Weekly Economic Commentary 6 May 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
Read full report here (PDF 674KB)
Slow progress
The labour market is clearly softening, and we’re likely to see further rises in unemployment as the economy remains sluggish. At the same time, there are still worrying signs that the higher inflation of recent years could be difficult to dislodge – and New Zealand is not the only country to be confronted with this.
Last week’s Household Labour Force Survey (HLFS) showed the unemployment rate rising from 4.0% to 4.3% in the March quarter. That was slightly higher than the 4.2% that market forecasters and the Reserve Bank had been expecting. The softening in the labour market has been a fairly drawn-out one so far – unemployment reached a record low of 3.2% in early 2022, and has risen by just over a percentage point in the two years since then.
That gradual rise reflects the fact that job creation has continued over the last couple of years – it’s just not fast enough to keep up with population growth. The working-age population has grown by more than 3% over the last year, driven by record levels of inward migration (and migrants themselves are largely coming to work). But in a cooling economy, there are no longer enough new jobs to go around. The HLFS figures on transitions suggest that while there has been some pickup in job losses, the more significant change has been that people who are out of employment are finding it harder to get in.
An unemployment rate of 4.3% is not particularly high compared to history – indeed, it’s broadly in the range of what we would consider to be a ‘neutral’ level over the long run. But its rise isn’t going to end here; we expect it to peak above 5% sometime next year. High interest rates are continuing to suppress economic activity, and the labour market tends to respond to this with a lag.
Moreover, the risks around the near-term outlook for the economy are turning to the downside. While business surveys showed some signs of improvement at the start of this year, the mood has definitely soured again. The manufacturing and services PMI surveys were both below 50 in March, consistent with negative growth (the next releases will be on 10 and 13 May). And the ANZ business confidence survey fell for the third straight month in April, effectively giving back all of the gains it had made since late last year.
A net 20% of firms reported that their trading activity had declined compared to a year ago. That’s the weakest result we’ve seen since the pandemic. There has also been a widespread fall in the number of businesses who expect that their trading activity will improve over the coming months. Consistent with those trends, fewer businesses are planning to take on more staff or increase their capital spending.
With the potential for conditions to change quickly, it remains important to keep an eye on high-frequency measures of the economy such as the Monthly Employment Indicator (MEI). Because this is drawn from tax data, it is a near-complete record of employment in this country, and is far more stable than surveys which can suffer from sampling error. The March report, released last Monday, showed that the number of jobs is still rising modestly, but not enough to match population growth.
The other aspect of the labour market that we’re watching is wage growth. Inflation in New Zealand remains stubbornly elevated, and increasingly is being driven by the services sectors, where labour makes up the largest share of their costs. Taming the pressure on pay rates is key to bringing overall inflation back to the Reserve Bank’s 1-3% target range.
On that front, last week’s news wasn’t all that encouraging. The Labour Cost Index (LCI) saw a 0.9% increase for the March quarter – only slightly slower than in previous quarters, and the annual growth pace of 4.1% hasn’t fallen far from its cyclical peak of 4.3%.
In part, wage growth is being held up by government pay agreements for teachers, nurses and the public service, which were agreed last year and staggered over several periods. (This has also affected the private sector wage measures, as parts of the health and education sectors are privately-run but publicly-funded.) Looking past this effect, it’s clear that there has been some progress in bringing wage growth down – but perhaps not as much as hoped, given the extent to which the tightness in the labour market has eased over the last year.
The ANZ business survey also showed that the number of firms planning to raise their prices has effectively stalled at a high level over the last nine months, despite the continued cooling in the economy. The need to pass on rising costs has been an ongoing theme.
We expect the Reserve Bank to hold off on cutting interest rates until early next year. But we remain open to the idea that the coming months could force them off this path in either direction – a sharper economic slowdown could prompt them into earlier rate cuts, or a lack of progress in bringing inflation down could bring further rate hikes back into discussion. Indeed, our latest “Hawks, doves and kiwis” briefing shows that there is plenty of ammunition right now for both views.
Updates to financial forecasts.
New Zealand is not the only part of the world where inflation pressures are proving more stubborn than central banks would have hoped. As we noted last week, recent figures from Australia and the US have shown an unexpected uptick in inflation. While we don’t expect this to be a sustained change in the trend, it’s likely to delay the timing of interest rate cuts. We now expect the US Federal Reserve to begin cutting rates in September (previously June).
We’ve also made further adjustments to our exchange rate forecasts to reflect this. We now expect the US dollar to broadly hold steady rather than falling over this year. Accordingly, we’ve revised down our New Zealand dollar forecast to end the year at 0.61.
Related articles
Weekly Economic Commentary 20 May 2024
NZ Economic Overview May 2024
Browse topics
Disclaimer
©2024 Westpac Banking Corporation ABN 33 007 457 141 (including where acting under any of its Westpac, St George, Bank of Melbourne or BankSA brands, collectively, “Westpac”). References to the “Westpac Group” are to Westpac and its subsidiaries and includes the directors, employees and representatives of Westpac and its subsidiaries.
Things you should know
We respect your privacy: You can view our privacy statement at Westpac.com.au. Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make improvements for you. We may at times use technology to capture data about you to help us to better understand you and your needs, including potentially for the purposes of assessing your individual reading habits and interests to allow us to provide suggestions regarding other reading material which may be suitable for you.
This information, unless specifically indicated otherwise, is under copyright of the Westpac Group. None of the material, nor its contents, nor any copy of it, may be altered in any way, transmitted to, copied of distributed to any other party without the prior written permission of the Westpac Group.
