Weekly Economic Commentary 13 November 2023
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Data maintains softer tone
Last week was a relatively quiet one as far as local data and events were concerned, with New Zealand markets mostly tossed around by developments in offshore markets. Perhaps of greatest interest to a net energy importer like New Zealand was a further sharp decline in the price of crude oil, with Brent trading down to $80/bbl compared to over $95/bbl just a few weeks ago. Should this decline be sustained, lower retail petrol prices will release disposable income that can be spent elsewhere in the economy. And at the margin, lower petrol prices will help to reduce inflation and inflation expectations.
On that score, the RBNZ’s latest survey of expectations – capturing the views of a small number of professional forecasters and business leaders – provided some moderately comforting news. The 1-year ahead expectation of inflation fell 57bps to a more than two-year low of 3.60%, while the 2-year ahead expectation fell 7bps to 2.76%. Both remain much higher than their pre-pandemic levels, but the RBNZ will welcome the direction of travel. Expectations of inflation at the 5-year and 10-year ahead horizon increased slightly. However, the RBNZ’s research has indicated that incorporating long-horizon expectations does not improve the accuracy of forecasts of inflation.
The flow of softer news from the labour market continued, with Seek reporting a further 5.6% decline in job advertising in October. The level of advertising is now 29.4% lower than a year earlier and well below trend levels. News from the manufacturing sector was even more downbeat last week, with the Business NZ manufacturing PMI declining a further 2.6pts to 42.5. This is the weakest outcome for a non-COVID affected month since May 2009, when the economy was still mired in the post-GFC recession. The output index fell to an even softer 41.5, while the employment and new orders indexes fell to 43.3 and 44.1 respectively. Given the focus of New Zealand’s manufacturing sector, we think that the weakening trend likely owes in part to the steep decline in dwelling consents over recent months, which portends a looming slowdown in construction activity.
Turning to the rural sector, the recent run of better dairy news was halted with the GDT auction producing a 2.7% decline in the price of whole milk powder. We remain comfortable with our forecast that Fonterra’s farmers will receive $7.25 per kilo for their milk this season – a level that will leave many farmers in the red given high interest rates and on-farm costs. Last week also saw an increasing focus of the plight of New Zealand’s sheep farmers. Lamb schedules have declined to around $6.75 per kilo of late, down more than $2 from the same time last year. As with weakness in dairy prices, much of the weakness in prices for lamb can be traced to soft demand from China, while increased production in Australia is also hindering returns this year. Weak commodity prices mean that the rural sector will be a weight on economic growth over the coming year.
Finally, last week also saw the release of the interim government financial statements for the three months to September, providing the first insight into how the fiscal accounts are tracking in the new 2023/24 year. This provided some good news for the incoming government, with tax revenue running fractionally ahead of the heavily downgraded forecasts that were contained in the Pre-Election Economic and Fiscal Update. At face value, this suggests that we should not expect a further upward revision to this year’s borrowing programme when the Treasury releases the Half-Year Economic and Fiscal Update next month.
This week’s somewhat busier local diary begins today with the release of the Business NZ Performance of Services Index for October. Following three months below the key 50-level, the index rebounded to a slightly expansionary reading of 50.7 in September, with the new orders index improving to its highest level since May. A sharp pick-up in responses from the Otago/Southland region and in the cultural/recreational industry hinted at the impact the ongoing recovery in foreign tourist arrivals. It will be interesting to see whether the improvement has been maintained, especially in light of last week’s poor manufacturing survey.
On Tuesday, Statistics New Zealand will publish an expanded set of monthly CPI series for October. In addition to the usual update on food and dwelling rental prices, for the first time we will receive monthly data covering airfares, accommodation services, fuel prices (exclusive of discounts) and prices for tobacco and alcohol. The new data on airfares will be especially useful, as this is one of the more volatile and so difficult to forecast components of the quarterly CPI report.
A busy Wednesday will begin with REINZ releasing its housing report for October. After allowing for seasonal effects, house sales fell, and prices moved sideways in September. We suspect that the proximity of the General Election played a role in suppressing activity in September, and this may have also been at play in the first half of October. Indeed, figures published last week by Auckland’s largest real estate agency indicated a further small decline in their sales in October (after allowing for seasonal effects), which nonetheless remained well above the exceptionally low levels reached a year earlier.
Later that morning, we expect news of another large inflow of migrants in September. Of greater importance will be whether there is a repeat of the recent pattern of large upward revisions to previous months – revisions that lifted the annual inflow to a record 110,000 people in August. Electronic card transactions data for October will also command attention, especially after the very soft consumer spending that was reported in September. Meanwhile, the RBNZ will release the results of its latest survey of household inflation expectations. The RBNZ’s research has indicated that amongst all measures of inflation expectations, year-ahead household inflation expectations add the most explanatory power to forecasts of inflation.
On Friday the week will close with the release of the annual national accounts for the year to March 2023 and the business price indexes for the September quarter. At least through the June quarter, the latter have pointed to a significant moderation in the pace of increase in firms’ non-labour costs, and we expect that this trend will have remained intact through the latest quarter despite higher energy-related costs. Finally, we are hopeful that coalition negotiations to form the next government will have concluded by the end of this week. If so, the focus for the market will be on what policy trade-offs have been made to secure the agreement.
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