The services sector has been the backbone to New Zealand’s economic growth since the 2008/09 recession. So, even with the rebound recorded in April’s Performance of Manufacturing Index, to an ”almost normal” level of 53.0, GDP growth looks prone to toil on the basis of the latest PSI. This, in turn, is starting to challenge the view that NZ GDP growth will do relatively well through the course of 2019 – albeit after a relatively mild Q1.
An Early Peek At Q2 Inflation
April’s food and rental prices released today come in close to our expectations, but there is still plenty to watch and consider regards the influences on inflation. This includes signs of price pressure following the recent lift in the minimum wage and higher rents feeding into the CPI. Meanwhile, there are a few activity indicators due this week that will allow us to gauge the current growth pulse and assess against RBNZ forecasts.
RBNZ Should Buy Itself Time
We believe the best approach the Reserve Bank could take this week is to keep interest rates on hold while formally building in an easing bias into its rate track. For all intents and purposes, this would be a time-buying exercise which would: limit the chances of the RBNZ making a policy mistake; increase the chances of a rate cut being impactive if it was eventually utilized; minimize future market volatility. From an investor perspective, the risks around this week’s meeting are huge. On this basis it may well be that a relatively neutral approach to the likely outcome is the most appropriate stance.
Beyond Sustainable Employment
This week has a couple of local economic reports that could yet swing opinion on a May OCR cut. With the market still reluctant to price it far from 50/50, it’s coming down to the wire. The slow headline Q1 CPI jerked pricing back to that area, while Adrian Orr’s interview with the NBR late last week (including talk of on fiscal stimulus) didn’t exactly encourage the idea of an immediate rate cut.
As we see it, Friday’s March figures will be consistent with solid growth in merchandise export and import volumes as per the Q1 GDP accounts (albeit with growth in exports overtaking that of slowing imports on an annual basis). This, in turn, is integral to the trend-like 0.5% expansion we currently estimate for Q1 GDP.
Inflation Likely Firmer Than RBNZ Foresaw
To be sure, some of the upside we see for the Q1 CPI relates to the rebound in fuel prices. However, also note we are picking that non-tradables inflation firmed to an annual pace of 3.0% in Q1, from 2.7% in Q4, whereas the Bank is looking for 2.8%. This gives a sense of where we see the directional bias to the core inflation measures for Q1.
As a sounding board for New Zealand, we think news, and rhetoric, out of Australia will bear monitoring. That economy has arguably been coming off the boil more than New Zealand’s has – and in key respects. Yet the RBA is sounding less committed to easing even further, compared to the RBNZ’s latest missive. There is certainly a lot of RBA-speak due before the next RBNZ announcement, starting this week.
Markets Gagging For A Rate Cut
The RBNZ has moved to a formal easing bias and, one can only assume, has given the markets a clear message that a rate cut is its central agenda. But we can’t help but think that key employment and inflation data still don’t support such a move. Consequently, while you never want to bet against what a central bank is telling you, we still can’t rule out tighter conditions than currently priced by markets.
RBNZ to Resist Snapping at Dovish Lure
We expect the Reserve Bank to remain reasonably balanced in its policy announcement this Wednesday, while keeping its cash rate at 1.75%. This is not to ignore the downside risks that are accruing – principally global, and notably in manufacturing. More to the point, the NZ economy is (more than?) fully employed, while inflation is middling and not without upside risk.
Economy Muddling to Middling
We anticipate Q4 GDP expanded 0.5% in volume, which would slow annual growth to 2.4%, from 2.6%. While this might appear disappointing, it is arguably close to the economy’s growth potential at present. As such, GDP growth is consistent with inflation running near enough to the 2% per annum mark, and employment rates remaining relatively high. Couched this way, we struggle to see any mandate for the Reserve Bank to cut its cash rate even further.
The Reality of Slower Growth
GDP growth is slowing, the world over. But labour markets remain relatively tight and, for the most part, are starting to generate some inflation. Such things make it important to understand what’s actually driving the slower growth – supply limits, or weaker demand – but also to appreciate lags between economic growth and hiring.
A Testing Week for Q4 GDP
Last week’s ANZ business survey did not exactly inspire confidence in this year’s rate of economic expansion. But that’s not to overlook vulnerabilities to growth of late last year either. While we expect Q4 2018 GDP to increase a respectable 0.7% (2.6% y/y), there are three key indicators this week which, on balance, threaten to peg it back.