Capacity, Commodities and Construction
- Businesses still upbeat?
- As capacity issues press
- Oil to dent near term inflation
- And add to already strong terms of trade
- May exports expected higher
- Building consents to bounce in May?
Data releases in New Zealand are relatively sparse this week. But what is on offer will provide more fodder to contemplate the growth and inflation implications of three important current themes namely capacity constraints, commodity price movements and construction activity.
Steady As She Goes
- RBNZ to reiterate steadiness at OCR review
- As positives and negatives weighed
- Our Feb-hike call looking too soon?
- Even with OCR presently half its neutral level?
- PSI/PMI each signal above-trend growth
We expect that the Reserve Bank will stick with its steady-as-she-goes tone at Thursday’s OCR review, while leaving its cash rate at a record low of 1.75%. To be sure, there has been some key news that the 11 May Monetary Policy Statement (MPS) hadn’t figured on. But the ups and the downs are probably offsetting in respect to OCR baselines.
NZ GDP Having Technical Issues
- We expect Q1 GDP expanded 0.5% (2.4% y/y)
- But expectations within a credibly wide range
- Capacity constraints coming to the fore
- External accounts a non-issue for Q1 and after
- May's (ECT) transactions clang with a 0.2% dip
- Also due this week: May's FPI, PMI (and REINZ?)
For Thursday’s March quarter GDP report we have toned down our growth expectation to a quarterly 0.5% (2.4% y/y). But we are at pains to point out the unusually wide range it could conceivably fall within. And this is not so much about the market range of 0.1 to 1.1%, with a median expectation of 0.7%. It’s more about the range of outcomes that we perceive as quite conceivable.
Q1 GDP Growth Looking More Moderate
- We prune our Q1 GDP pick to 0.6%, from 0.7%
- Wholesaling (like retailing) robust
- But Q1 building dip is a big, albeit once-off, weight
- Tomorrow's Q1 manufacturing might also disappoint
- Barfoot's data affirm slowing Auckland housing
- Commodity prices looking robust, still
A little bit like for Australia, there are question marks about how robust Q1 GDP will be in New Zealand as well. The negative from the Building Work Put in Place outweighs the positive from Wholesaling, such that we are today revising down our expectation for Q1 GDP growth to 0.6% (verging on 0.5%), from 0.7% (verging on 0.8%).
Our final call on Q1 GDP growth will depend, as usual, on the last statistical piece of the jigsaw, the quarterly manufacturing sales and inventory data. These are due tomorrow morning. We expect them to infer a strong bounce in manufacturing production, after weakness in Q4 that we judged as once-off.
Eyeing A Record
The NZ economy continues to perform well. The latest broad indicator will come via Wednesday’s ANZ business survey. While its confidence index moderated to about average in April, respondents maintained a strong outlook regarding their own activity, employment, investment and profitability. With this there have been signs of stretched capacity and a firming intent to raise prices. We haven’t seen anything in the past month or so to change this narrative, so we expect May’s edition of the business survey to reiterate these broad themes.
A Choice Looking Budget
It’s all looking choice for Thursday’s Budget. New Zealand’s fiscal trajectory is looking more and more positive. This is thanks to a long efficiency drive on the part of government spending, along with solid tax-flow from a robustly expanding economy. However, as this is an election year – and a tight looking one at that – there’s added pressure to funnel some of the surfeit back into the economy
- McDermott speech to expand on RBNZ reserve?
- A neutral stance but with OCR well below neutral
- Retail trade keeps booming in Q1
- April's slow PSI intriguing; PMI still strong
- Q1 business prices to show broader inflation
- April's tourism numbers up about 25% y/y?
Who was it who said never make predictions, especially about the future? They obviously didn’t work in the markets, where some sort of view – whether implicit or explicit – is often essential in order to navigate the way ahead. And to compare and contrast with others’ views. But as a reminder that we never quite know even the undercurrents of the economy, as a starting basis, this morning’s retail trade figures blew everyone out of the water. Even accounting for population growth, they remained rapid.
