Recession deepens
Leading indicators still suggest the economy is turning the corner but, at the same time, imply that any real momentum is unlikely to develop until the last quarter of this year, at the earliest. Meanwhile, this week’s GDP is likely to deliver confirmation of plenty of spare capacity in the economy justifying the RBNZ’s intention to continue lowering the cash rate.
Smaller deficit likely
Q2 trade data supported our priors that net international trade is highly likely to be a net drag on economic growth in the quarter. We will finalise our Q2 GDP pick, currently at -0.2%, after tomorrow’s final partial indicators. Trade data revisions will act to narrow the current account deficit. A smaller deficit will likely be viewed favourably by rating agencies. Monthly indicators over the coming week will help shape thoughts for activity during Q3, chiefly the PMI on Friday and PSI next Monday.
Q2 GDP partial indicators trickling in
We get a couple more Q2 GDP partial indicators this week via international trade and building work put in place data. Both are expected to imply a drag on Q2 economic activity. While we are of the view that economic activity will show some improvement ahead, the extent of weakness (or otherwise) in Q2 activity is important to keep assessing. Merchandise terms of trade are expected to lift to a record high in this week’s Q2 data. Higher export prices are the driver, albeit with more signs that heat is coming out of commodity price inflation.
Retail sales strength surprises
Today’s 0.5% jump in June quarter retail sales volumes came as a complete surprise to us. It certainly provides ammunition to the market hawks and may be yet another sign the economy is building momentum. But we’re not getting carried away yet. More signs of progress are needed for us to feel comfortable with the growth story we are currently presenting. Hopefully, the week ahead will provide some of those.
A step in the right direction
The conditions the RBNZ laid out in July for further easing have been met in our view. The RBNZ is expected to cut the OCR 25bps to 3.00% on Wednesday. That is our forecast and the strong market consensus. The key outstanding question is: how much further might rates go after the cut to 3.0%? Economic indicators for July show some signs of life. Further gains are required to be consistent with our economic forecasts, but some improvement provides hope that the tide may be turning.
August MPS Preview
In its July Monetary Policy Review the RBNZ stated that “If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further”. In our opinion this condition has been satisfied meaning a 25 basis point cut at the August 20 Monetary Policy Statement (MPS) is a given. The bigger question is, what next?
NZ faces higher US tariff; labour market soft
NZ goods sold into the US are set to face a 15% tariff. This is a lift from the 10% that was put in place earlier this year. In addition to a higher rate, another adverse factor this time around is that NZ goods will no longer be facing the lowest possible tariff rate into the US. We anticipate this Wednesday’s Q2 labour market data to portray a softer market than the RBNZ published in its May MPS. Inflation expectations data is due too
Q2 Labour Market Preview
We expect next week’s data to portray a weak labour market via a dip in employment, push higher in the unemployment rate, and easing wage inflation. The labour market looks to be tracking softer than the RBNZ forecast in May. Today’s filled jobs data supports that view. Business and consumer confidence updates are due this week.
Green Light for August Easing
Any fear that today’s CPI outturn (0.5% for the quarter, 2.7% for the year) might convince the RBNZ to keep its finger on the pause button should have been shattered by the news that prices rose “just” 0.5% in the June quarter. We think an August cut is now as close to a done deal as can be the case.
Turning to inflation
The last few days have seen a number of high frequency activity indicators support our view that not only did the economy stall in the June quarter but it is also struggling to gain momentum going into Q3. Indeed, so poor have these indicators been that we have lowered our expectation for Q2 GDP to -0.2%, from zero, and have made exactly the same adjustment for Q2 employment. Attention turns to inflation over the coming week, with June Selected Prices on Thursday ahead of the Q2 CPI next Monday.
Eyes on RBNZ
Last week, we moved to expect no change in the OCR at this week’s RBNZ meeting. That is not to say we don’t still think there is a chance of, and indeed a strong case for, a 25bp OCR cut this week from its current 3.25%. But we reached the conclusion that it will be hard for the RBNZ to cut at this meeting largely because post the May MPS it suggested market pricing would be a key driver of its decision. The market is currently pricing little chance of a cut on Wednesday. As for data, the June PMI due on Friday is of most interest after last month’s plunge.
In confidence . . .
It is looking increasingly likely the RBNZ will stand pat when it delivers its July 9 Monetary Policy Review. Our formal view is for a 25 basis point cut but we recognise that the odds of this are diminishing by the day. Be that as it may, we think changing our call before seeing Tuesday’s NZIER Quarterly Survey of Business Opinion would be ill-advised.
Tensions and Trade
Further escalation in Middle East tension over the weekend brings an expectation of risk off and higher oil prices. If the oil price lift were to persist or extend, it threatens a lift in the cost of imports and to put upward pressure on inflation and potentially inflation expectations. None of this would be good for growth. This week’s trade data for May is expected to show very strong export growth and a rapidly narrowing annual deficit.