QSBO says inflation beaten
In our humble opinion, today’s Quarterly Survey of Business Opinion (QSBO) screams cut rates sooner rather than later. Indeed, this is our central view. But we still think the RBNZ will want to see inflation within its target band before it pulls the trigger and that could be some time away.
Some More Progress
Inflation indicators are generally moving in the right direction. But they need to fall further to be consistent with the RBNZ desires.
Firms’ inflation expectations in this afternoon’s ANZ business survey eased a bit further to 3.46% from 3.59% in May. More progress toward the inflation target band. These levels are consistent with annual CPI inflation printing in the 3s in Q2, as seems to be the consensus view (no official polls yet).
Economic Weakness Continues
The economy grew 0.2% in Q1, to be up 0.3% on a year ago. The quarterly rise was marginally above market expectations of +0.1%.
The positive sign on quarterly growth might excite some with headlines of the country lifting out of recession. We think that would completely miss represent the big picture. Economic weakness prevails.
Narrowing But Large
The current account deficit stood at the equivalent of 6.8% of GDP in the year to March 2024. This matched market expectations, although was a little larger than the 6.6% we anticipated.
The annual deficit is still a touch narrower than the 6.9% reading in the previous quarter and is meaningfully smaller than the 8.8% it peaked at in 2022. The deficit is smaller than it was, but it is still relatively large. We suspect that combined with weak economic growth, the deficit will remain on the radars of rating agencies.
Bottom of the Barrel
Activity in New Zealand’s services sector dropped to its lowest level of activity for a non-COVID lockdown month since the survey began, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for May was 43.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 3.6 points from April and the lowest level of activity for the sector for a non-COVID lockdown month since the survey began in 2007.
BusinessNZ chief executive Kirk Hope said that the May result was as bad is it can get for the sector, reaching contraction levels greater than during the Global Financial Crisis of 2008/09. While most of the sub-index values didn't reach their lowest ever levels, combined they led the May result well below the long-term average of 53.3. The key index values for Activity/Sales (40.9) and New Orders/Business (42.6) were both in significant contraction, while the Stocks/Inventories (42.4) activity level was the lowest recorded for a non-COVID month.
The proportion of negative comments for May (65.4%) was similar to April (66.3%). Given the overall result, respondents continued to note the typical aspects of the current economic downturn.
BNZ's Senior Economist Doug Steel said that "the speed of decline is as worrisome as its size over the past three months. There is weak and then there is very weak. Overall, this tells of a services sector in reverse, at pace”.
Lack of orders
Activity in New Zealand’s manufacturing sector experienced a drop in May and ongoing contraction of the sector, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for May was 47.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 48.8 in April, and means the sector has now been in contraction for 15 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that there was little in the May result to signal a positive turnaround in the sector is coming soon.
“The key sub-index result of New Orders (44.4) remains stubbornly in contraction, and a clear impediment to overall expansion in the sector. To put this into perspective, during the Global Financial Crisis of 2008/09 New Orders remained in contraction for 14 consecutive months. The current results are now a third more than that with New Orders now in contraction for 21 consecutive months. Production (44.5) reverted back to current trends after a surprise expansion in April, although Employment (50.6) did remain in expansion following the expansionary April result.
Despite the dip in the May result, the proportion of negative comments stood at 63.5%, which was down from 69% in April and 65% in March. The vast majority of negative comments focused on a general slowdown and the tough recessionary times at present".
BNZ’s Senior Economist Doug Steel said that “PMI readings to date this year are consistent with falling manufacturing GDP. We anticipate next week’s Q1 GDP figures to include a contraction in the manufacturing component. The latest PMI indicators suggests Q2 will also be weak and potentially weaker than we already anticipate”.
Trend Decline Extends
There has been no respite in the trend decline in job ads. Job ads fell 4.8% in May. This follows a similar sized drop in April, taking job ads’ annual decline to 30.5%. Aside from Covid lockdown periods, job ads are at their lowest level since February 2016.
Painful
Most interest in today’s ANZ business survey was in its inflation gauges. Inflation expectations have been steadily and consistently falling each month for well over a year, but firms’ pricing intentions had become a bit sticky. Both eased in May.
Inflation expectations fell to 3.59% from April’s 3.76%. This is at a level consistent with annual CPI inflation falling into the mid-3s in Q2. Indeed, a further decline in the final month of the quarter would raise some downside risk to the RBNZ’s (and our) current Q2 CPI inflation forecast of 3.6%.
Retail Wriggle
It has not been seen for more than two years. A lift in real quarterly retail sales. The lift might surprise a few or at least have them wondering how sales can increase in the current economic climate. It’s noisy data. The retail sector remains under significant duress.
RBNZ Hawkish
The Reserve Bank of New Zealand has today delivered a clear warning it is still thinking about raising rates. We don’t think this will happen, but a shot has been clearly fired across the bow.
The RBNZ left the cash rate at 5.5% at today’s Monetary Policy Statement but, contrary to popular opinion, raised its modelled cash rate track. And, in the summary record of meeting, the tone was unequivocally hawkish. Indeed, it was noted that the Monetary Policy Committee contemplated raising rates at this meeting. To cap things off, the rate track has a peak of 5.65% implying there is a greater than even chance of a rate hike.
Struggle street
New Zealand’s services sector continued to contract further in April, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for April was 47.1 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 0.1 points from March and the lowest level of activity for the sector since January 2022.