Warning: Explicit Tightening Bias Ahead
- Higher cash rate demanded
- As inflation and inflation expectations rise
- Labour market nears full employment and NZD weakens
- RBNZ to prevaricate with modest shift to tightening bias
- We move our hike call forward to February
There is no excuse for the cash rate to be just 1.75% in New Zealand. But odds are the Reserve Bank will find one when it delivers its May 11, Monetary Policy Statement. As we see it: inflation expectations are elevated and rising; growth is at or above trend; capacity constraints are intensifying; headline and core inflation are around the mid-point of the Reserve Bank’s target band; the currency is proving to be weaker than anticipated; and commodity prices are pushing New Zealand’s Terms of Trade to near record levels. All of this argues for the cash rate to be a lot closer to neutral than where it currently is.
Labour Market Powering Through the Crosswinds
- HLFS to continue its jagged improvement in Q1
- But needs cross-checking with QES and LCI reports
- RBNZ inflation expectations survey now due Friday
- Dairy price recovery levelling off?
- April's QVNZ housing report…another mixed one?
If we are not so sure about what figures the HLFS will throw up for the March quarter, we are confident about the broad trajectory of New Zealand’s labour market. Based on the staffing indicators we look at we get a clear sense of above-average momentum.
Let the (Fun and) Games Begin
- RBNZ should move to a clear tightening bias
- But it's likely to resist for as long as it can
- Masters games (then Lions tour) add to tourism
- Migration, trade and building consents due for March
- French politics goes to show NZ's relative centrism
The World Masters Games are well under way in New Zealand this week. We can also see some fun and games playing out between a Reserve Bank doing its best to maintain a 1.75% cash rate low, and a market seeing this as increasingly unjustified with inflation firming as much as it is. At the February Monetary Policy Statement (MPS) we struggled to find anyone who seriously thought there was a chance of further OCR easing (as the Bank then indicated). For the 11 May MPS the question will come on any gambit by the Bank to maintain its neutral stance.
CPI Inflation to Persist Around 2%
- Annual CPI inflation to hit 2.1% in Q1
- And will keep middling the 1-3% target band thereafter
- Pay-equity ruling to ripple into macro wage data
- Prices likely higher at dairy auction overnight
- Impacts of this wet autumn bear thinking about
- Can the PSI hold above the now-racy PMI (57.8)?
As we’ve done for awhile, we expect Q1 CPI inflation to be miles above what the RBNZ expected as per its February Monetary Policy Statement, namely 0.3% for the quarter and 1.5% for the year. To be fair, the Bank has since intimated that its expectation is now higher. But also that it doesn’t see annual CPI inflation holding up near 2% beyond the short term. In contrast, we believe it will stay up. The Quarterly Survey of Business Opinion pointed to this as well.
The More Things Change (for the RBNZ)
- More potential changes to/for the RBNZ
- But unlikely to alter monetary policy judgements
- March ECT to inform on Q1 retail volumes
- March PMI due Thursday
- We expect March Food Price Index fell 0.2%
There will be some potentially interesting changes at, and for, the Reserve Bank of New Zealand over the next twelve months or so. However, we don’t believe any of it will cause the Reserve Bank to act that much differently to what it would under the status quo. Or, at least, it shouldn’t. One thing that will not change, we believe, is the commitment to inflation targeting/control.
Monetary Policy Pressures to Evolve Further
- QSBO to portend moderating growth
- But elevated inflationary pressure
- Opposition Finance spokesperson to muse on monetary policy future
- Change in RBNZ Governor will not mean change in RBNZ stance
- Commodity price inflation has peaked
Tuesday’s QSBO should reaffirm moderating growth accompanied by rising inflationary pressure (at least at the headline level). Meanwhile, the RBNZ will stick to its knitting even after the Governor departs. But keep an eye out for the opposition finance spokesperson’s monetary policy musings for potential shifts in direction if a close-run election was to deliver a change in government.