Weekly Economic Commentary 17 October 2022
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
Read full report here (PDF 993KB).
Even less bang for your buck.
This week’s Consumers Price Index is set to reveal another big rise in prices. We’re forecasting a 1.8% increase in the CPI over the three months to September. While that would see the annual inflation rate slipping from 7.3% last quarter to 6.9%, we’re still looking at a picture of consumer prices that are continuing to charge higher.
The September quarter inflation result (due for release on Tuesday) will be boosted by the seasonal rise in vegetable prices, along with the annual increases in local council rates and alcohol taxes. But underlying the large price rises in those specific areas, we’re also continuing to see widespread inflation pressures rippling through all corners of the economy.
In part, that broad-based strength in inflation is due to continued pressure on businesses’ operating costs. Notably, recent months have seen wage costs rocketing higher as businesses have struggled to attract and retain staff.
Those elevated cost pressures have been compounded by the continued firmness in demand. That’s been seen most clearly in the construction sector, with building activity charging higher over the past year. However, strong demand has also seen growing pressures on operating capacity, namely a severe shortage of workers, in other parts of the economy, especially in service sector industries like hospitality.
That firmness in demand and the related pressures on operating costs will also be reflected in the range of core inflation measures that Stats NZ and the RBNZ will publish along with the CPI. Those measures track the underlying trend in prices, and we expect they will continue to run well above the RBNZ’s 1% to 3% target band.
Up the elevator, down the stairs – inflation is past its peak.
While the economy is continuing to be buffeted by powerful inflation headwinds, the annual inflation rate is actually expected to soften in the September quarter. That easing is mainly due to swings in petrol prices, which rose rapidly over 2021 and early 2022 as the global economy emerged from the pandemic and the demand for fuel picked up again.
While prices at the pump remain well above the levels we saw prior to the pandemic, they have dropped in recent months. In addition, the very large petrol price increases that we saw last year are now dropping out of the annual CPI calculation. Nevertheless, this still leaves us with annual inflation that is running close to a multi-decade high, signalling ongoing pressure on households’ spending power.
September quarter inflation result to reinforce the RBNZ’s hawkish bias.
Our forecast for September quarter inflation is higher than the RBNZ’s latest published forecast for a 1.4% rise. However, the RBNZ’s forecast was finalised in August, and since that time, market opinion has generally shifted towards a higher OCR peak than the 4.1% that the RBNZ was projecting. The hawkish tone of its October policy review, which highlighted that the Committee had discussed a larger 75 basis point hike, suggests that the RBNZ is already braced for stronger inflation pressures in the near term.
Recent weeks have seen financial markets pricing in the likelihood of large Official Cash Rate increases continuing into the new year. A result in line with our forecasts would strengthen the case for those moves.
The great rebalancing.
As higher interest rates dampen domestic demand, the economy is rebalancing. The opening of our borders, high export commodity prices and the weak New Zealand dollar are adding to the effect.
On the travel front, tourists are flooding back to our shores. From a standing start in March, August tourist arrivals are now back to around 40% of pre-Covid (2019) levels. And for Australian arrivals, the bounceback has been even more impressive, with August arrivals touching three-quarters of their pre-Covid levels. Anyone who has been in Queenstown recently will have noticed this.
Looking to the peak tourist season over the summer months, we expect the surge to continue. Notably, over this period we expect tourists from longer-haul markets, such as Europe and North America, to return en masse as well. Indeed, the announcements and subsequent commencement of routes such as Auckland to New York by a number of airlines suggests that they’re well aware of the level of demand.
The pandemic years aside, tourism has been a cornerstone of our export earnings. We estimate that tourism’s pre-Covid net contribution to the economy (the earnings from tourists visiting New Zealand less the amount that New Zealanders spend overseas) was around 2.5% of GDP. We expect the balance to return to around this magnitude over coming years.
The return of tourists to our shores is thus a shot in the arm for the economy, and comes at a time when other parts of the economy like the household sector are slowing. It’s a big part of the reason why we expect the overall economy to grow slowly in the next couple of years rather than tipping into outright recession. The other key reason is strong export commodity prices, reinforced by the weak New Zealand dollar.
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