RBNZ to Stick Loosely to Its Script
s we’ve been saying for a good many months, the RBNZ will probably not be keen to follow the global tendency, toward less monetary stimulus – at least not soon. If there is a risk around Thursday’s OCR review it is that the Bank comes across a touch dovish, perhaps with reference to the near-term CPI. However, all up, we believe the Bank will affirm a steady-as-she-goes message.
Q4 GDP A Measure of Being Well
Thursday’s Q4 GDP report will be the highlight this week. Not that it’s looking like being a big deal, one way or the other. We estimate a steady quarterly gain of 0.7% (after its 0.6% outcome of Q3). This is what the Reserve Bank expects too, with reference to its February Monetary Policy Statement. A quarterly expansion of 0.7% would set annual growth of 3.1%. While that wouldn’t look especially strong in per capita terms it will probably appear robust to the recent transitions on the political front.
GDP Partials Dominate the Week Ahead
The week ahead will allow us to settle on our pick for Q4, 2017 GDP. At the moment we’ve got 0.5% penciled in for the quarter but the risks are very much skewed to the upside. The Reserve Bank plumped for 0.7% in its February MPS and this is, increasingly, looking like a good bet. But we’ll wait for this week’s partials before formalising our suspicions.
Time to Improve
It’s not just business sentiment that could do with a lift. The activity indicators in the ANZ survey – even though they held up a lot better than general confidence did – were still well below par. Granted, this is not inconsistent with our view of near-term slowness in GDP. However, we will need to see these activity pointers improve by mid-year if we are to retain confidence in our view that GDP growth will pick up the pace as 2018 progresses.
The Exuberance in Improved Productivity
Thursday’s likely-boosted productivity estimates might all be a bit of a wash in terms of inflation pressure. But they are relevant to understanding economic trends and performance – including the degree of exuberance integral to the household sector, which Friday’s retail trade figures will likely allude to.
Slump or Hiccup?
We have been expressing for some time now our concern that just about every asset looks overpriced and that a correction was long overdue. Is this that correction? Maybe. Whether it is or not, it is a timely reminder that asset prices of all descriptions have been running strong for a very long time now and, accompanying that strength, volatility has been very low.
RBNZ to Hold the Line
If it boiled down to just the local information over the recent months, the RBNZ could well perceive reason to signal a softer OCR track. However, such things are balanced by 1) the sense there is already a strong precautionary element to the record-low OCR setting of 1.75%, 2) the Bank’s recent emphasis on the flexibility it has in guiding inflation to the mid-point of its target band (akin to the current RBA approach of late) and 3) the fact there are a number of identifiable inflation impulses on the not-too-distant horizon, including now from global sources.
Before the next MPS, the only NZ data which could potentially cause a stir are those regarding the December quarter labour market. These are due 7 February. New Zealand’s labour market is certainly steaming – if one consults the latest tax data.
An Inflationary Basis
Providing the NZ CPI doesn’t shock for Q4, the debate will turn to how it will go in the early stages of 2018. In particular, that there is a good chance its annual rate of inflation will slow in Q1 – simply because a stocky quarterly result from Q1 last year will be dropping out of the calculations. Increased subsidies for tertiary fees will also be a drag on the CPI in Q1 2018. We expect annual inflation to dip to 1.5% in this quarter, and stay there in Q2. It will belie much of the capacity pressure in the economy, but could yet engender more delay with respect to OCR normalisation.
2018: The More Things Change…
In spite of all that has changed, and is changing, we haven’t really altered our forecasts of the NZ economy, from a broad perspective. As such, they remain relatively upbeat. So we still envisage pressure will come on the RBNZ to start lifting its policy rate later on this year.