RBNZ Cuts Another 50
The Reserve Bank of New Zealand lopped another 50 basis points off its cash rate today, reducing it to 3.75%. And projected more easing ahead.
This was very much as we and the market expected. We went into this meeting with three broad expectations. First, the Bank would lower the OCR by 50 basis points. Second, it would significantly bring forward its projected low point in its forward rate track. And third, it would maintain that low point near 3%. It did all three.
Over the line
After 10 consecutive months of contraction, New Zealand’s services sector exhibited slight expansion during January, according to the BNZ –BusinessNZ Performance of Services Index (PSI).
The PSI for January was 50.4 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 2.3 points from December but still well below the average of 53.1 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that like its sister survey, the PSI has also waited an extended period of time to get back into expansion mode. For the sub-index results, Activity/Sales (54.0) led the way in January with its highest value since March 2023. Although New Orders/Business (50.0) showed no change for January, it was still its highest value since February 2024. In contrast, Employment (47.1) and Supplier Deliveries (47.8) remained in contraction during the month.
The proportion of negative comments for January stood at 61.9%, which was up from 57.5% in December and 53.6% in November. The economic downturn and uncertainty featured heavily amongst respondents.
BNZ's Senior Economist Doug Steel said that "the PSI is consistent with stabilisation rather than elevation, but its latest move upwards is encouraging”.
Food and Fuel Prices Higher in January
The balance of January’s selected price indices suggests a bit more upside to Q1 CPI calculations. The monthly prices are heavy on tradeable goods and that is what drove the generally firmer looking outcome.
Expansion
New Zealand’s manufacturing sector displayed expansion for the first time in 23 months, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for January was 51.4 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 46.2 in December and the highest level of expansion since September 2022. However, the January result is still below the average of 52.5 since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that after the longest continued period of contraction, the manufacturing sector has finally broken the trend and started 2025 on a positive note.
“All sub-index values were in expansion during January. The key sub-index results for both Production and New Orders both stood at 50.9, with the latter at its highest level of activity since August 2022. Employment (50.2) rose 2.5 points from December, while Finished Stocks (51.9) recorded its highest level of activity since May 2024.
The proportion of negative comments from respondents stood at 57.7% in January. This was down from 59% in December, but still up from 56% in November and 53.5% in October. Negative comments during January focused on the holiday break, as well as the ongoing effects of the soft economy. Positive comments displayed no strong pattern, with many focusing on specific business opportunities.
BNZ’s Senior Economist Doug Steel said that “it’s a positive start to 2025, with the manufacturing sector shifting out of reverse and into first gear. While the PMI still sits below its long-run average of 52.5, the improvement is welcome news for manufacturers after a very challenging two years”.
Unemployment continues its climb
New Zealand’s labour market continues to deteriorate. As anticipated by most, the unemployment rate rose to 5.1% in the December quarter from 4.8% a quarter earlier. This is now the highest unemployment reading since December 2016, if you exclude the COVID blip.
Business Inflation Indicators Nudge Up
Headlines around today’s ANZ business survey concentrated on a dip in business confidence and firms’ expectations for their own activity. But the dips do not look material and even less so once seasonally adjusted. We could say similar things about reported activity. There was very little change there either.
New Zealand at a Glance
Against a volatile international setting, New Zealand’s recession rolls on. Growth is moribund and the unemployment rate will continue to rise for some time. However, there are signs that the trough in activity might soon be behind us, and leading indicators have turned positive aided by ongoing easing in monetary conditions. Inflation is broadly contained but rising oil prices and a weakening NZD are causing some angst. Nonetheless, further cash rate cuts are still expected, the only real debate is how far the OCR will need to fall to generate the requisite economic response. Meanwhile the fiscal position is deteriorating and will do so for at least another year.
Labour market likely to lag
Job ads declined a further 2.1% m/m in December. The latest outturn is a return to declines after the 1.0% lift in November, as the labour market continues its trend deterioration. December rounds out a difficult 2024 for job seekers, with ads down 21.9% on a year earlier. With interest rates falling, we take a brief look at employment in three key interest-rate sensitive sectors below.
Inflation no threat to further rate cuts
With almost half the data that goes into the CPI now published on a monthly basis, there is little room for surprise when the quarterly data are released. And so it proved to be the case today. The 0.5% increase in prices reported for the quarter was bang on market expectations and a rounding error 0.1 below our own projection.
No Christmas Joy
New Zealand’s services sector exhibited a faster rate of contraction during December, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for December was 47.9 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 1.2 points from November and well below the average of 53.1 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that the sector has now been in contraction for ten consecutive months, which has meant a tough 2024 for those businesses trying to keep their heads above water during the wider economic recession. The key sub-index of Activity/Sales (46.2) displayed increased contraction during December, although New Orders/Business (49.5) remained at the same value as November. The Employment Index (47.4) displayed its highest value since August 2024, while both Stocks/Inventories (48.8) and Supplier Deliveries (47.7) both fell back into contraction.
The proportion of negative comments for December stood at 57.5%, up from 53.6% in November but down from 59.1% in October. Respondents' comments were heavily focused on the cost of living and the general economic climate/recession.
BNZ's Senior Economist Doug Steel said that "comparing across our key trading partners, New Zealand has the only PSI in contraction. Our neighbour Australia is the closest comparison, but their equivalent PSI is sitting more comfortably at 50.8”.
