Weekly Economic Commentary 13 May 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Mixed news as RBNZ meeting draws closer into view
The local and international data flow was relatively light last week, leaving the domestic market to ruminate on the meaning of recent softer-than-expected labour market reports in both New Zealand and the US. These reports have caused the market to grow a little more confident that the RBNZ will ease monetary policy before the end of this year, notwithstanding the stronger-than-expected CPI inflation data released last month. This stands in contrast to our own forecast – and that of the RBNZ – that stickiness in domestic sources of inflation will likely require the OCR to remain at its present level until at least the beginning of next year.
Turning to last week’s economic news, the latest Global Dairy Trade auction produced a better-than-expected outcome for the nation’s dairy farmers, with the headline GDT index rising 1.8% when the futures market had anticipated a decline. Prices for whole milk powder – the key element of New Zealand’s product mix – increased 2.4%. Given this outcome, we remain content with our forecast of a $7.90 farmgate milk price for the current season, rising to $8.40 next season. The latter would restore at least some level of positive profitability to all but the most leveraged farmers.
Less encouragingly, in April the Business New Zealand manufacturing PMI remained in contractionary territory for a fourteenth consecutive month, albeit lifting 1.9pts to 48.9. In the detail, the production index posted the largest increase, rising 4.8pts to 50.8 – the first expansionary reading since January 2023. However, the new orders index remained very soft at 45.3 – a full 9pts below the historic average for this series. Official statistics were thin on the ground, although production of ready-mixed concrete – a good indicator of construction activity – fell a further 3.7% in the March quarter. Indeed, concrete production has declined 12% over the past year and fallen for nine consecutive quarters. This outcome strongly suggests that construction activity will make a significant negative contribution to GDP growth during the March quarter.
The weak performance of the economy was reflected in the Government’s Financial Statements for the 9 months to March, which showed a continued negative divergence against the forecasts contained in the Half-Year Economic and Fiscal Update (HYEFU). Specifically, total tax revenue in the year to March is now $1.36bn below the HYEFU forecast. In the detail, corporate tax is now running $1.7bn below the HYEFU forecast and down 15% compared with the same nine months of the ‘22/23 year. This reflects a decline in taxable profits. And in common with other indicators, it also suggests that firms’ investment spending will decline further, at least in the near term. GST is also running $0.3bn below forecast due to weaker than expected consumption spending, which the Treasury suggests could continue through to the end of the fiscal year. At this stage, government expenditure is running behind forecast (as usual) so the OBEGAL deficit is just $0.6bn larger than the HYEFU forecast. The core Crown residual cash deficit is also $0.6bn higher than forecast.
These are the final accounts to be released ahead of Budget 2024, which will be tabled on 30 May. They confirm that the fiscal starting point is a little worse than the forecast in the HYEFU. But as set out in the Budget Policy Statement (BPS) in late March, the real problem for the Government is that the HYEFU forecasts assumed that the economy would soon pick up and generate significantly more tax over the forecast period. Unfortunately, recent economic data – including very weak trend productivity growth – suggests that the HYEFU forecasts are too optimistic, as the BPS acknowledged. Indeed, in her first pre-Budget speech this week, the Minister of Finance lamented that she had grown to dread updates from her Treasury officials, with each successive update seemingly pointing to a weaker fiscal outlook than the last. So going forward, it seems inevitable that Budget 2024 will announce yet another large increase in the forecast government borrowing programme.
This week will bring the release of the final domestic economic indicators that will come available prior to the RBNZ’s next monetary policy deliberation on 22 May. The week is bookended with pricing data. Today the Selected Price Indexes (SPI) for April will allow analysts to begin to refine their forecasts for the Q2 CPI, with the SPI providing insight regarding 45% of the CPI basket, including some of the most volatile and so hard-to-predict components in the tradable sector (e.g., international airfares). This afternoon the RBNZ will release its quarterly Survey of Expectations for Q2. Last quarter the survey pointed to a solid decline in inflation expectations across all horizons, but expectations nonetheless remained above pre-pandemic levels. On Friday, Statistics New Zealand will release its suite of business price indexes for Q1, including the producer price and capital goods price indexes.
The focus elsewhere during the week will be on key activity indicators. Today the Business NZ services index for April will be of interest, especially following the sharp pullback in this indicator in March. Tuesday will bring an update on migrant arrivals in March and consumer spending in April. Net migrant inflows seem to have slowed a little in recent months but remain at very high levels. There is considerable uncertainty about how quickly inflows will respond to the weakening labour market that is now in train. Finally, the REINZ housing report for April (also out on Tuesday) will be of particular interest. Some indicators suggest that house prices may again be softening amidst a renewed slump in consumer confidence, increasing worries about job security and a sharp lift in the number of listings. Should house prices not pick up this year as we and the RBNZ have forecast, this would likely point to downside risks to consumer spending over the balance of this year.
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