Exports Challenges in Perspective
It’s wise to keep your GDP expectations up to the minute, when New Zealand’s two biggest export industries are suddenly encountering headwinds. Such is the case now. In the case of the tourism sector, it is obviously facing challenges around the coronavirus. Local dairy output, meanwhile, is being tested by increasingly dry soil conditions. These issues pose downside risks to our already tepid-looking GDP growth expectations for the first half of 2020.
Inflation: Testing, Testing, One Two Three
Annual CPI inflation in New Zealand looks to be closing in on the 2.0% mid-point of the Reserve Bank’s target band. We believe Friday’s Q4 CPI will get it up to 1.8%, from 1.5% in Q3 (en route to 2.1% in Q1 2020). This is based on a quarterly increase of 0.4%, in line with market expectations.
This is higher than the RBNZ expected in its November MPS, namely a quarterly increase of 0.2% and 1.6% y/y.
2020: Limited Upside
Our base case for 2020 is that the NZ economy continues to expand close to a trend-like pace, while financial markets broadly hang together. This should keep the RBNZ firmly on hold at a record-low 1.0% cash rate. With this, the exchange rate could reflect relatively more of the gyration in the marginal economic news. While we are conscious of the many things that could trip the NZ economy up this year, we also think that upside news needs to be decent part of the scenario analysis now. Upside potential for the New Zealand economy itself, however, would appear to be limited.
Q3 GDP 2% Higher than Anticipated?
If we are right with our 0.5% call on Q3 GDP growth, it will be stronger than the 0.3% increase the RBNZ had in its November Monetary Policy Statement. This will add to the sense the economy is holding up, when many were getting nervous on it. Revisions to GDP – also integral to Thursday’s national accounts – will probably elaborate on the impression the economy has been doing better than generally appreciated. Indeed, these could translate into a level of real GDP 1-2% higher than currently estimated.
How “Significant” Fiscal Stimulus?
This week’s smattering of economic data will be overshadowed by the government’s Half-year Economic and Fiscal Update (HYEFU), due Wednesday (1:00pm). This will reveal what Finance Minister, Grant Robertson, meant by a “significant” fiscal stimulus. We suspect it’s principally about capital expenditure (leaving options related to households until next year’s election Budget).
High Noon For Bank Capital
There is market chatter that the Reserve Bank, having completed its consultation process in full, might take a smidge off the originally proposed capital target percentages. Also, that it might extend the transition period beyond the five years initially proposed. Overall, however, the bank-capital policy will surely mean for a substantial change from what we have. This will have, along with purported benefits, costs, which will have to show up somewhere, for someone. And not just in the price of credit but more directly in its volume of supply.
A Week to Sate Data Watchers
If things are – as the Reserve Bank has proposed – firmly in data-watching mode, then there are loads of it on offer this week. None of it is top-tier. But there are copious amounts of the next best thing. This will give us a good feel on momentum, across various aspects of the economy. The economic news will be complemented by financial-sector angles of Wednesday’s RBNZ Financial Stability Report (FSR).
Stronger GDP (and Productivity)
One of the biggest problems with productivity is in trying to measure it. In the old days of nuts and bolts and punch-clocks, it wasn’t all that difficult. But these days productivity is far more complex in concept and measurement – particularly with the service sector increasingly dominant in the economy.
In The Balance
To our way of thinking, there is not a strong case for the Reserve Bank cutting its cash rate even further at Wednesday’s Monetary Policy Statement. Be that as it may, we believe the OCR committee will feel the case for another rate cut is finely balanced. And we think that, after vigorous debate, it will err on the side of a 25 basis point cut (to 0.75%), while maintaining a slight easing bias. This is mainly as the committee remains nervous about GDP growth not being as strong as it forecast in August, and all that that entails for its inflation and employment projections.
Eyes On The Labour Market
Domestic focus this week will be centered fair and square on Wednesday’s plethora of labour market data. With financial markets undecided and twitchy on whether the RBNZ will cut the OCR again next week, each piece of incoming data is getting analysed to the third degree.