Weekly Economic Commentary 25 March 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Down but not out
The domestic focus for markets last week was the release of the admittedly dated national accounts for the December quarter. The preferred production-based measure of GDP revealed a further 0.1% contraction in activity during the quarter and so indicated that the economy had re-entered a shallow “technical recession” in the second half of last year. Activity was also 0.3% lower than a year earlier. This was a fractionally weaker outcome than we and the RBNZ had expected, with a small downward revision to activity in earlier quarters leaving the economy about 0.2ppts smaller than estimated. However, the detail of the report was much as expected, with services continuing to post weak growth while output contracted in the goods sector.
The expenditure-based measure of GDP was flat during the quarter and 0.5% lower than a year earlier. While household consumption and net exports contributed positively to growth, residential construction fell and a further sharp decline in inventories weighed heavily on activity. The income GDP measure – which now holds official status – pointed to continued growth in labour incomes but a solid decline in gross operating surplus. These outcomes are consistent with the trends being observed in tax data, with corporate and small business tax under pressure due to declining profitability. Annual growth in nominal GDP slowed to 3.8% from 6.1% previously.
On balance, the national accounts might suggest slightly less need to keep monetary policy tight for an extended period. That said, there is also a lot of water still to go under the bridge before the May Monetary Policy Statement (MPS), including the next QSBO business survey (early April), the March quarter CPI (mid-April) and the March quarter labour market surveys (early May). There’s also the crucial first Budget for the new coalition Government in late May – while that will be unveiled after the MPS, the RBNZ will no doubt be briefed on the key details.
Ahead of the national accounts, Statistics New Zealand also released balance of payments figures for the December quarter. These were largely as expected, with the calendar year current account deficit declining to 6.9% of GDP from 8.8% of GDP in 2022. Almost all that improvement owes to the reopening of the foreign border, with the deficit on the services balance narrowing by about two-thirds over the past year. That improvement was only partly offset by a weaker income balance due to the impact of higher interest rates on the cost of funding New Zealand’s net international liabilities – the latter growing to almost 52% of GDP in the December quarter. We expect improvement in both the goods and services balance to drive a further narrowing of the current account deficit this year.
Turning to last week’s more contemporary news, the Westpac McDermott Miller Consumer Confidence Index rose 4.3pts to 93.2 in the March quarter. While still low – and signalling net pessimism on balance – that’s the highest confidence has been in more than two years. The largest contributor to the improvement was a less downbeat assessment of consumers’ present financial situation, which might reflect the impact of declining inflation. Meanwhile, the Business NZ Performance of Services Index also painted a more positive picture, rising 0.8pts to 53.0 in February – the best reading in 11 months. Of note, the new orders index increased an especially encouraging 3.7pts to 56.0. At current levels, the Business NZ indexes are pointing to at least a modest lift in economic activity over coming months.
The news from the external sector was a little disappointing, however. While we had expected some decline in dairy prices at last week’s GDT auction, the 2.8% decline in the overall index was larger than expected. Moreover, the 4.2% decline in the key whole milk powder price was about double expectations and means that prices have now declined by almost 9% over the past three auctions. In the detail, we noted lower than usual purchases from China and the Middle East, which doubtless weighed on prices. Despite the recent decline in prices, dairy giant Fonterra last week retained its forecast farmgate payout at a midpoint of $7.80kg/ms for this season. However, if recent weakness is sustained, this will begin to weigh on prospects for a lift in the payout next season.
Looking ahead, this week’s local economic diary is relatively quiet. The ANZ will release the latest instalments of its business and consumer confidence surveys while we will also receive tax-based filled jobs data for February. Also of note, on Wednesday the Government will publish its first Budget Policy Statement (BPS), which will set out its priorities; high-level fiscal goals; the operating spending and capital allowances it will work within in Budget 2024; and an update on the economic outlook.
As we noted in our preview, the BPS won’t contain an updated fiscal outlook. However, we expect the Government to confirm it will work within operating spending allowances no larger than set out in the Half-Year Economic and Fiscal Update (HYEFU). Baseline spending savings should be no smaller than those detailed in December’s “mini- Budget”. We suspect internal Treasury projections presently suggest that an operating surplus will not be achieved until 2027/28 – a year later than forecast in the HYEFU. The weaker near-term growth (and thus revenue) outlook will be the key driver. We continue to expect that personal tax cuts will be implemented in some form in Budget 2024.
At present, we think it’s reasonable to think that a $7-10bn increase in the four-year government borrowing programme could be announced in Budget 2024. This BPS is likely to announce a top up to the Multi-Year Capital Allowance which, combined with a weaker outlook for the operating balance, implies a greater borrowing need than forecast in the HYEFU. We think that the Government will most likely retain its predecessor’s long-term goal of achieving an average operating surplus in the range of 0-2% of GDP and the objective of keeping net debt below 30% of GDP. However, the Government could choose to differentiate itself from its predecessor by lowering the ceiling slightly given it is unlikely to be binding (net debt currently sits at less than 21% of GDP).
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