Disclaimer
This information has been prepared by the Westpac and is intended for information purposes only. It is not intended to reflect any recommendation or financial advice and investment decisions should not be based on it. This information does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter into a legally binding contract. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure this information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of this information, or otherwise endorses it in any way. Except where contrary to law, Westpac Group intend by this notice to exclude liability for this information. This information is subject to change without notice and none of Westpac or its related entities is under any obligation to update this information or correct any inaccuracy which may become apparent at a later date. This information may contain or incorporate by reference forward-looking statements. The words “believe”, “anticipate”, “expect”, “intend”, “plan”, “predict”, “continue”, “assume”, “positioned”, “may”, “will”, “should”, “shall”, “risk” and other similar expressions that are predictions of or indicate future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts. Past performance is not a reliable indicator of future performance, nor are forecasts of future performance. Whilst every effort has been taken to ensure that the assumptions on which any forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from any forecasts.
Conflicts of Interest: In the normal course of offering banking products and services to its clients, the Westpac Group may act in several capacities (including issuer, market maker, underwriter, distributor, swap counterparty and calculation agent) simultaneously with respect to a financial instrument, giving rise to potential conflicts of interest which may impact the performance of a financial instrument. The Westpac Group may at any time transact or hold a position (including hedging and trading positions) for its own account or the account of a client in any financial instrument which may impact the performance of that financial instrument.
Author(s) disclaimer and declaration: The author(s) confirms that no part of his/her compensation was, is, or will be, directly or indirectly, related to any views or (if applicable) recommendations expressed in this material. The author(s) also confirms that this material accurately reflects his/her personal views about the financial products, companies or issuers (if applicable) and is based on sources reasonably believed to be reliable and accurate.
Further important information regarding sustainability-related content: This material may contain statements relating to environmental, social and governance (ESG) topics. These are subject to known and unknown risks, and there are significant uncertainties, limitations, risks and assumptions in the metrics, modelling, data, scenarios, reporting and analysis on which the statements rely. In particular, these areas are rapidly evolving and maturing, and there are variations in approaches and common standards and practice, as well as uncertainty around future related policy and legislation. Some material may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. There is a risk that the analysis, estimates, judgements, assumptions, views, models, scenarios or projections used may turn out to be incorrect. These risks may cause actual outcomes to differ materially from those expressed or implied. The ESG-related statements in this material do not constitute advice, nor are they guarantees or predictions of future performance, and Westpac gives no representation, warranty or assurance (including as to the quality, accuracy or completeness of the statements). You should seek your own independent advice.
Additional country disclosures:
Australia: Westpac holds an Australian Financial Services Licence (No. 233714). You can access Westpac’s Financial Services Guide here or request a copy from your Westpac point of contact. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice.
New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac (NZ division) or Westpac New Zealand Limited (company number 1763882), the New Zealand incorporated subsidiary of Westpac ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. WNZL is not an authorised deposit-taking institution for the purposes of Australian prudential standards. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz .
Singapore: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients of this material in Singapore should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore.
U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. The services and products referenced above are not insured by the Federal Deposit Insurance Corporation (“FDIC”). Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. Transactions by U.S. customers of any securities referenced herein should be effected through WCM. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person of WCM or any other U.S. broker-dealer under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.
UK and EU: The London branch of Westpac is authorised in the United Kingdom by the Prudential Regulation Authority (PRA) and is subject to regulation by the Financial Conduct Authority (FCA) and limited regulation by the PRA (Financial Services Register number: 124586). The London branch of Westpac is registered at Companies House as a branch established in the United Kingdom (Branch No. BR000106). Details about the extent of the regulation of Westpac’s London branch by the PRA are available from us on request.
Westpac Europe GmbH (“WEG”) is authorised in Germany by the Federal Financial Supervision Authority (‘BaFin’) and subject to its regulation. WEG’s supervisory authorities are BaFin and the German Federal Bank (‘Deutsche Bundesbank’). WEG is registered with the commercial register (‘Handelsregister’) of the local court of Frankfurt am Main under registration number HRB 118483. In accordance with APRA’s Prudential Standard 222 ‘Association with Related Entities’, Westpac does not stand behind WEG other than as provided for in certain legal agreements (a risk transfer, sub-participation and collateral agreement) between Westpac and WEG and obligations of WEG do not represent liabilities of Westpac.
This communication is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. This communication is not being made to or distributed to, and must not be passed on to, the general public in the United Kingdom. Rather, this communication is being made only to and is directed at (a) those persons falling within the definition of Investment Professionals (set out in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”)); (b) those persons falling within the definition of high net worth companies, unincorporated associations etc. (set out in Article 49(2)of the Order; (c) other persons to whom it may lawfully be communicated in accordance with the Order or (d) any persons to whom it may otherwise lawfully be made (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this communication or any of its contents. In the same way, the information contained in this communication is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Conduct Authority and is not intended for “retail clients”. Westpac expressly prohibits you from passing on the information in this communication to any third party.
This communication contains general commentary, research, and market colour. The communication does not constitute investment advice. The material may contain an ‘investment recommendation’ and/or ‘information recommending or suggesting an investment’, both as defined in Regulation (EU) No 596/2014 (including as applicable in the United Kingdom) (“MAR”). In accordance with the relevant provisions of MAR, reasonable care has been taken to ensure that the material has been objectively presented and that interests or conflicts of interest of the sender concerning the financial instruments to which that information relates have been disclosed.
Investment recommendations must be read alongside the specific disclosure which accompanies them and the general disclosure which can be found here. Such disclosure fulfils certain additional information requirements of MAR and associated delegated legislation and by accepting this communication you acknowledge that you are aware of the existence of such additional disclosure and its contents.
To the extent this communication comprises an investment recommendation it is classified as non-independent research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and therefore constitutes a marketing communication. Further, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research.