Weekly Economic Commentary 8 July 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Keeping it tight
The key event this week in New Zealand will be the RBNZ’s latest policy review, with the decision to be announced at 2pm on Wednesday. That said, we are not anticipating any change in the OCR – which will remain at 5.5% – or the guidance that “…monetary policy needs to remain restrictive to ensure inflation returns to target within a reasonable timeframe”. The overall tone of the RBNZ’s communication is likely to be similar to that seen in May, when the Bank pushed out the timing of its first policy easing to August next year. While there have been some developments since the RBNZ’s May meeting that might shift the policy outlook at the margin, there are several very important data releases that lie ahead in coming weeks – notably the Q2 CPI and labour market reports. The RBNZ will want to see this data before contemplating any change in stance. The August Monetary Policy Statement meeting will see the RBNZ present updated projections for the economy and a refreshed track for the OCR and would be the more likely vehicle for communicating a less hawkish stance – one more consistent with our forecast of a first policy easing in February next year.
With the key policy message likely unchanged, we expect the policy statement accompanying this week’s decision will be very brief, much as was the case with the April policy review. The main interest therefore will likely fall on the nuances conveyed in the discussion in the Record of Meeting, which might provide some insight into how the RBNZ is provisionally interpreting recent developments. Back in May, the RBNZ noted that some upside risks to growth and inflation potentially could come from the fiscal outlook. This week’s review is the RBNZ’s first opportunity to update its view now the Budget is public. We anticipate the RBNZ will continue to retain a hawkish perspective with respect to fiscal risks as Budget 2024 ended up being slightly less contractionary than the projections the RBNZ’s forecasts were based on. However, we doubt the Bank will be drawing definitive conclusions as no forecasts will be presented at this review and it is too early to judge the impact that tax cuts (timed to begin at the end of July) will have on consumer spending and inflation.
On the other hand, while the March quarter GDP outcome printed in line with the RBNZ’s expectations, recent data pertaining to the June quarter has been very soft – indeed suggesting that the economy has likely contracted during the quarter, in contrast to the RBNZ’s expectations. Following some very weak PMI data in mid-June, last week’s NZIER QSBO survey confirmed that economic activity remained weak in the June quarter – particularly in the interest-sensitive construction sector – with a net 28% of respondents reporting a decline in their own domestic trading activity. Considering the weakness seen in recent top-down activity indicators, we have nudged down our early estimate of Q2 GDP growth to -0.2%q/q from -0.1%q/q previously.
Within the survey firms reported a weaker outlook for investment and employment. Almost 61% of firms reported that lack of demand was the single biggest constraint on output – the most since 2013. Meanwhile, less than 9% of firms cited lack of labour as the biggest constraint – the least since 2014 when the nationwide COVID lockdown quarter is excluded. Indeed, the broad sweep of labour market indicators in the QSBO confirmed that the unemployment rate almost certainly increased further during the quarter. The Monthly Employment Indicator (MEI), also released last week, pointed to a broadly unchanged level of filled jobs in May. However, the MEI has been consistently overestimating employment on its first release, with April employment levels revised down 0.2ppts to now report a 0.1% decline. So, with the working age population continuing to grow, the RBNZ might be thinking they have some upside risks to their unemployment rate projections (which are 0.2ppts lower than Westpac’s by the end of 2024).
On the pricing side of the ledger, we don’t see very much to have moved the RBNZ’s short term inflation forecasts. At this stage the partial monthly CPI data suggest the Q2 CPI will be in line with the RBNZ’s May forecast of 0.6%. House prices have been flat recently and might have some modest downside risks in the RBNZ’s forecasts given recent trends. Pricing indicators in both the ANZ and QSBO business surveys suggest that inflation pressures are receding but remain somewhat elevated. The most recent pricing intentions data – which have posted notable declines since the RBNZ’s May meeting – will have added to the RBNZ’s confidence. However, the RBNZ will want to see these intentions translated into the hard data, with the next couple of quarterly CPI prints most important in that regard.
All up, we don’t think the markets will get a dovish tilt that supports recent market pricing (around a 60% chance of an easing in the October Review and around 39bps priced in by end 2024).
Aside from the RBNZ’s policy meeting, there are several data releases due this week which will also have a bearing on the policy outlook. On Thursday, Statistics NZ will release the Selected Price Indexes for June, which cover about 45% of the CPI regimen. Following this report, we will finalise our pick for the Q2 CPI, which will be released on 17 July. On Wednesday, we will receive an update on migrant and tourist flows for the month of May. Recent data has suggested that net migrant inflows have slowed from the very high peak levels seen last year, while the pace of recovery in tourist inflows has slowed markedly. Friday will bring the release of news on consumer spending (which is likely to have remained soft in June if anecdotal and survey reports are any guide) and the latest manufacturing PMI (which has been in contractionary territory since March last year). Finally, late in the week we will receive the REINZ housing report for June. Here too, anecdotal reports point to a still subdued housing market with house prices tracking broadly sideways since September last year.
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