April MPR Preview
“If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025”. These were the final words of the policy assessment contained in the February Monetary Policy Statement (MPS). In our opinion, the expected evolution has been sufficiently met. The Reserve Bank should cut its cash rate 25 basis points to 3.5% at the April 9 Monetary Policy Review (MPR). And the parting words of the February MPS should be repeated leaving the door wide open to further 25 point cuts in May and July.
Job ads slip in February
Job ads declined 1.8% m/m in February, acting as a reality check after their 4.0% lift in January. Job ads are down 16.8% compared to a year ago. The labour market is still deteriorating, albeit the pace of decline is slowing. The Prime Minister recently noted the areas of the economy which he expects to support growth. We take a brief look at job ads in three of these sectors below.
Recovery begins
The NZ economy finished an abysmal 2024 with a lift in the final quarter. That was the main message from today’s Q4 GDP figures.
GDP grew 0.7% in the final quarter of last year. That was much stronger than expected. The market consensus was looking for 0.4%, we had 0.2%, and the RBNZ had 0.3%.
Confidence shattered, external accounts not so
Today’s economics note was meant to be all about the positive aspects of a rapidly reducing current account deficit. But any positive thoughts about our economy have been completely drowned by the release, this morning, of Westpac’s Consumer Confidence reading, which was simply awful.
Ups and downs
New Zealand’s services sector slipped back into contraction during February, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for February was 49.1 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 1.3 points from January and further away from the average of 53.0 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that unlike its sister survey in the manufacturing space that kicked on in terms of expansion during February, the PSI reverted back to what the services sector had experienced from March to December. For the sub-index results, Activity/Sales (49.2) fell 4.6 points after displaying the highest sub-index value for the previous month. New Orders/Business (49.4) slipped back to the same level of activity that was seen in December, although Employment (48.9) did display its highest value since August, albeit still in contraction.
Despite a return to contraction, the proportion of negative comments for February (57.8%) was down from January (61.9%), although still up from 57.5% in December and 53.6% in November. The overall tough economic climate remained the key observation from comments made.
BNZ's Senior Economist Doug Steel said that "while one might have hoped that the PSI would move higher again, we know that economic turning points can be messy. The brief foray above 50 in January remains the only month in the last year the PSI hasn’t been in contraction".
Fuel Prices Sticky
Weighting together the range of selected prices released this morning from Stats NZ shows their annual inflation pulled back to 1.6% in February, from 2.6% in January.
On the face of it, this looks encouraging for further easing in overall CPI annual inflation. However, we do not believe this to be the case. Prior to today’s data we thought annual CPI inflation would push higher over coming quarters including in Q1. Today’s data adds to the case.
Lift off
New Zealand’s manufacturing sector displayed its highest value for expansion since August 2022, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for February was 53.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 51.7 in January and the highest level of expansion since August 2022. The February result is also above the average of 52.5 for the survey since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the February result was a welcome sight to see with the result building on the return to expansion in January.
“All sub-index values were again in expansion during February. The key sub-index results for both Production (52.4) and New Orders (51.5) were both the highest values recorded since August 2022. Employment (54.0) rose a further 3.2 points from January and at its highest value since September 2021. In addition, both Finished Stocks (54.1) and Deliveries (56.2) experienced notable improvements in expansion, with the latter displaying the strongest level of expansion of the sub-index values for February".
Despite the lift in expansion, the proportion of negative comments from respondents stood at 59.5% in February, compared with 57.7% in January. It was also up from 59% in December and 56% in November. Negative comments during February focused on an ongoing issue around a lack of orders for some manufacturers, as well as sluggish sales.
BNZ’s Senior Economist Doug Steel said that “the sustained improvement is a welcome change. It is one of several indicators that suggests the broader economy is turning for the better. Indeed, it indicates the pickup may be a bit faster than we are currently forecasting”.
Tracking the Tourism Recovery
Increasing international visitor numbers back to 2019 levels is an immediate Government focus in its endeavour to support economic growth. As tourism is NZ’s second largest export industry (after dairy), its progress is vital to New Zealand’s economic success. With this in mind, we take a step-back to assess just how the international tourism recovery is tracking at the moment.
Trans-Tasman Comparison
Last week, the RBNZ reduced the official cash rate by 50 basis points to 3.75% as widely expected. In the details, the accompanying statement noted lower net migration in NZ was “partly in response to subdued labour market conditions relative to Australia.” We take a brief look at employment in both countries below.
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.