More growth, more tension
There is a flood of data already released and due for release this week all of which is likely to support our view that the economy risks overheating, growth and inflation are surprising to the upside, and supply issues are increasingly problematic.
Determining Q1 GDP
This week we get further insight into the progress of around 15% of the New Zealand economy through the first quarter of this year. With the Wednesday release of the respective surveys of manufacturing and wholesale trade, we should get a much better feel for whether the economy contracted in Q1, as hypothesized by the RBNZ.
Inflation warning signs blaze
Today’s ANZ Survey supports our view that the demand for labour is exceeding potential supply and inflationary pressures are rising at an accelerating rate. Both these conditions support the RBNZ’s recent decision to ponder raising its cash rate next year. This week we get to see some partial indicators for Q1 GDP. We think the balance of risk is that these will suggest a positive March Quarter outturn in contrast to the RBNZ’s 0.6% expected drop. Meanwhile, keep an eye on the Canterbury floods which are negative for the region’s growth but the rain across the country is a big plus for those dried up hydro lakes.
Risk and Reason for a Less Dovish RBNZ
While we expect the RBNZ to broadly maintain its very accommodative line at Wednesday’s MPS, there is a risk it comes across as a little less dovish. The Budget, and even this morning’s stronger than anticipated Q1 retail trade figures, certainly add to the case for less monetary stimulus.
RBNZ MPS and Budget Preview
It’s hard to see how the RBNZ’s May MPS could be more dovish than its February equivalent. It could, however, display a distinct tilt to the less dovish side. In our opinion, the labour market is turning out to be tighter than the RBNZ had expected and the outlook for CPI inflation higher. If the Reserve Bank has come to the same conclusion then it would also be consistent to conclude monetary conditions don’t need to be as easy as previously assumed.
Expectations Firming for More Than Just CPI Inflation
Expectations are firming for CPI inflation, along with numerous other things about the NZ economy. Wages, economic activity, investment, employment – they are all now anticipated to be stronger in their rate of expansion. Fiscal policy options too, are getting latitude, from the rapidly repairing fiscal accounts, based off strong growth in tax revenue. There is also a certain resilience in the housing data of late, which is interesting.
Labour Market to Get Tighter Than RBNZ Expects
xpectations for Wednesday’s Q1 labour market data, while decent, are broadly margin of error material. The real test is what one projects for the unemployment rate over calendar 2021, and into 2022. On this, we see a clear drop, to around 4%, as above-trend demand for staff clashes the available pool of labour expanding at well below normal rates. The Reserve Bank’s last set of forecasts, by comparison, had the jobless rate drifting a bit above 5% over 2021 and not getting below 5% until 2023.
The government’s plans to have more say in financial regulation will be important for the markets to monitor. However, judgement will have to wait until the details are, firstly, revealed and then confirmed in legislation. This could take at least a couple of years, going by currently proposed timelines.
Core Inflation Nudging Above 2%?
This week not only marks the start of a two-way travel bubble between New Zealand and Australia but also provides key data on inflation. Is there inflation coursing through the local economy? We believe we are not alone in thinking there is. Will this be obvious in Wednesday’s Q1 Consumers Price Index? Probably not.
The Framing of Stagflation
We expect the RBNZ to maintain its dovish settings and rhetoric at Wednesday afternoon’s Monetary Policy Review. This entails a cash rate stuck down at 0.25% and the Bank’s LSAP envelope kept at $100b. However, this is right as the economy is encountering stagflationary aspects, which will be real a test for the RBNZ this year.
Previewing the April Monetary Policy Review
RBNZ will stand fast
Should be happy with current market pricing
May 5 Financial Stability Report probably of greater interest
Commodity prices continue to boost NZ economy
Population growth slump continues to slow it
Construction Inflation as a Leading Light
Those who continue to fret over “too-low” CPI inflation should be greatly encouraged by trends in New Zealand’s construction industry. There, pricing is definitely ramping up. This is as strong demand clashes with supply constraints that are being exacerbated by global supply-chain problems. This is another reason for us to wonder if we have quite enough housing-related inflation in our CPI forecasts.
Trans-Tasman Bubbles and Comparisons
Ultimately, any trans-Tasman travel bubble must be logistically safe and secure. But it’s also important the border is re-opened to people, to the extent safely possible, for the sake of the screeds of businesses currently suffering its virtual closure. This is a pointer that the economic impacts of a travel bubble are potentially more significant from a compositional perspective than for respective net-GDP gains overall.