December doldrums
New Zealand’s manufacturing sector remained in contraction for the last month of 2024, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for December was 45.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). Although this was up from 45.2 in November, it was still well below the average of 52.5 since the survey began. The sector has now been in contraction for 22 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that 2024 was the first time in the survey's history that all 12 months were in contraction. The next closest was 2008 during the height of the Global Financial Crisis when nine of the twelve months were in contraction.
“The key sub-index result for Production (41.9) fell another 0.4 points from November to be at its lowest level of activity since June 2024, while New Orders (46.5) increased 2.0 points from November. Employment (47.6) lifted to its highest value since May 2024, while Finished Stocks (45.9) were at its lowest activity level since October 2023.
The proportion of negative comments from respondents stood at 59% in December. This was up from 56% in November and 53.5% in October, but down from 63.5% in September. Negative comments during December showed similar patterns to previous months, with a focus on the cost of living and general economic climate. Those mentioning the Christmas/holiday break saw manufacturers somewhat split between whether it had a negative or positive influence.
BNZ’s Senior Economist Doug Steel said that “the PMI is yet another New Zealand economic indicator that suggests parts of the economy are suffering the most they have since the GFC (excluding the COVID-turmoil)”.
QSBO Not Earth Shattering
There was nothing in today’s QSBO to change our view on anything. Our main themes for 2025 are that the economy will witness a slow recovery as the year progresses, the labour market will continue to deteriorate but at a slowing pace, inflation will remain contained (though not dead and buried), allowing the cash rate to keep falling.
From what we can tell the QSBO ticks all the boxes.
Strong GDP Demands Rate Cuts
We knew today’s GDP data would be nigh on impossible to interpret because of revisions to historical data. And that is, indeed, the case.
While it is right for headline writers to focus on just how much the economy has collapsed over the last six months, we note that very few are acknowledging that economic activity, as at the end of the September quarter, was 0.6% higher than the Reserve Bank had estimated when it put together its November Monetary Policy Statement.
Employment Report: Stabilising at a low level
Job ads increased 1.1% m/m in November. While encouraging, the gain needs to be viewed in the context of the 1.4% decline the month before. Looking through month-to-month volatility, the trend appears to be stabilising at a very weak level. Job ads are down 21.4% on a year earlier. Excluding covid, they are at levels last experienced in 2013, and further back on a per capita basis to 2010.
NZ Debt Funding Requirements Soar
The big surprise in today’s Half Year Economic and Fiscal Update was the news that the Government bond programme will be $20bn higher over the next four years than was the case at the May Budget.
There are increases of: $2bn in the 2024/25 programme, $4bn 2025/26, $6bn 2026/27 and $8bn 2027/28. This is substantially higher than market commentators were expecting and has been reflected in a modest sell off in bonds.
Knocking on the door
New Zealand’s services sector showed contraction at a slower rate during November, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for November was 49.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 3.3 points from October, and very close to the no change mark of 50.0. However, the November result was still well below the average of 53.1 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that the November result was the highest since February 2024, with some encouraging signs. The two key sub-indices of Activity/Sales (48.6) and New Orders/Business (49.8) remained in contraction, although both were also at their highest level of activity since February. The Employment Index (46.8) rose 0.4 points from September, while both Stocks/Inventories (52.2) and Supplier Deliveries (52.2) were at their high levels since January 2024 and July 2023 respectively.
The proportion of negative comments for November stood at 53.6%, which was down from 59.1% in October, 58.5% in September and 60.8% in August. The general economic climate and the cost of living continued to dominate comments from respondents.
BNZ's Senior Economist Doug Steel said that "the November result is another case of things getting less bad before they get good. The direction of change is encouraging, but it’s important to remember the PSI remains well below its long-run average of 53.1”.
Retreat
New Zealand’s manufacturing sector continued to show contraction at a faster rate during November, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for November was 45.5 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 45.7 in October, and the lowest level of activity since July 2024. The sector has now been in contraction for 21 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that any momentum built over the July-September period has now reverted back to a retreat for the sector.
“The key sub-index result for Production (42.5) fell another 1.5 points from October to be at its lowest level of activity since June 2024, while New Orders (44.8) fell back 3.7 points to be at its lowest result since July 2024. Employment (46.9) has remained within a tight band of contraction for the last four months, while both Finished Stocks (49.3) and Deliveries (49.9) improved.
The proportion of negative comments from respondents stood at 56% in November. This was up from 53.5% in October, but down from 63.5% in September, 64.2% in August and 71.1% in July. Negative comments during October showed similar patterns to previous months, with a focus on a lack of orders and cost of living.
BNZ’s Senior Economist Doug Steel said that “the main message of a manufacturing sector still under significant pressure remains. Recent business surveys report that manufacturers are feeling more confident about the outlook, but there is scant evidence of a general turnaround in activity to date”.
Happier New Year
Forward looking indicators in the ANZ business survey maintained recent strength in November. Business confidence, activity outlook, exports, investment and employment intentions, and profitability expectations are all firmly positive.
RBNZ Delivers Another 50 Point Cut
The Reserve Bank of New Zealand today slashed another 50 basis points off its cash rate today, reducing it to 4.25%. We think this was the right thing to do and is what we thought was by far the most likely outcome. Nothing to change our view of more easing to come.
We have been of the view that economic spare capacity continues to grow and will do so for some time. Inflation is well contained, so too inflation expectations, and the unemployment rate is set to rise further over coming quarters. This allows room to reduce the OCR.