Weekly Economic Commentary 6 November 2023
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Jobs data locks in RBNZ pause
Last week we published our latest quarterly Economic Overview. The broad outlook for the New Zealand economy has not changed much in recent months. In short, we continue to think that sustained tight monetary policy settings – which are necessary to ensure that inflation returns to the RBNZ’s target range – will mean that economic growth is relatively weak over the year ahead (and negative in per capita terms). That said, we have slightly revised up our forecast for growth, reflecting our assumption that the current large inflow of migrants will persist for longer than previously foreseen. We have also slightly revised up our forecasts for inflation and now no longer expect that it will return to the RBNZ’s target range next year. This reflects our taking a more cautious view of the speed at which inflation might fall in parts of the service sector, rather than a significant change to our forecast of the real economy. As previously highlighted, we continue to forecast that the RBNZ will most likely need to lift the OCR further in 2024 while at this stage we don’t see scope for policy easing until early 2025. But as always, the path taken by monetary policy will hinge on the flow of economic data and other developments – both in New Zealand and abroad – over the months ahead.
On that score, with prospects for continued disinflation tied inextricably to forecasts of increasing economic slack, last week there was significant interest in the labour market surveys for the September quarter. In summary, these provided some good news for the RBNZ. As we had expected, the unemployment rate increased by a further 0.3ppts to 3.9%, marking the highest reading in more than two years. Also of note, the so-called underutilisation rate – which amongst other things also captures those people that would like more work – increased by 0.5ppts to 10.4%. In the detail, employment fell 0.2% during the quarter, which was a weaker outcome than suggested by the tax-based Monthly Employment Indicator (MEI). While this could reflect conceptual and coverage differences between the MEI and household survey, we are inclined to think that rotation of the survey sample may explain much of the unexpected weakness in employment in the September quarter, especially as the labour force participation rate also surprised to the downside. We will be paying close attention to developments in the MEI over coming months.
Most importantly, there were further signs that the uplift in the unemployment rate is beginning to take some of the heat out of wage growth. In particular, the private sector Labour Cost Index increased by a less than expected 0.9% in the September quarter. This marked the second consecutive quarter in which growth has printed 0.2ppts lower than in the same quarter a year earlier, and so annual growth has declined to 4.1% from a peak of 4.5% in the March quarter. Wage growth in the public sector was very strong, in part reflecting large settlements in the education sector. However, looking ahead, we expect wage growth to weaken in the public sector, lagging the private sector has it usually does. This is especially so given that the parties that will form the incoming centre-right government have pledged to focus on tight control of spending, which will likely include some job losses in the bureaucracy. Coming on top of the recent downside surprise in CPI inflation, last week’s labour market news will almost certainly allow the RBNZ to remain on the sidelines at this year’s final meeting on 29 November. But further significant progress in reducing inflation pressures will be required to keep the RBNZ on the sidelines next year.
Last week’s other key economic data concerned building activity and business confidence. Somewhat disappointingly, the number of consents for dwellings fell by a further 5% in September and are now more than 30% lower than a year earlier. In addition, consents for commercial buildings were also weak, with the amount of floor-space consented over the past 12 months down 13% on the previous year. More positively, the ANZ’s Business Outlook Survey pointed to a sharp lift in business confidence, while firms’ assessment of their own trading outlook also improved significantly. That said, it remains to be seen to what extent this is simply a kneejerk reaction to the success of centre-right parties in last month’s General Election. Elsewhere in the survey, key inflation indicators eased only modestly, and over coming months will need to make substantial further progress to arrive at levels consistent with inflation inside the RBNZ’s target range.
Aside from economic data, last week the RBNZ released its six-monthly Financial Stability Report. Unsurprisingly, the RBNZ concluded that New Zealand’s banking system remains well placed to handle potential external shocks and a downturn in the economy, with banks’ liquidity positions viewed as “strong” and asset quality described as “high”. Looking ahead, the RBNZ noted that pockets of stress are likely to grow in the medium term as highly-indebted households continue to be tested by higher debt servicing burdens. In the farm sector, it was noted that a prolonged downturn in dairy prices could see a material pickup in loan losses for banks, and that farmers in some areas also face increased risk of drought conditions due to the impacts of El Niño. None of these comments would have been a surprise to market participants.
At the end of last week the formation of a new government moved a step closer with the release of the final results of this year’s General Election. As history had suggested, following the counting of special votes, the centre-right National Party has lost 2 seats since election night, finishing with 48 seats. As a result, the combined seat-holding of National and its preferred coalition partner ACT is 59 seats – insufficient to command a majority in what will become a 123-seat parliament following the Port Waikato by-election on 25 November (even allowing for the fact that National will almost certainly gain a further seat at the by-election). It is worth noting that several electorate outcomes are very tight (for example, Te Pāti Māori holds one seat by just 4 votes) and are likely to be the subject of recount applications. However, this will have no impact on the party seat allocation nor the fact that the National and ACT parties will require the support of the NZ First party (8 seats) to command a majority in the new parliament.
Coalition talks will now move beyond the preliminary discussions that have been held to date. Although it could still be a couple of weeks before a formal coalition agreement is signed, the respective parties have indicated a desire to move as fast as possible. As we wrote in our pre-election primer, there is a reasonably high degree of commonality amongst the prospective coalition partners across key policy areas, but we can assume that the two minor parties will want some specific policy “wins” to demonstrate to their respective supporters. A quick agreement will be required if the new government is to release a mini-budget before the end of the year, as desired by PM-elect and National Party leader, Christopher Luxon.
Turning to the week ahead, the local diary is a quiet one. On Wednesday, the RBNZ’s Survey of Expectations will reveal whether the gradual downtrend in (largely) professional forecasters’ inflation expectations has remained intact. Earlier that day, the latest GDT dairy auction will also be of interest to see if the recent recovery in prices has been sustained. On Thursday, the Treasury will release the Government’s Financial Statements for the three months to September, providing the first snapshot of how tax revenue is tracking in the current fiscal year. Developments here will help condition expectations regarding any further prospective changes in the government borrowing programme in next month’s fiscal update and might have some impact on what the incoming government can deliver following coalition talks. On Friday, the week will end with the release of the Business NZ manufacturing PMI for October, which last month fell to a fresh post-GFC low (excluding the slumps associated with lockdowns during the pandemic).
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