Vulnerabilities
Global IT issue highlights vulnerability and risk. NZ’s falling hydro lake storage levels is another risk to watch. Wholesale electricity prices have already lifted appreciably, adding to costs for those exposed and a drag on growth. Much weaker imports in today’s June trade data reflects ongoing weakness in domestic demand. Along with some softer export volume figures, it supports our view GDP retreated in Q2.
Crumbling
If there was a surprise in the Reserve Bank’s greenlighting of earlier rate cuts last week it was only in the timing. We’ve long been of the view the economy is buckling, inflation is beaten, and rate cuts would ultimately be delivered much earlier than RBNZ projections.
Misery but no rate cuts
This week, all eyes will be on the July Monetary Policy Review on Wednesday afternoon. We wrote our full preview in last week’s Markets Outlook but, for the record, we expect rates to be unchanged and the central bank to stick to its broad view that interest rates will need to stay elevated for longer to ensure it meets its inflation target.
RBNZ MPR Preview
We believe the RBNZ will ultimately ease much earlier than it currently assumes. But, equally, there are a number of conditions that will have to be met before it springs into action. We still reckon February 2025 is the most likely starting point but think that by November of this year the necessary conditions will be met for the RBNZ to give a clear indication of its intent to move early in the New Year.
More Slack Ahead
Lead indicators point to weak economic conditions continuing. That promises more economic slack opening up this year. Recent RBNZ research suggests that could have a bigger downward influence on inflation that before. But the Bank also sees opposing risk of inflation remaining persistent. Interest will be on inflation gauges in this week’s confidence surveys, but we’ll be watching the growth and labour market indicators too.
One After Another
We think this week’s Q1 GDP figures will be weak, but noisy. Even if growth can manage a positive sign in Q1, the latest run of indicators including the PMI and PSI suggest increasing downside risks to growth ahead. Softer demand indicators raise the chance that the RBNZ reduce the OCR earlier than projected. But components of inflation may keep the RBNZ wary in the near term. RBNZ Chief Economist to talk on inflation this week. A weak economy and a large current account deficit will remain on the radars of rating agencies.
GDP Preview: Still Struggling
The economy still looks like it is bumping along the bottom and contracting on a per-capita basis. The ‘partial’ indicators suggest GDP struggled to grow in Q1. A flat to negative outcome would be a touch lower than what the RBNZ had factored into its May MPS. On the inflation front, Friday’s selected prices for May will be assessed for guidance on Q2 CPI.
Oil, Power, and Growth Indicators
Any major deviation from our priors for this week’s range of GDP ‘partial’ indicators could have implications for our pick for Q1 activity, although shouldn’t change the main message of softness. OPEC+ and ComCom decisions suggest opposing forces for energy prices. The aluminium smelter deal looks growth positive.
Economy Pressuring Budget
A structural deficit and cyclical pressures make for an awkward backdrop for a Budget. But that is the current situation, leading into the Government’s Budget on Thursday. Given the economic pressures, we expect to see larger fiscal deficits and funding programme than published in the Half Year Economic and Fiscal Update (HYEFU).
Holding Tight
The RBNZ Monetary Policy Statement (MPS) is due for release on Wednesday. We expect the OCR to be held at 5.50%. On the outlook, we wouldn’t be surprised to see the RBNZ broadly repeat its previous messaging as it weighs up mixed data and ahead of known unknowns like the details of the Government’s Budget. Large net migrant inflows are cooling rapidly with implications for growth and inflation.
May MPS Preview
We expect the Reserve Bank’s view of the world, as espoused in its upcoming Monetary Policy Statement, will be largely unchanged from what it said back in April. Sure, inflation has been higher than it had anticipated and risks of further near-term upside remain but growth is surprising to the low and unemployment to the high indicating that any near term inflationary issues should dissipate in time.
Softening Affirmed
Last week’s Q1 labour market data affirmed our view of a softening market, and we see further softening ahead. Understandably, the RBNZ gave no sense of material surprise to last week’s information. Inflation information and the Budget look the more important events on the local calendar to shape the Bank’s view.