BusinessNZ chief executive Kirk Hope said while the April result was all but the same as March, the sub-index results outlined a difficult time for the sector as a whole. Although Activity/Sales (46.5) improved slightly, New Orders/Business (47.1) continued to fall backwards, while Employment (47.1) dropped to its lowest result since February 2022. Supplier Deliveries (47.6) also dropped to its lowest point since November 2022.
The proportion of negative comments from businesses continued to march upwards over April (66.3%), compared with 63.0% in March and 57.3% in February. A noticeable proportion of respondents noted the current difficult economic times, along with lingering inflationary issues.
BNZ's Senior Economist Doug Steel said that "combining today’s weak PSI with last week’s PMI yields a composite reading that would be consistent with GDP tracking below year earlier levels into the middle of this year. That is what we expect and, if anything, the combined index suggests some downside risk to our forecasts”.
Another fall
Job ads fell 4.4% in April. It extends the downtrend that started in mid-2022. The trend measure itself suggests the rate of decline has slowed over recent months. Job ads are 29.6% lower than a year ago. Aside from Covid lockdown periods, job ads are at their lowest level since April 2016.
To and Fro
Activity in New Zealand’s manufacturing sector experienced a pick up during April, although still remained in contraction, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for April was 48.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 46.8 in March, although still lower than the 49.1 recorded in February. The sector has now been in contraction for 14 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that despite ongoing contraction in the sector, there were a few positive aspects to the April result.
“The key sub-index result of Production (50.8) returned to expansion for the first time since January 2023, as well as Employment (50.8) and Finished Stocks (50.4) also both returning to slight expansion. In contrast, New Orders (45.3) remained firmly in contraction, although showing a slight improvement from March. Despite the small improvement in April, the proportion of negative comments again increased to 69%, compared with 65% in March and 62% in February. An overall lack of sales and orders was the dominant theme in comments, along with a struggling economy".
BNZ’s Senior Economist Doug Steel said that “the PMI this year to date is consistent with manufacturing GDP trailing year earlier levels. However, the details were a bit more mixed in April, rather than uniformly weak as has been the case over recent months”.
Labour market softens
In totality, today’s labour market data were a smidgen softer than we anticipated. The 4.3% unemployment rate for the March quarter was bang on our expectations but both employment (-0.2%) and the participation rate (71.5%) surprised to the low side. Capping things off, the underutilisation rate rose to 11.2% from 10.7% to be more than two percentage points higher than where it stood this time last year.
Growth Optimism Unwound
This afternoon’s ANZ business survey had two key messages. First, the previous post-election bounce in real activity is rapidly unwinding and is outright weak, if not negative. Second, inflation indicators are mixed.
CPI Nothing to Write Home About
There was nothing in today’s CPI release that should have changed anyone’s view of the world. The 0.6% increase in the March quarter was bang on consensus as was the 4.0% annual reading. Sure, the numbers were greater than the RBNZ projected when it produced its February Monetary Policy Statement but, in our opinion, it’s not enough to spook the Bank.
Lost momentum
New Zealand’s services sector fell back into contraction during March, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for March was 47.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 5.1 points from February and well below the long-term average of 53.4 for the survey.
BusinessNZ chief executive Kirk Hope said that the drop back into contraction halted the momentum that the sector had experienced for the first two months of 2024. Both Activity/Sales (44.8) and New Orders/Business (48.3) fell back into contraction, although Employment (50.1) did manage to show the smallest amount of expansion since November 2023.
The proportion of negative comments from businesses rose to 63.0% in March, compared with 57.3% in February and 53.0% in January. A number of respondents noted the current recession, as well as ongoing inflationary/cost of living effects.
BNZ's Senior Economist Doug Steel said that "combining today’s weak PSI activity with last week’s similarly weak PMI activity, yields a composite reading that would be consistent with GDP falling below by more than 2%compared to year earlier levels. That is much weaker than what folk are forecasting”.
One step back
Activity in New Zealand’s manufacturing sector experienced stronger contraction during March, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for March was 47.1 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down from 49.1 in February and the lowest result since December 2023. The sector has now been in contraction for 13 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that it was a case of two steps forward, one step back with improving activity levels for the first two months of 2024 being undone somewhat by the March result.
“The key sub-index results for New Orders (44.7) and Production (45.7) both experienced a noticeable drop, while Employment (46.8) was at its lowest level since October 2023. In addition, the proportion of negative comments increased to 65% in March, compared with 62% in February and 63.2% in January. A lack of orders was again mentioned by numerous respondents, along with the general economic slowdown".
BNZ’s Senior Economist Doug Steel said that “the PMI’s average for the first quarter of the year is consistent with manufacturing GDP posting another quarter that is below that of a year earlier”.
RBNZ Sticks To The Script
The RBNZ held its cash rate at 5.50% this afternoon. This was as we expected and expected by all and sundry. It was fully priced by the market. So, no surprise there. In fact, in the big picture there was no surprise whatsoever to us in the very short statement issued today.
Job ads still trending lower
Labour market conditions continue to show softening trends. Job ads eased 0.4% in March, to be down 27.2% on a year ago. There is more evidence of some moderation in the pace of decline, but still nothing to indicate any material improvement is likely any time soon.
QSBO Soft
A weak economy and broad disinflationary pulse were writ large across this morning’s NZIER Quarterly Survey of Business Opinion (QSBO). Inflation gauges themselves are generally heading in the right direction but remain higher than would be consistent with annual inflation at the RBNZ’s target midpoint.