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.
Return to Trend-Decline
Job ads in August are down 28.2% on a year earlier, and excluding Covid, are at their lowest level since 2013. They fell 1.3% in August, unwinding some of their 3.5% lift in July. The August outturn continues the general downwards trend of the last two years.
External deficit reduction stalls
The current account deficit stood at the equivalent of 6.7% of GDP in the year to June 2024. This is of a size that is likely to keep the external accounts on rating agency radars.
Today’s result was a larger annual deficit than the market (6.5%) or we (6.3%) expected, although a touch smaller than the 6.9% seasonally adjusted figure the RBNZ projected in its August MPS. For us, the known revisions to exports of services were offset by other factors and revisions.
Slow Crawl
Activity in New Zealand’s services sector inched its way higher during August, although still firmly in contraction territory, according to the BNZ –BusinessNZ Performance of Services Index (PSI).
The PSI for August was 45.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 0.3 points from July, but still well below the average of 53.2 over the history of the survey.
BusinessNZ’s Director, Advocacy Catherine Beard said despite two consecutive months showing a lift in activity levels, the key index value for Activity/Sales (43.9) remains lackluster, while New Orders/Business (46.6) dipped slightly from July. On a more positive note, Employment (49.2) lifted to its highest result since March.
The proportion of negative comments for August stood at 60.8%, which was down from 67.0% in both July and June. Respondents continued to note the high cost of living and general economic conditions as reasons for ongoing tough times.
BNZ's Senior Economist Doug Steel said that "smoothing through monthly volatility, the PSI’s 3-month average remains deep in contractionary territory at 43.9. The PSI has been in contraction for six consecutive months which is the longest continuous period of decline since the GFC”.
Incremental improvement
New Zealand’s manufacturing sector showed further signs of improvement during August, although still in contraction, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for August was 45.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 44.4 in July, but still significantly below the long term average of 52.6. The sector has now been in contraction for 18 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that the PMI is heading back in the right direction, but the pathway to eventual expansion after a year and a half being firmly in contraction mode means there is still some way to go.
“The key sub-index results for Production (46.3) and New Orders (46.8) were both the strongest they have been in a few months, with the former improving significantly from June. Employment (46.6) recovered somewhat from its June/July dip, while Finished Stocks (46.2) was all but unchanged from July".
Given the ongoing improvement in activity for August, the proportion of negative comments stood at 64.2% for the current month, compared with 71.1% in July and 76.3% in June. Negative comments typically focused on the general economic recession, including lack of demand and cost of living.
BNZ’s Senior Economist Doug Steel said that “while business confidence and building consent indicators have ticked up from their very low levels offering potential for improvement over the coming 12 months, the PMI is an indicator of outcomes and continues to show that current conditions remain challenging”.
Monthly Prices Affirm Q3 CPI View
Today’s selected prices data for August gives us no cause to alter our general thinking for Q3 CPI. There was a range of ups and downs in the details, which is usually the case for these wobbly monthly indicators, but the overall net result was close to our priors.
Relief
We thought there would be a bounce in economic confidence following the dovish tones, subsequent interest rate reduction and projection of more from the RBNZ. Today’s ANZ business confidence survey confirmed a bounce. It was sizeable.
Business confidence lifted to a 10-year high, punching up to 50.6 in August, from the 27.1 in July which was already up from a low 6.1 in June. It is interesting that the August business survey details suggest a bounce was well under way before the RBNZ cut the OCR at its August meeting. This suggests the confidence swing was well underway following the dovish pivot in July, as we suggested last month. In any case, it just goes to show what a difference a few months and some relaxation in tight monetary conditions can do following a period of tightness.
Retail Retreat Near Its End?
Today’s retail sales figures essentially confirmed our suspicions – that sales are very weak and continued to decline in Q2. We thought when sales volumes bounced a touch in Q1 that it was more noise than any indication of change in trend at the time. Sales volumes fell 1.2% in Q2, taking sales 3.5% below on a year ago, and completing the third successive annual decline. Core (ex auto) sales volumes fell 1.0%.
Milk Price Outlook Improves
This morning’s GDT dairy auction was positive. Dairy prices posted a strong lift, with the GDT price index gaining 5.5%. It is the largest gain in a single auction since March 2021, although should be seen in the context of a large drop early last month. The price index is not far from recovering all that decline.
July Jump
Job ads rose 3.4% in July. It is the first monthly increase in job ads since a marginal increase back in January. But July’s gain needs to be seen in the context of an 8.0% slump the month before and a 4.8% decline the month before that. Gains have been few and far between in a very strong downtrend that started back in late 2022. The trend in job ads remains firmly downward. Jobs ads in July are down 28.6% on a year earlier.
Relative progress
Activity in New Zealand’s services sector for July showed some improvement after a horrendous June result, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for July was 44.6 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 3.9 points from June and the highest result since May. However, the PSI has only averaged 46.5 so far for 2024, compared with 53.2 over the history of the survey.
BusinessNZ chief executive Kirk Hope said that while the relative improvement in activity for July was a welcome sight, there's still a lot of work to go before the sector is back on track. The key index values for Activity/Sales (39.1) still remains under the 40-point mark, although New Orders/Business (45.3) did show a marked improvement compared with June, albeit off a very low base.
Stopping the Rot
Activity in New Zealand’s manufacturing sector showed some small signs of improvement, although still in contraction, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for July was 44.0 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 41.2 in June, but still significantly below the long term average of 52.6. The sector has now been in contraction for 17 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that while the July result showed some improvement from June, the numbers still told the story of a sector continuing to struggle.
“The key sub-index results for Production (43.4) and New Orders (42.5) both returned to figures above the 40-point activity level, although both still showing significant contraction. In contrast, Employment (43.1) continued to plunge further, as did Finished Stocks (46.5)".
Given the relative improvement in activity for July, the proportion of negative comments stood at 71.1% in July, compared with 76.3% in June. Negative comments outlined a lack of orders, customers and sales continuing recent trends.
BNZ’s Senior Economist Doug Steel said that “manufacturing activity will turn when the broader economy turns. Easing monetary conditions will help in this regard, but it will take time for the likes of a lower OCR to generate a general pick up in sales”.
Disinflating
This morning’s Selected Price Indexes support the notion of firm disinflation. It’s only one month, and a lot of components are volatile, but the direction of travel is clear.
RBNZ declares victory against inflation
After 15 long months of extremely tight monetary policy, the RBNZ has given the green light to progressively lower interest rates. Not only did it cut the cash rate 25 basis points to 5.25% today but it also published a rate track which implies a further three 25 point cuts by February next year on its way to an eventual low of 3.0%.