Economy Muddling to Middling
We anticipate Q4 GDP expanded 0.5% in volume, which would slow annual growth to 2.4%, from 2.6%. While this might appear disappointing, it is arguably close to the economy’s growth potential at present. As such, GDP growth is consistent with inflation running near enough to the 2% per annum mark, and employment rates remaining relatively high. Couched this way, we struggle to see any mandate for the Reserve Bank to cut its cash rate even further.
The Reality of Slower Growth
GDP growth is slowing, the world over. But labour markets remain relatively tight and, for the most part, are starting to generate some inflation. Such things make it important to understand what’s actually driving the slower growth – supply limits, or weaker demand – but also to appreciate lags between economic growth and hiring.
A Testing Week for Q4 GDP
Last week’s ANZ business survey did not exactly inspire confidence in this year’s rate of economic expansion. But that’s not to overlook vulnerabilities to growth of late last year either. While we expect Q4 2018 GDP to increase a respectable 0.7% (2.6% y/y), there are three key indicators this week which, on balance, threaten to peg it back.
Q4 Retail Silences the Doubters
The Q4 2018 retail trade figures support our view that New Zealand’s economic growth still has some substance to it. As for how well, and how long, this will last, Thursday’s ANZ business survey will give insight. But even if it remains a bit lacklustre with regard to GDP growth, this is no guarantee that its inflation pointers will fade…given the role of diminishing supply potential in all of this.
The Electorate Will Dictate the Tax Agenda
Regarding Thursday’s Tax Working Group final report, none of the changes mooted by it are supposed to be coming in any time soon, if at all. The government has made it clear that it will legislate for any (major) tax changes to come into effect after the next election. This means the electorate will be the ultimate decision maker, and will have a long time to debate the issues, especially around the taxing of capital.
RBNZ One Of The Crowd
Wednesday’s RBNZ Monetary Policy Statement (MPS) is front and centre for the market this week. The Official Cash Rate is unanimously expected to be held steady at 1.75%. But the market has become increasingly aggressive in pricing the chance of a cut later this year. The Bank’s commentary will give important direction, after a virtual 3-month vacuum from the Bank in this regard.
Labour Market Still Trending Tighter
Thursday’s Household Labour Force Survey (HLFS) is prone to look slower. But only in a statistical sense, after outsized gains in its employment measure in Q3, and plunge in unemployment, to 3.9%. The Q4 HLFS should not give any respite to nominal wage and salary inflation, therefore, which we believe remains firmly biased northward.
Statistics NZ Slashes Migration
Statistics New Zealand’s new way of measuring migration should trim population growth estimates over the last few years. Our back of the envelope suggests 0.3% less over each of the last couple of years, and a cumulate reduction of about 45,000 over the last four years. This should boost macro-based measures of productivity, by definition. It also takes a lot of pressure off the supposed housing shortage, in the stroke of a pen. These are just a taste of the many things we’ll have to think through and monitor, with respect to the NZ economy, as a consequence of the new way Statistics NZ is measuring migration.
BNZ Markets Outlook - Headline CPI Inflation to Belie Core Pressure
• CPI prone to undershoot RBNZ expectations
• But core inflation pressures remain in full force
• Which should keep the Reserve Bank thinking
• Slower PSI (53.0) counters stronger PMI (55.1)
• Migration/tourism data due (separately) Friday
The headline CPI is prone to undershoot recent RBNZ expectations. And not just in Q4 figures due to be published tomorrow, but running into calendar 2019 as well. However, as last week’s Quarterly Survey of Business Opinion (QSBO) highlighted, the underlying drivers of inflation remain firmly in force. This should have the Bank thinking twice before acting on its dovish signals.
2019: A Dawning Sense of Realism
As 2019 gets underway, a sense of realism appears to be setting in to markets. Compared to a few months ago, equities have taken a knock. While measures of volatility/risk have come back on the radar after a long slumber. Realism on the economic front is a matter of accepting that the post-GFC expansion is now very long in the tooth. This brings with it the likelihood of apparently-weak GDP growth, but also the risk of surprisingly resilient inflation.