More Evidence of Economic Momentum
The big news for the week has already been released. The Performance of Manufacturing (PMI) and Performance of Services indices (PSI) have bounced relatively strongly. We’d been concerned that they might go the same way as business confidence and foretell a significant economic slowdown. Had this been the case our growth forecasts would have been threatened. Fortunately, for now at least, the performance indicators are sufficiently strong for us to maintain our view that GDP can continue to expand at a near potential rate for a while longer yet. For the record, we are forecasting GDP growth of 2.9% for calendar 2018 and 2.8% for next year.
Oil Caps CPI, Replenishes Disposable Income
Bear in mind there is a full three months’ worth before the next RBNZ policy meeting; the 13 February MPS. That’s a long time between drinks. But already, the trajectory on the NZ CPI is being pruned, by the latest wave of reversal in international oil prices.
When Perception Isn’t Reality
It’s a moot point which way the numbers go in Wednesday’s ANZ business survey. But there is an argument that from where its headline results already sit, they will be hard pressed to shock the market now. This is particularly so, with a lot of the hard data on the NZ economy defying the worst of the recent business survey insinuations. Speaking of which, there is a lot of hard data on the NZ economy due this week – albeit none of it top-tier.
No Holiday For Expanding Trade Deficit
It is a short week, given yesterday’s Labour Day holiday. It is also a week short on data, with Thursday’s merchandise trade figures for September the only piece with any potential to pique the market’s interest. To be sure, a monthly trade release is unlikely to substantially alter views. But we think the deteriorating trend in the nation’s external trade flows is well worth paying attention to. It is something we have been monitoring for a while and it’s not just higher oil prices in play.
(More Than) Fuel to the Inflation Flickers
It would be easy to dismiss tomorrow’s likely strong-looking Q3 CPI as simply soaring petrol prices. Too easy, we’d say. The way we prefer to view it, CPI inflation is firming up from an underlying basis, with headline inflation outcomes likely to reinforce this tendency. This will become more evident over the coming many quarters, with tomorrow’s CPI just a step in that direction.
A Little Data to Cross-Check Some Big Stories
The coming week’s New Zealand data are relatively minor. But they could have important things to say about some key topics. Like the Food Price Index re Q3 CPI inflation; like electronic transactions on the fortitude of consumer spending; like the PMI as a cross-check on the QSBO’s messages of manufacturing softness, and like tomorrow’s 2017/18 Crown accounts with respect to the government being on track with its self-imposed fiscal targets.
Capacity Issues Undermining Business Confidence
The QSBO’s net confidence measure is prone to print even more negatively than it did in Q2 (-20). This will no doubt further aggravate political debate. But probably at the expense of appreciating the many things that are disconcerting the business sector at the moment, not just government policy. Like rising costs, related to chronic capacity constraints.
Ironing Out the Rate-Cut Wrinkle
At Thursday’s OCR review, the Reserve Bank will need to look past recently robust local data, in order to retain its up-or-down rhetoric with respect to the cash rate. Which we think it will do. This is a reminder that the August MPS alternative scenarios were pitched around how GDP and the CPI might travel into 2019, rather than anything immediate. These will take time to take shape, or not.
GDP Preview and the Week Ahead
Thursday’s Q2 GDP report will hold most attention across the domestic data on show this week. Despite its usual historic date stamp, this week’s growth figures will be important to see how the economy has been performing in light of low business confidence and ahead of fiscal stimulus. We think the economy has held up reasonably well, and better than the RBNZ forecast, even with a dent from repairs and maintenance and some large operations.
Upside Risks To GDP
The investor market is very heavily focused on the prognosis for New Zealand’s GDP. This is not surprising as the RBNZ published an alternative scenario in its August MPS which shows a lower-than-forecast GDP outturn could see the cash rate cut by 100 basis points. Markets have taken this to heart by pricing in a 50% chance of rate cut in the next twelve months. But what will the RBNZ do and say if GDP surprises to the upside. This is, in fact, what we expect to happen – at least in the short term.
Business Profits/Investment in Focus
The news in Thursday’s business survey will likely revolve around respondents’ expectations of own-activity, employment and investment. All were positive back in July, but only by the skin of their teeth. So it wouldn’t take much for them to slip into negative territory for August – where the survey’s profit gauges have already sagged to.