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.
Labour market still deteriorating
Job ads are down 26.2% on a year ago, after a decline of 1.4% m/m in October. This is consistent with ongoing loosening in the labour market. Last week, the Treasury noted that “recent second-tier data has been suggestive of a turning point in the economy.” That might well be true, and employment intentions have improved in some recent business surveys, but we continue to expect the labour market to lag the broader economic recovery. October’s job ads support that view.
Stuck in a rut
New Zealand’s services sector result for October remained in contraction, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for October was 46.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 0.3 points from September, but activity has varied by only 0.7 points over the last four months, which has kept the sector within a tight band of contractionary results. The October result is also still well below the average of 53.1 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that the October result showed mixed results when broken down by sub-index values. While the New Orders/Business Index (48.1) was at its highest level since February 2024, the Activity/Sales Index (44.3) lost some momentum during October. The Employment Index (46.4) recovered some of its fall after a sizeable drop in September.
The proportion of negative comments for October stood at 59.1%, which was up from September at 58.5%, but down on 60.8% in August and 67.0% in both July and June. The cost of living and the general economic climate continued to dominate comments from respondents.
BNZ's Senior Economist Doug Steel said that "although it is contracting at a much slower pace than it was in June (when the PSI was 41.1), the PSI has been hovering between 45 and 46 over the last four months. The activity outlook for the sector has improved in recent business surveys, but the here and now remains extremely challenging”.
Lost momentum
New Zealand’s manufacturing sector showed contraction at a faster rate during October, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for October was 45.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 47.0 in September, and the lowest level of activity since July 2024. The sector has now been in contraction for 20 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that despite some momentum over the previous few months that saw the results for the sector getting progressively closer to the no change mark of 50.0, October's result halted that.
“The key sub-index result for Production (44.5) fell 3.4 points from September, while both Employment (45.8) and Deliveries (44.6) dropped one point. In contrast, Finished Stocks (47.4) lifted 0.7 points, while New Orders (49.0) rose 1.1 points and at its highest level since May 2023.
The proportion of negative comments from respondents stood at 53.5% in October. This was down from 63.5% in September, 64.2% in August, 71.1% in July and 76.3% in June. Negative comments typically focused on the general economic downturn.
BNZ’s Senior Economist Doug Steel said that “despite lower interest rates, the manufacturing sector continues to face significant headwinds. Recent business surveys have shown a sharp contrast between improved expectations for activity and weak current conditions”.
Q4 CPI Forecast Stays Put
Today’s Selected Prices data for October were generally close to our expectations. There were no major surprises, although the net of all the monthly price indicators put together was marginally on the softer side.
It is not enough to change the rounding on our estimate for Q4 CPI annual inflation which stays a 2.3%, but gives a whiff of downside risk to it. The RBNZ forecast 2.3% y/y for Q4 CPI in its August MPS. So, we see nothing here to materially to alter the RBNZ’s view of the world.
Labour market deterioration gains pace
Those looking for a sharp jump in unemployment to justify the RBNZ cutting its cash rate by 75 basis points at its November 27 MPS will be sorely disappointed with the news today that the unemployment rate rose less than expected to 4.8% in September from 4.6% in June. The RBNZ was expecting a 5.0% headline reading.
Nonetheless, while the unemployment rate may have hinted at a relatively resilient labour market, not much else did.
Growth Expected Next Year
Businesses remain very upbeat about the outlook over the coming year, according to this afternoon’s October ANZ business survey. Indeed, business confidence hit its highest level since March 2014.
One can’t help but feel a chunk of this reflects an exceptionally weak starting position in a ‘things will surely get better than now’ kind of way. Regardless, the positivity is a supporting signal for some pickup in growth next year.
September Still Struggling
Job ads declined a further 0.5% m/m in September as the labour market continues to deteriorate. They are down 29.1% on a year earlier and weakness remains broad-based across the economy. Their general trend has been in decline since July 2022, and, while falling interest rates will be supportive, we expect the labour market to lag the broader economic recovery.
