RBNZ to continue easing
Donald Trump’s policy machinations are making it a horrible time to be a central banker. But decisions still have to be made, and we think the negative growth impact of the US administration’s policy gyrations add to the need for the RBNZ to continue its easing cycle. Meanwhile, the 2025 Budget takes centre-stage. We expect multiple new spending announcements but the majority of which will be funded from savings made elsewhere.
Activity indicators feature
Sadly, the only game in town is Mr Trump and his tariff antics. However, while we remain at the mercy of offshore developments there are still domestic indicators that need to be watched closely for first indications as to how international developments might start to impact local activity. The key data we will be watching over the next week will be the BNZ-Business NZ Performance of Manufacturing Index, released Thursday, and the Performance of Services Index Monday May 19.
Still No Clarity
Financial markets’ extreme angst might have passed for the time being, with risk assets recently bouncing off their lows, but the economic impact of the US-driven global trade shock is only just beginning to show up in indicators.
Central banks in disarray
Donald Trump has thrown global trade into chaos. He’s created volatility in financial markets. He’s raised fears of recession in the United States alongside the prospect of rising inflation. He’s created massive uncertainty across the planet. All of which has thrown the global central banking community into disarray.
Ongoing tariff fiasco remains centre stage
Trump’s tariff machinations will remain the focus for the week(s) ahead. It’s difficult to know where this is all going to end but, whatever the end point, growth will be flayed and uncertainty will remain elevated. Today’s retail, tourism and PSI indicators again highlight the fragility of a New Zealand economy that simply does not need the extra pressure coming from the United States. Meanwhile, keep an eye on Thursday’s CPI which should reveal an acceleration in domestic inflation.
It's All About Tariffs!
The actions of one President Donald Trump simply beggar belief. In a matter of days one man has almost single-handedly knocked the world economy off its pedestal. Disruptors are a necessary part of both economic and social evolution. They are invaluable at leading change when society is stuck in the status quo. But what we are witnessing right now is simply something else!
4% GDP Growth? Really?
Businesses remain firmly optimistic about the way ahead. Yes, business confidence edged a touch lower in March, but less than it usually does at this time of year and firms’ own activity expectations rose to 48.6. Judging by historical relationships, the latter is consistent with annual economic growth of over 4%. We forecast growth to pick up, but not to that degree. RBNZ is to review capital settings.
Trade Transmission
Commodity prices are higher, but the NZD hasn’t followed. This is altering the transmission of a rising terms of trade. Exports are significantly higher than a year ago, but consumer confidence is weak. We get another update on the latter this week, along with filled jobs for February as a partial guide to Q1 employment.
Chaos Reigns!
Two key macro aggregates are due for release this week: Q4 GDP (Thursday) and Q4 Balance of Payments (Wednesday). They are both critical to our understanding of how the economy has evolved. Well, that’s the theory. In practice, the data are ancient history, subject to significant revision (especially in the case of GDP) and pale into insignificance with regard to prospective monetary policy having been completely usurped by shifts in our high frequency indicators, the antics of the Trump regime in the United States and potential changes of style at the RBNZ.
Orr’s Abdication Hawkish?
In our opinion, the departure of Adrian Orr from the Governorship of the RBNZ may signal that New Zealand’s cash rate has less downside than would otherwise be the case. However, there are many moving parts. We won’t be changing our rate cut expectations solely on the back of the current ructions down at the Reserve Bank, but we warn strongly that the direction of risk to those forecasts is clearly upward. GDP partials are expected to confirm a weak Q4, PMI/PSI to give a timelier guide on activity, while pricing indicators are expected to suggest rising annual CPI inflation.
More Signs of Recovery
The economic recovery we forecast for 2025 continues to take shape. Last week’s data printed mostly for the better. But consumers remain pessimistic, and world worries remain. The terms of trade has charged higher and has further to go. It will support domestic activity. Today’s trade volumes look GDP positive. More Q4 GDP partial indicators are due this week and next.
Activity Rising; Uncertainty Heightened
The RBNZ met our and market expectations with last week’s 50 point cut and commentary. The Bank displayed comfort with looking through a near term forecast lift in inflation, as a negative output gap weighs on core inflation. However, activity indicators are improving and need to be watched closely. Today’s Q4 retail sales surprised on the high side, nudging up our estimate of Q4 GDP. Meanwhile, uncertainty measures are elevated and need to be respected.