The Christmas Rush: GDP, HYEFU And All That
The week before Christmas traditionally brings a heap of economic news and data in NZ. This year is no different. Q3 GDP and the Government’s Half Year Economic and Fiscal Update (HYEFU) are headline grabbers. We see GDP at -0.4% q/q but warn of significant revisions. HYEFU will reflect economic pressures with deficits forecast and heightened funding requirements. November’s Selected Prices are already out and keep our Q4 CPI pick a bit above the RBNZ’s view. And there’s a ton of other data with PSI already out and the Balance of Payments, Merchandise Trade, and no less than three confidence surveys due. Merry Christmas!
Q3 Contraction Likely
As the ‘partial’ indicators for Q3 GDP tickle in, we haven’t seen anything yet to dissuade us of our long-held view that the economy contracted in that quarter. This week’s manufacturing, wholesale, and services data have the potential to fine tune Q3 GDP estimates, but it would take a material surprise to alter a general sense of softness. There’s a bunch of monthly indicators to monitor this week too.
First GDP Partials Arrive
The week ahead delivers two key indicators that will help us finalise our Q3 GDP forecast. Both are expected to support the view that economy activity contracted in the quarter. Net exports are forecast to make a negative contribution and we are anticipating a significant drop in building activity.
Will It Be 50?
The RBNZ is widely expected to cut the OCR by 50 basis points at its Monetary Policy Statement on Wednesday. A 50 point cut this week remains our base case, with further cuts expected ahead. Today’s Q3 retail sales, including another drop in core sales, underlines weakness in domestic demand. October’s consumption imports show signs of a turn, while stronger exports continue to support narrowing in the annual trade deficit.
November MPS Preview
Reasonable people could present sound arguments for rate cuts of 25, 50 or 75 basis points at the upcoming MPS. We’re sticking with a 50 point move but acknowledge the risks.
Trumped!
With all the noise surrounding the US election, we thought it worthwhile trying to summarise the likely impacts on the New Zealand economy following Trump’s resurrection. That said, we are very wary there may yet be a big void between what has been said in the run up to the election and what policy will actually be introduced so any predictions of likely outcomes, including this one, should be taken with a bucket load of salt.
Labour Market Loosening
This week’s data is expected to simply add confirming evidence of a loosening labour market. We expect the unemployment rate to rise to 5.0% in Q3, along with a quarterly decline in employment and the participation rate. Wage inflation is forecast to slow. None of this should come as a major surprise to markets, nor the RBNZ, with our forecasts similar to market medians and RBNZ’s projections. The RBNZ’s full Financial Stability Report is due out tomorrow, while Thursday’s Crown Financial Accounts for the 3 months to September will show how the fiscals are tracking against Budget baselines.
RBNZ Likes What It Sees
RBNZ Governor Orr’s speech, Q&A, and media interview last week made for some interesting reading and listening. It was good to hear the Governor’s thoughts. Data and events will continue to shape the policy outlook. Today’s filled jobs data for September were consistent with a deteriorating labour market and we expect more of the same in next week’s Q3 official figures. This week’s business survey will be mostly monitored for the latest on firms’ activity outlook, employment intentions, and inflation gauges. The RBNZ is scheduled to give an update on the housing market.
Next rate cut 75?
With recent market chatter of whether the RBNZ will cut 75bps or not in November, we thought we’d have a quick look at when previous RBNZ moves of 75bps or more occurred and why. We found three reasons. There is limited local data on the calendar this week, but a few RBNZ speakers to listen too.
CPI Preview: Back in the Band
The Q3 CPI is due out on Wednesday. It is highly likely to show another large drop in annual inflation putting it back inside the RBNZ’s target band for the first time since Q1 2021. We expect annual inflation to drop to 2.3% in Q3, from 3.3% in Q2. This matches the RBNZ’s published forecast. This would support further relaxation of monetary policy restraint. So do does ongoing subdued activity indicators with the latest PMI, PSI, and electronic card transactions data playing to that theme.
OCR Down But How Much?
The RBNZ is expected to lower the OCR on Wednesday. We favour a 50bp move, but it is a close call between that and a 25bp reduction. The latest incremental information has provided no more clarity. The Government’s full year accounts will reveal the exact size of the FY2024 deficit. Friday’s selected prices for September will add guidance to Q3 CPI, while the PMI will provide its usual guide to conditions in the manufacturing sector.
All Eyes On The QSBO
NZIER’s Quarterly Survey of Business Opinion (QSBO) tomorrow is the final major domestic data release scheduled ahead of the RBNZ’s October rate decision next week. It has the potential to change views. There are no polls for the QSBO, but it will be closely followed. Inflation and employment indicators will be among those of most interest to us.