In confidence . . .
It is looking increasingly likely the RBNZ will stand pat when it delivers its July 9 Monetary Policy Review. Our formal view is for a 25 basis point cut but we recognise that the odds of this are diminishing by the day. Be that as it may, we think changing our call before seeing Tuesday’s NZIER Quarterly Survey of Business Opinion would be ill-advised.
Tensions and Trade
Further escalation in Middle East tension over the weekend brings an expectation of risk off and higher oil prices. If the oil price lift were to persist or extend, it threatens a lift in the cost of imports and to put upward pressure on inflation and potentially inflation expectations. None of this would be good for growth. This week’s trade data for May is expected to show very strong export growth and a rapidly narrowing annual deficit.
Economy Hits Q2 Brick Wall
Timely indicators like the PMI and PSI suggest the economy hit a brick wall during Q2. This does not deny what looks like a firm expansion in Q1, expected to be confirmed in this week’s data. May’s selected prices are expected to support our view that annual inflation pushed higher in Q2. A significant escalation in Middle East tensions has seen oil prices spike, adding yet more uncertainty to the global economic outlook. NZ’s large current account deficit is seen narrowing in Q1.
Q1 GDP Preview
We expect next Thursday’s Q1 GDP data to confirm further economic recovery. The output gap still appears wide and there is much uncertainty around the path ahead, but recovery looks as though it continued in the first quarter of the year.
Trade Mixed For Q1 Growth
Issues surrounding tariffs continue to keep global economic uncertainty elevated. It keeps coming. Today’s Q1 goods trade data looked highly supportive of Q1 growth, while services trade looked the polar opposite. We await more Q1 GDP partials over the coming week. The trade data confirmed rising tradeable inflation which we think is peaking.
RBNZ to cut this week
We expect the RBNZ to cut the OCR by 25 basis points on Wednesday and signal further reductions ahead. Whatever the Bank does, it needs to highlight the massive uncertainty that is pervasive, and the fact that such uncertainty means very little about the future can be taken for granted including future interest rate settings. Business expansion plans may be curtailed by uncertainties offshore. New season milk price forecasts are due and likely to be solid.
RBNZ to continue easing
Donald Trump’s policy machinations are making it a horrible time to be a central banker. But decisions still have to be made, and we think the negative growth impact of the US administration’s policy gyrations add to the need for the RBNZ to continue its easing cycle. Meanwhile, the 2025 Budget takes centre-stage. We expect multiple new spending announcements but the majority of which will be funded from savings made elsewhere.
Activity indicators feature
Sadly, the only game in town is Mr Trump and his tariff antics. However, while we remain at the mercy of offshore developments there are still domestic indicators that need to be watched closely for first indications as to how international developments might start to impact local activity. The key data we will be watching over the next week will be the BNZ-Business NZ Performance of Manufacturing Index, released Thursday, and the Performance of Services Index Monday May 19.
Still No Clarity
Financial markets’ extreme angst might have passed for the time being, with risk assets recently bouncing off their lows, but the economic impact of the US-driven global trade shock is only just beginning to show up in indicators.
Central banks in disarray
Donald Trump has thrown global trade into chaos. He’s created volatility in financial markets. He’s raised fears of recession in the United States alongside the prospect of rising inflation. He’s created massive uncertainty across the planet. All of which has thrown the global central banking community into disarray.
Ongoing tariff fiasco remains centre stage
Trump’s tariff machinations will remain the focus for the week(s) ahead. It’s difficult to know where this is all going to end but, whatever the end point, growth will be flayed and uncertainty will remain elevated. Today’s retail, tourism and PSI indicators again highlight the fragility of a New Zealand economy that simply does not need the extra pressure coming from the United States. Meanwhile, keep an eye on Thursday’s CPI which should reveal an acceleration in domestic inflation.
It's All About Tariffs!
The actions of one President Donald Trump simply beggar belief. In a matter of days one man has almost single-handedly knocked the world economy off its pedestal. Disruptors are a necessary part of both economic and social evolution. They are invaluable at leading change when society is stuck in the status quo. But what we are witnessing right now is simply something else!