Latest news with #KiwiEconomics
Scoop
18-07-2025
- Business
- Scoop
Headline Heads North. But Core Matters More.
Press Release – Kiwi Economics The rapid deceleration in imported inflation, which helped to pull down headline, is reversing course. Were no longer importing deflation. The RBNZ May forecasts pencilled in a 0.9%yoy increase in imported inflation from 0.3%. Kiwi inflation likely lifted to 2.8%yoy from 2.5%yoy over the June quarter. But context is key. A reacceleration in imported inflation is driving the move higher. Domestic price pressures continue to cool, on balance. This is the first test for an August cash rate cut. It's widely expected that headline will push towards the top end of the RBNZ's target band. But more important to policy is underlying inflation, which continues to ease. Spare capacity within the Kiwi economy is also keeping downward pressure on domestically generated inflation. Downside risks to medium-term inflation remain. Whether that's a consequence of a slowdown in global economic growth, or a diversion of trade marked at a discount. There is still a case for more accommodative interest rate settings. The first test for a cut to the cash rate in August comes next week. Kiwi inflation data is due out on Monday. By our calculations, consumer prices likely rose 0.7% over the June quarter. Such a move would see an acceleration in annual inflation, from 2.5% to 2.8%. Inflation is pushing closer to the top end of the RBNZ's 1-3% target band. But context is key. A strengthening in imported inflation is driving headline higher. But domestic price pressures, on balance, continue to cool. For now, there's little risk this bout of high inflation will persist. Especially given that there's still significant spare capacity in the Kiwi economy. The rapid deceleration in imported inflation, which helped to pull down headline, is reversing course. We're no longer importing deflation. The RBNZ May forecasts pencilled in a 0.9%yoy increase in imported inflation from 0.3%. Those forecasts predate the recent lift in food prices. More timely data suggests a larger lift. We expect annual tradables inflation to rise to 1.4%. Domestic inflation, in contrast, should continue its (slow) move south. We expect annual non-tradables inflation to pierce below 4% for the first time in four years. We have pencilled in a fall to 3.8%, broadly in line with the RBNZ's 3.7% estimate. Over time, domestic inflation has become less broad-based. Capacity pressures have eased, and the moderation in wage growth suggests that price-setting behaviour is adapting to the low-inflation environment. Reflective of a weakening economy and labour market, is the continued slowing in services inflation. Wage growth has eased significantly. As a result, services inflation has trended lower. For monetary policy, the underlying trend in inflation is most important. Core measures of inflation strip out the volatile price movements. Encouragingly, core inflation has been trending south since hitting the 6.7% peak at the end of 2022. In the year to March 2025, core inflation fell to 2.6%. We expect more progress was made over the June quarter, with measures of core inflation remaining within the RBNZ's target band.
Scoop
15-07-2025
- Business
- Scoop
Our Laterally Locked Housing Landscape Is Holding The Line. We're Looking Ahead
Press Release – Kiwi Economics Investors have been hunted by policymakers, both from the last Government and RBNZ. Interest rate deductibility, Brightline tests, and laser focussed LVR restrictions have all targeted investors. The Kiwi housing market continues to stumble sideways. Yes, there was an unsustainable 46% surge out of Covid. Yes, the RBNZ orchestrated an 18% correction back to more sustainable levels. But over the last 2 years, house prices have gone nowhere. That will change, next year. Interest rate cuts will fuel confidence. And confidence will generate activity. Investors have been hunted by policymakers, both from the last Government and RBNZ. Interest rate deductibility, Brightline tests, and laser focussed LVR restrictions have all targeted investors. Precisely what we don't need with a chronic housing shortage. It's investors that will reignite the housing market. But now, they remain sidelined, waiting to rebuild equity in their portfolios. It's chicken and the egg. Which one came first? Interest rate cuts. Interest rates are the biggest driver of house prices. Swift interest rate cuts are feeding through fast. But they have not gone far enough. And investors no longer need to worry about the Brightline test or interest deductibility. But they do still worry. They're waiting for the economy to recover. They're waiting for their own businesses to improve. They're waiting. The true test will come over the warmer months. The latest REINZ data shows a housing market that remains largely locked in lateral moves. After seven consecutive months of (very) modest gains, house prices dipped by a seasonally adjusted 0.3% in June. Over the year, house prices were up just 0.3%. That's not a market in recovery. It's a market that is failing to find its footing. And after 225bps of rate cuts, the recovery lacks any real conviction. House prices are still down 16.3% from the November 2021 peak. And prices have only lifted half a percent since the RBNZ started cutting in August last year. Rate cuts have not yet triggered investors. The median national house price sits virtually unchanged from a year ago at $770,000. And the median days to sell, one of the best real-time indicators of housing dynamics, continues to yo-yo above the long-term average of 40. The longer it takes to sell, the weaker the market. And days to sell lifted to 50 from 47 last month. It's still a buyer's market out there. As we said in our latest outlook 'We've seen green shoots emerge, and then die off, only to re-emerge again. But we must wait, like gardeners, until spring… to see if the green shoots start blossoming or remain in drought.' The data for June was frost bitten. The colder months are always harder on the housing market. But nevertheless, this is certainly not a hallmark of an economy that has undergone a significant easing cycle. And if anything, the unresponsiveness of investors is a sign that there is more work for the RBNZ to do. More rate cuts are needed to stimulate demand in housing. Much of our optimistic forecasts for growth in the Kiwi economy into 2026 is predicated on a bounce in housing demand. It's the Kiwi way. Heightened job insecurity from a labour market still bleeding out, a surge in housing stock, the continued absence of investors, and rapidly declining net migration are all weighing heavily on the housing market's recovery. Many of these pressures are themselves by-products of an economy that still needs stimulus. Yes, we are getting closer to the bottom in interest rates. And these days forecasters, including ourselves, are arguing over just 50bps. It's not much, but it is still important. Do we need a neutral (unhelpful) rate of 3%, or do we need a stimulatory (helpful) rate of 2.5%. We argue that the economy needs (more) help.
