, and any restriction changes will have a very large bearing on that.”
North vs South
New Zealand’s manufacturing sector saw an overall return to expansion for September, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for September was 51.4 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 11.7 points higher than August, but still someway off levels of expansion typically seen pre-lockdown.
BusinessNZ’s executive director for manufacturing Catherine Beard said that while the positive national result for September was encouraging, it masked a few underlying issues.
“Prior to the lockdown, the PMI averaged close to 60 since the start of 2021, which means expansion has some way to go before getting back to what was seen during the first half of the year. Also, there is currently a clear difference between the two islands with the North Island still in contraction, while the South Island has swiftly returned to levels of expansion seen pre-August.”
“In addition, the proportion of negative comments from respondents remains high at 71%, although slightly down from the 78% recorded in August.”
BNZ Senior Economist, Craig Ebert stated that “the rebound the PMI experienced in September was encouraging, although the survey is not without some still‐frayed parts. Credit where it’s due though, as the NZ PMI traced much less of a contraction, and quicker stabilisation, compared to what it went through during the initial outbreak of COVID-19.”
More to Suggest Surging Inflation
Today’s preliminary ANZ business survey for October was robust in its activity indicators and even more so for its pricing gauges.
Firms’ own activity expectations rose to 26.2 in early October from 18.2 in September. This likely overstates the sense of improvement, in that it represents a broadly flat movement when seasonally adjusted, around the 22/23 mark. However, in being close to its long-term average it’s a very solid result given the circumstances of uncertainty and changeable nature of alert level restrictions over recent months. Positive investment and employment intentions only add to the feeling of resilience across the survey.
New Zealand’s annual consumer price inflation will burst through 4.0% in the September quarter 2021. Moreover, it will stay above 4.0% into 2022. That’s long enough to feed into adaptively-formed inflation expectations.
Growth funds COVID offset
As expected, the audited fiscal accounts for the year ended June 2021 proved to be much healthier than they were projected to be when the Government published its Budget back in May.
Employment Report: Stable but mixed
The significance of September’s job ads was not so much that they increased 0.3% but that, in doing so, they managed to stop falling. This was good to see, after August registered a drop of 12.2%. The other encouraging perspective is that job ads have, so far at least, remained comfortably above where they were at their pre-COVID peak, around mid-2019.
RBNZ Unfazed By COVID
The key news in today’s RBNZ Monetary Policy Review is that the Reserve Bank is currently relatively comfortable the spread of COVID throughout New Zealand will unlikely prevent it delivering the tighter monetary conditions that the economy requires to keep in balance.
QSBO Simply Bizarre
Today’s NZIER Quarterly Survey of Business Opinion produced a set of results that can be best described as bizarre. On the one hand the survey tells us capacity constraints are extreme and the labour market is stretched to breaking, demanding an immediate response from the RBNZ. On the other hand, it would appear businesses have no intent to raise prices, cost pressures are under control and inflation threatens to drop to the lower end of the RBNZ’s target band. The response to this would be diametrically opposite to the labour market reaction. Put all this together and one can only conclude the survey will not be categorical enough to change the minds of the decision makers at the Reserve Bank before they release their decision tomorrow.
In the zone
New Zealand’s services sector fell back in contraction during August, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for August was 35.6 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was the second lowest level of activity since the survey began, with the April 2020 result still the lowest during the national lockdown last year.
BusinessNZ chief executive Kirk Hope said that like its sister survey the PMI, the national lockdown was the sole influencing factor causing service sector activity levels to plunge into contraction. Even for those outside Auckland moving down alert levels to resume business activity, there will be residual effects at least through September with both uncertainty and lower alert level restrictions playing their part.
BNZ Senior Economist Craig Ebert said that “while the August result wasn’t quite as bad as the 26.0 it plunged to in April 2020, the September 2021 result might be the better marker as the first half of August’s trading would have been solid, if July’s PSI result of 55.9 was any lead.”
Back to the future
New Zealand’s manufacturing sector returned to contraction on the back of another nationwide lockdown, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for August was 40.1 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 22.1 points lower than July, and similar to the result recorded in May 2020.
BusinessNZ’s executive director for manufacturing Catherine Beard said that the August value came as no surprise given what we had seen during the previous national lockdown.
“Employment (54.5) managed to keep its head above water, but all other sub-index values were in contraction with Production (27.7) the hardest hit. Although manufacturers outside of Auckland have returned to alert levels that allow business operations to restart, any moves towards the sector getting back into expansion will ultimately depend on how soon Auckland can also return to lower alert levels”.
BNZ Senior Economist, Doug Steel stated that “while many anticipate a bounce in activity as the country progresses down alert levels (all going well on the Covid front), today’s PMI clearly demonstrates the economic pain being felt. This should not be underestimated, even if there is hope for the future. GDP and manufacturing output are expected to fall heavily in Q3. It is something of a reality check in the afterglow of yesterday’s very strong Q2 GDP outcome.”
The New Zealand economy grew a staggering 2.8% in the second quarter of 2021 to take activity 17.4% ahead of where it was in the June quarter of 2020. Sure, the annual reading is savagely distorted by the shocking base it is compared with but let’s not forget that if we were in the United States we would be reporting this quarter’s increase as 11.7% annualised!
External Deficit Bigger, Liability Position Shrinks
The current account deficit stood at 3.3% of GDP for the year to June 2021. This matched market (and our) expectations. But just because there was no surprise here on the day, we think there is still plenty to consider regards the external accounts going forward. The external deficit is widening, and we think it will widen further.
Job ads fall but resilience remains
Unsurprisingly, August’s job ads began to reflect the renewed COVID-19 level 4 restrictions that came into effect mid-month. Note: the 12% reported drop, compared to July, would have included a solid first half to the August numbers, inferring a more material drop occurred over the latter half, as businesses took stock of the abruptly changed situation.
Milk Price Outlook Strong
The balance of risks around domestic milk price forecasts has swung upwards. We have been detecting signs of such over recent weeks, with today’s solid GDT auction result providing the latest evidence.
Expectations were positive going into the GDT event overnight and it didn’t disappoint. The GDT Price Index rose 4.0%, with solid price gains across all major products. Indeed, the overall outcome was even a bit stronger than anticipated on the day and raises hopes for the rest of the season.