MPS Preview: Enough Already?
At Wednesday’s Monetary Policy Statement (MPS), the RBNZ is bound to acknowledge the better-than-anticipated local data – and starkly so relative to its May MPS expectations. However, the Bank will also surely reiterate the many risks it sees on the broader horizon. So, there will be plenty to keep the Bank with a clear easing bias. Having said this, and while noting the risk of a further easing in monetary policy in some way shape or form, we think the RBNZ is likely to leave its policy settings unchanged at this juncture, the LSAP metrics included.
Cutting to the Employment Outlook
For all the ups and downs in GDP, the labour market will be key to understanding the economy’s trajectory. And by this we mean the coming many quarters, rather than just the June quarter data due for release on Wednesday, which might not look that bad.
The ANZ business survey’s partial read, for early July, encouragingly showed a sense of recovery that was largely lacking through June. Can its full update for July build on this, is the question?
In many ways, it needs to. This is in order to validate the idea the economy is firmly in rebound mode, as many would now appear to presume (aided by the feel-good factor of a Covid-free NZ community).
Time Is On RBNZ’s Side
At face value, the case for the RBNZ to hold policy steady at its August Monetary Policy Statement appears quite straightforward. The balance of developments since its previous May projections have tended to be on the better side of expectations. This argues for the LSAP limit to stay at $60b for the time being, given that provides plenty of headroom at present. The OCR is expected to stay at 0.25% for quite some time. But there remains much to monitor, including obvious offshore risks.
Some Resilience To The World’s Ills
The pandemic has seen incomes dented and unemployment rise across the globe – conditions usually associated with lower commodity prices. While some prices for NZ’s major primary export products have fallen, many have shown a fair degree of resilience over recent months. This ultimately helps support activity and, combined with lower imports, will help move the trade balance back into surplus. Thursday’s Q2 CPI is likely to be the start of a period of easing annual inflation.
We continue to monitor many high frequency data series to help gauge the very latest changes in economic conditions. Recent readings, across several indicators, have shown a general theme of holding up reasonably well, especially given the circumstances.This spans areas such as housing, commodity prices, external trade, domestic spending, and employment. But there are caveats. We also look at how the unemployment rate will be influenced by labour force participation rate and what Australia’s experience might be telling us.
Mindful of Labour Market Measurement
There is a decent chance New Zealand’s near-term labour market data paint a picture of resilience to the ravages of COVID-19. However, interpretation will need to be mindful of measurement issues, and timing.
RBNZ OCR Review
This week’s RBNZ OCR review should be singularly unexciting. As far as we are concerned, the very best thing the RBNZ could do is simply leave everything where it is. For now, things seem to be ticking along in the manner you would expect and there is insufficient evidence to stop the RBNZ from sitting very firmly on its hands.
Global Outlook A Galeforce Headwind
New Zealand may be Covid-free (for now at least) but the rest of the world certainly is not. Nor will it be so for a very long time. Given that exports account for almost a third of our GDP, the preponderance of the illness across the planet will continue to be a limiting factor on our economic expansion for the foreseeable future, even as economies elsewhere begin to open up.
Recovery Builds Momentum
We think the move to Level 1 will provide the economy a significant boost. For the vast majority of us there will be little difference in our day to day activity as we emerge from Level 2 but we think the confidence impact will be tangible. Confidence has a huge impact on both consumer spending and investment activity. And there is already some evidence of household expenditure picking up in excess of our expectations.
Looking Up Out Of The Hole
More than a week with zero new COVID cases, and just a solitary active case, gives obvious grounds for optimism. So too does the gradual easing of previous restrictions including last Friday’s move to allow gatherings of up to 100 people (up from 10 previously). With the recent movement down alert levels, and with restrictions beings relaxed, it is no surprise to see many timely indicators showing marked improvement. Further gains are expected with a move to alert level 1 getting closer by the day. Meanwhile, job losses reflect the damage done.
Unbearable! Australia Out In Front
There’s a lot of discussion about the relative economic performance of New Zealand and Australia. So far, most economic indicators we look at suggest Australia is going to come through the current shock in a better state than ourselves. We have little reason to question that conclusion. However, we are less inclined than some to put the “blame” for this on the decisions of policymakers.
April’s Plunge from Q1 Cliff
With last week’s Monetary Policy Statement and Budget all said and done, this week’s focus will return fairly and squarely on the economic data. Friday’s retail trade report might take a bite out of thoughts of a steady Q1 GDP. And, the range of data for April will hammer home the maximum lockdown that the country went into that month.