Weekly Economic Commentary 5 February 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Horses for courses
Recent weeks have seen markets become challenged on their very strong view that now central bank policy rates have peaked, there should be a sudden significant reduction in policy interest rates. Markets have generally held the view that the central bank policy rate cycle will continue to be synchronised. Hence policy easing is expected to come from most jurisdictions at around the same time and be delivered by a similar magnitude. The challenge to these views is coming on two fronts: firstly, on the timing of the first policy rate cut; and secondly on the extent of policy easing in 2024 and beyond.
Central banks have tended to push back on the idea of near-term policy easing and in the case of Japan, expectations are growing of an increase in the policy rate (finally!) out of negative territory. In most jurisdictions, inflation remains relatively high or has fallen due to factors that might prove transitory. The central banks of the US, Canada and the UK have all recently indicated caution on reducing rates too soon even though in some cases (especially the US and Canada) core inflation has dropped off more significantly than other advanced economy jurisdictions.
New Zealand fits into the category of advanced economies where core inflation remains stubbornly high. The RBNZ noted this when their Chief Economist updated markets on the RBNZ’s thinking this week. He emphasised that non-tradables inflation still hovers around 6% and is falling only very slowly. We also saw evidence of core inflation stickiness in recent business surveys – for example the ANZ Business Outlook measure of pricing intentions in January continued its very recent rising trend and might suggest inflation could get stuck around the 4% level for a while. Other business surveys such as the long running Quarterly Survey of Business Opinion paint a similar picture. Hence, despite market expectations that the RBNZ will move to reduce rates at around the same time as other major economies, we continue to see it more likely that NZ will need to endure the current 5.5% OCR for all of 2024 based on what we see right now. We think the world has graduated from the time where every country gets a similar interest rate. Looking forward it will be horse for courses and individual country circumstances will determine the timing and magnitude of policy adjustment.
We remain alert to signs that the inflation dam might break as we head through the year. It is certainly the case that economic momentum in New Zealand remains weak. This should generate lower inflation outcomes in the period ahead – although we have been waiting a while for this the happen. The housing market still is not showing signs of a summer bounce – although the population pressures continue and should increasingly be felt as we head through the year. The government is yet to definitively chart its course for fiscal policy and the taxation policies to be applied to housing investors. Hence investors remain on the sidelines and real estate activity remains more than seasonally weak.
We got some data on household living costs this week that confirm the story that especially mortgaged households remain under the pump. While consumer price inflation slowed to 4.7% in the year to December, household living costs rose by 7% - much higher than the 5% growth in disposable incomes over 2023 (see our chart of the week). High and rising mortgage rates explain much of the difference – especially as borrowers have transitioned onto higher rates in the last year.
We see the impact of higher mortgage rates quite clearly in Westpac New Zealand’s new tracker of spending on Westpac issued cards. Spending in the final quarter of 2023 was up just 4% on a year earlier for all households. But there is a clear divergence between the spending trends of unmortgaged households was up by 5% whereas it was only 2% by those with mortgages. The mortgaged households will remain under pressure for the foreseeable future. While we are a fair way through the mortgage repricing cycle there is still perhaps another 80 basis points or so to run (depending on what happens to mortgage rates over the balance of 2024).
Next week will see the release of the Q4 Labour market data which will be another important indicator of the future resiliency (or lack thereof) of the New Zealand household. We anticipate another tick higher in the unemployment rate to 4.3% (slightly above the RBNZ’s estimate).
Employment growth should tick up given indicators of ongoing demand for labour in the context of a significant increase in the working age population in turn driven by strong net migration inflows. But it looks like labour supply is strong than demand – hence the rising unemployment rate. Wage growth has passed its peak and should move a bit lower, as both skill shortages and cost-of-living pressures have eased. The unemployment rate will be a key talisman for the RBNZ this year as it assesses the sustainability of the move lower in core inflation pressures that we hope for (and expect). Without an ongoing and significant rise in the unemployment rate and reduction in wages growth it will be hard for core inflation pressures to fall as much as required.
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