Inflation beaten into submission
The Reserve Bank of New Zealand should be overjoyed with today’s inflation outturn. One can never claim that inflation is dead and buried but, for the time being, it’s as near as dammit.
Consumer prices rose just 0.6% in the September quarter, delivering an annual increase of 2.2%. This is the first time annual inflation has been within the Bank’s target band since March 2021. Moreover, it’s not just inside the band but sits close enough to the 2.0% midpoint to be immaterially different.
Same same
September's result for New Zealand’s services sector remained the same as August, although still firmly in contraction mode, according to the BNZ –BusinessNZ Performance of Services Index (PSI).
The PSI for September was 45.7 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was the same as August, and shows the results in a tight band for the last three months. However, this is still well below the average of 53.1 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that after seven consecutive months in contraction, the sector seems to be stuck in a rut and struggling to get out of contraction. Looking at the key sub-index values for September, it is encouraging to see the Activity/Sales Index (45.6) continue to improve, although the New Orders/Business Index (46.7) stagnated and the Employment Index (45.7) reversed back to its lowest result since February 2022.
On a brighter note, the proportion of negative comments for September stood at 58.5%, compared with 60.8% in August and 67.0% in both July and June. A significant proportion of respondents noted the overall economy as a key negative influence on activity levels.
BNZ's Senior Economist Doug Steel said that "movements in the PSI sub-indices were mixed in September, but all of them have been below 50 for seven consecutive months. While falling interest rates will be supportive in time, the sector continues to face significant headwinds at present”.
Long and slow road
New Zealand’s manufacturing sector continued to show higher levels of activity for September, although remained in contraction, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for September was 46.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 46.1 in August, and the third consecutive month showing a higher level of activity compared with the previous month. However, the sector remains firmly in contraction that now extents to 19 consecutive months, and well below the average of 52.6 since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the good news was that the PMI is now at its highest result since April. The bad news though was that it appears to be a long and slow road to get the sector back into positive territory.
“The key sub-index results for Production (48.0) and New Orders (47.8) were the highest since April 2024 and November 2023 respectively, while Finished Stocks (46.6) also nudged up from the previous month. However, both Employment (46.6) and Deliveries (45.6) were slightly down from August".
The proportion of negative comments from respondents stood at 63.5% in September, which was down from 64.2% in August, 71.1% in July and 76.3% in June. Negative comments typically focused most heavily on a lack of orders and sales.
BNZ’s Senior Economist Doug Steel said that “while all sub-indices remain well below their historical average, four of the five series have moved closer to breakeven in the last three months since June”.
RBNZ accelerates easing cycle
The Reserve Bank of New Zealand today slashed its cash rate by 50 basis points to 4.75%. We think this is exactly the right thing to do and stick with our view that there is much more to come. As we have said before, the RBNZ will not relax until monetary conditions are no longer restraining the economy. We are still some way from this.
RBNZ to accelerate rate cuts
We have been increasingly pointing to the fact that October’s Monetary Policy Review could be a line ball call between a 50 basis point cut and a 25. Not cutting at all has never entered our minds. And a line ball call it is. We’d hoped that the ANZ Business Opinion Survey and today’s QSBO would deliver the same message, and in so doing settle the argument. But they haven’t, with the ANZ survey delivering a hawkish message and the QSBO a starkly dovish tilt.
Business survey questions RBNZ acceleration
If you were looking for a reason why the RBNZ should cut rates 50 basis points at its October meeting, this wasn’t it.
The September ANZ Survey of Business Opinion was unequivocally strong.
A net 45% of businesses now expect their activity to increase over the next 12 months. On a seasonally adjusted basis this was the strongest reading since August 2017 and is consistent with GDP growth approaching 4.0%.
Comparing Across the Ditch
While Australia’s economy faces headwinds, they pale in comparison to New Zealand’s. In Q2, NZ annual GDP contracted 0.5%, much weaker than annual growth of 1.0% across the ditch. While NZ is in the midst of a rolling recession, Australia’s economy has remained relatively more resilient. But, given the extent of the downturn, there is at least a lower hurdle rate for NZ to achieve positive growth as we head into 2025.