Scoop
16-06-2025
- Business
- Scoop
Forecast Update: We're Feeling Our Way Through
Press Release – Kiwi Economics Our COTW looks into the reversal in the manufacturing PMI, here at home. After four straight months of signalling expansion, the index is back in contractionary territory. News of tit-for-tat missiles strikes between Israel and Iran rattle financial markets last week. Troubling for the global economy and markets, the conflict has spread to the energy sector. Oil has surged and investors sought safe havens. We've updated our outlook for the Kiwi economy. And no surprises, we have downgraded our growth profile given heightened global uncertainty and a likely slowdown in global trade. Our COTW looks into the reversal in the manufacturing PMI, here at home. After four straight months of signalling expansion, the index is back in contractionary territory. Here's our take on current events The outlook for global growth is cloudier than ever. And it's not just tariffs that we are now grappling with. News of Israel's missile strikes on Iran rattled financial markets at the end of last week. The conflict continued over the weekend and, in an unprecedented move, spread to the energy sector with an exchange of strikes on refineries and gas facilities. Naturally, oil prices have surged, and investors have flocked to safe haven assets. Gold, in particular, has benefitted, nearing record-highs. But in a rather head-scratching move, US treasury yields climbed on the risk-off news. The atypical reaction may tempt some to question the safe haven status of US treasuries. But the move likely reflects concern over a resurgence in inflation, especially if the conflict does not de-escalate quickly enough. As a small open economy, we're especially vulnerable to a disruption on the global stage. So where does the Kiwi economy go from here? These days, the multiverse feels acutely vast as news headlines roll in. The future may unfold in many different ways. As we note in our updated outlook (see here) , the balance of risks is skewed to the downside for the Kiwi economy in the near term. But we maintain a sense of optimism into 2026. The Kiwi economy was poised, primed and positioned for a recovery. Timely economic data were showing promising signs of a turnaround in activity. From PMIs popping into positive territory, to healthy export earnings for the rural sector. But the beginnings of our economic recovery – as fragile as it was – has largely been driven by the external sector. And it's the external sector which is most vulnerable to the risks offshore. A certainty amidst all this uncertainty, is that a slowdown in global growth is inevitable. The likes of the IMF and OECD have slashed their forecasts, just as we're starting to get back on our feet. The NZ economy crawled out of a deep, deep hole last year. We continue to expect economic growth in 2025, but at a much slower pace. We forecast the economy growing just 0.9% this year, down from our previous forecast (which was already below-trend, and consensus) of 1.4%. Our previous house price forecast has proved too optimistic, as high levels of stock have flooded the market. We still (somewhat optimistically) expect to see a lift in prices over the spring and summer months, recording a 2-3% gain by year end. Trailing the broader economic cycle, a further loosening in the labour market is expected before employment growth rebounds into 2026. We see a near-term spike in inflation to 2.7% this year. But there's no need to panic. The implementation of higher tariffs will likely reduce medium-term inflationary pressures. Import prices will likely fall as exporters adjust to weaker global demand. Trade diversion will also weigh on import prices. Goods made in China and destined for the US, may wash up on our shores at a discount. For the RBNZ, they will need to move policy settings from restraining the economy to supporting it. The outlook requires further easing. The RBNZ has delivered 225bps of cuts since August 2024, and we forecast another 75bps to set policy at more stimulatory levels. A 2.5% cash rate is still our forecast terminal rate, although the path toward is shrouded in uncertainty. Back to the present, more like the past, this Thursday we will see how the Kiwi economy performed at the start of the year. And we're expecting another strong result. By our estimates, the Kiwi economy likely grew 0.7% over the March quarter, matching the same pace as the Dec24 quarter. On an annual basis, we expect the Kiwi economy to be 0.8% smaller than this time last year. It should also be noted, importantly, that Thursday's data won't reflect the more recent, likely negative, effects of tariff uncertainty on Kiwi growth yet either. What the data will likely show is a real divide between the sectors that are indeed thriving, and those that are still in survival mode. The modest and still fragile recovery that we've seen to date has been largely concentrated across the primary industries, with particular strength across the agricultural sector. Supported by stronger export prices (up 17% over the year to March) and a weaker Kiwi dollar earlier in the year, we expect activity to have lifted further in Q1. That momentum has also flowed through onto food manufacturing and the broader manufacturing sector. Alongside PMIs in expansionary territory, and manufacturing sales volumes up a solid 2.4% over the quarter, we're expecting a solid 1.5% lift in manufacturing growth over the quarter – if realised, that would mark the sector's strongest performance since the end of 2021. However, it seems like the return to strength for manufacturing may be short lived. The latest