4% GDP Growth? Really?
Businesses remain firmly optimistic about the way ahead. Yes, business confidence edged a touch lower in March, but less than it usually does at this time of year and firms’ own activity expectations rose to 48.6. Judging by historical relationships, the latter is consistent with annual economic growth of over 4%. We forecast growth to pick up, but not to that degree. RBNZ is to review capital settings.
Trade Transmission
Commodity prices are higher, but the NZD hasn’t followed. This is altering the transmission of a rising terms of trade. Exports are significantly higher than a year ago, but consumer confidence is weak. We get another update on the latter this week, along with filled jobs for February as a partial guide to Q1 employment.
Chaos Reigns!
Two key macro aggregates are due for release this week: Q4 GDP (Thursday) and Q4 Balance of Payments (Wednesday). They are both critical to our understanding of how the economy has evolved. Well, that’s the theory. In practice, the data are ancient history, subject to significant revision (especially in the case of GDP) and pale into insignificance with regard to prospective monetary policy having been completely usurped by shifts in our high frequency indicators, the antics of the Trump regime in the United States and potential changes of style at the RBNZ.
Orr’s Abdication Hawkish?
In our opinion, the departure of Adrian Orr from the Governorship of the RBNZ may signal that New Zealand’s cash rate has less downside than would otherwise be the case. However, there are many moving parts. We won’t be changing our rate cut expectations solely on the back of the current ructions down at the Reserve Bank, but we warn strongly that the direction of risk to those forecasts is clearly upward. GDP partials are expected to confirm a weak Q4, PMI/PSI to give a timelier guide on activity, while pricing indicators are expected to suggest rising annual CPI inflation.
More Signs of Recovery
The economic recovery we forecast for 2025 continues to take shape. Last week’s data printed mostly for the better. But consumers remain pessimistic, and world worries remain. The terms of trade has charged higher and has further to go. It will support domestic activity. Today’s trade volumes look GDP positive. More Q4 GDP partial indicators are due this week and next.
Activity Rising; Uncertainty Heightened
The RBNZ met our and market expectations with last week’s 50 point cut and commentary. The Bank displayed comfort with looking through a near term forecast lift in inflation, as a negative output gap weighs on core inflation. However, activity indicators are improving and need to be watched closely. Today’s Q4 retail sales surprised on the high side, nudging up our estimate of Q4 GDP. Meanwhile, uncertainty measures are elevated and need to be respected.
All Eyes on the RBNZ
We expect the Bank to lower its cash rate by 50 basis points to 3.75%, at Wednesday’s meeting. Such a cut is the very widely held consensus view. And markets are pricing a 50-point cut as all but a done deal. It would be a massive surprise if the RBNZ did anything but deliver. The big interest for markets is what the Bank will intimate about its future rate track. Meanwhile, the PMI and PSI have finally shown some signs of life. Near term inflation looks a bit higher on tradeable prices, while non-tradeable inflation looks to be easing sharply.
February MPS Preview
Immediately following the November Monetary Policy Statement Governor Orr (MPS) suggested that if New Zealand’s economic evolution turned out broadly as expected the Bank would deliver a 50 basis point cut at the February MPS. While uncertainty has risen (largely thanks to the installation of one Donald Trump), domestic data has been revised (sometimes aggressively) and domestic government policy changes are flying thick and fast, it still seems to us that the broad trajectory of the economy is where the Bank expected it to be. Additionally, financial markets are pricing a 50 point cut as almost a done deal. On these bases, it would be massive surprise if the RBNZ did anything but deliver.
Labour Market Still Softening
As the world watches the opening salvos of a trade war, initiated by the US, there is an obvious risk that domestic proceedings play second fiddle. Nonetheless, there are some important releases to monitor. Q4 labour market data is expected to show a further softening in the labour market, including a lift in the unemployment rate.
Exports Lifting; Labour Market Lags
There is no top tier data due in the week ahead, but a decent smattering of timely monthly indicators and an RBNZ speech to pique some interest. Labour market indicators are expected to remain soft, while a lower NZD and higher commodity prices are improving export prospects. We nudge our milk price forecasts higher. Confidence and inflation expectation updates due.
Inflation Close To Target, But
Domestic focus this week will be on the Q4 CPI due out tomorrow. We think inflation is under control but there are areas to watch. More so regards 2025 than in this week’s figures, although the starting point is always relevant. The PMI and PSI remain moribund suggesting the output gap continues to widen, while electronic card transactions add to thoughts of a turn upward in spending. Globally, eyes are on the US as Trump is sworn into office.
Economic Turning Points Are Messy
Economic growth is expected to start recovering this year. But we caution that it might not feel like recovery for a while because even as activity increases it is likely to remain below potential for some time yet. Nothing there to stand in the way of more monetary easing. However, there is more upward pressure on near term inflation via a lower NZD and higher oil prices over the NZ summer break. We don’t think a 50-point cut by the RBNZ in February is a done deal, but there is still a lot of water to go under the bridge yet. This week’s QSBO, Selected Price Indexes, and PMI are the key releases still to come.