PMI survey for May revealed a sharp fall back into contraction across almost all sub-indexes and points to a weaker June quarter (see our COTW for more). Beyond that, we expect the flow through of lower interest rates to continue breathing life and activity back into other sectors of the economy. Retail and wholesale should benefit as household disposable incomes recover and discretionary spending gradually picks up. Still, not all sectors are feeling the relief just yet. Particularly not construction. While indicators like building consents and work put in place suggest the sector may have found a floor, we still suspect construction remained subdued over the quarter. Chart of the Week: Manufacturing momentum no more. Last week our chart of the week focused on US PMI data. So naturally, this week we're taking a look at PMI data here at home. After nearly two years of being in contractionary territory (a reading below 50), the Kiwi manufacturing PMI had found a breath of life over the start of this year. The first four months of 2025 saw the index finally back in expansion with monthly readings ranging between 51.8-54. At the same time, other sub-indexes of the PMI survey, notably production, employment and new orders were also signalling expansion. Momentum in manufacturing was clearly building over Q1, and we expect to see that reflected in this week's GDP numbers. However, it seems like the strength in the industry may be short-lived. Last week, the latest manufacturing survey saw the the index fall sharply from 53.3 to 47.5 in May. And, along with the headline rate, most sub-indexes posted a great fall too. For example, new orders dropped 5.5 points to 45.3. Meanwhile, the employment sub- index fell 8.9 points to 45.7 – the largest single monthly fall in the survey's 22-year history! Both offshore, and now at home, low confidence amid economic fragility and tariff uncertainty is resulting in softening demand and orders across manufacturing. And it's something which could very well and quickly spread to other sectors of the economy. It's under these conditions that we're expecting a weaker Q2 GDP outturn than the strong prints over the summer period.
Scoop
09-06-2025
- Business
- Scoop
We're In The Eye Of The Storm, As Tailwinds Become Headwinds
Press Release – Kiwi Economics Our COTW takes a look at the slowdown in US output, but rise in inflationary pressure. Last week was very much a US story. To be fair, these day's that's become the norm. But between friendship fallouts, and a number of slowing US indicators, there was plenty to digest. We've seen a front loading of activity in anticipation of tariffs. And we may now be seeing the start of the unwind. Both of which cloud what's happening to the actual trend growth beneath. There has been a shock to sentiment, and conditions are deteriorating. Our COTW takes a look at the slowdown in US output, but rise in inflationary pressure. Here's our take on current events We're officially one month away from the end of the 90-day pause on reciprocal tariffs. And so far, we've had one deal. One. It's with the UK, and it's with loose ends. We would have expected many more by now. And still hope for many more to come between now and July 9th. But if the current track record is anything to go by, it's painfully slow. We remain in limbo. And President Donald Trump's attention seems to be elsewhere, with his very public breakup with Elon Musk. Beyond the playground drama, the US economy is starting to pay the price of the tariff turmoil environment. We've been waiting and watching, trying to gauge the tariff impacts. And it feels like we're in the eye of the storm. We know, mostly anecdotally, that there has been a lot of front-loading. Car sales for example, surged in March, only to fall off a cliff in April. And we've seen a further pullback in Chinese sourced goods over the month of May. The front loading of activity, and growth, is common sense. We saw similar reactions when GST was introduced. If you know a tax hike (GST or tariff) is coming, you buy now, not after. The inflation gauge spikes, temporarily, and then returns to levels seen before the tax hike. So, what we saw in the first half of the year, was a confused front loading. And what we'll see over the second half, is an unwind. In fact, we're possibly already seeing that unwind now. Monthly trade data out of the US last week showed signs that the recent front loading of imports into the US may be coming to an end. The US trade deficit over April narrowed 55.5% – the most on record- led by a record 16.3% decline in imports. And the value of US imports from China fell to its lowest level since the early months of pandemic when borders were physically shut. Nevertheless, as economists, it's difficult to strip out the likely front loading from the actual trend growth beneath. And it's equally difficult to strip out the unwind. So, growth may be rosy for now, and bleak a little later. So, what do you do? Well, we turn to sentiment indicators. And there has been a shock to sentiment, as you'd expect given all the uncertainty. Last week we saw a fall across US PMI surveys indicating a contraction in activity. See our COTW for more, but essentially the surveys can be summed up simply as firms are facing weaker activity but persistent inflation pressures. That's painful. Everything that happens in an economy washes out in the labour market. If we're growing, businesses hire. If we're stalling, businesses retrench. The US payrolls report is the 'glamour stat'. The red carpet gets rolled out on the first Friday of every month, and camera crews fight for a glimpse into the labour market. Well last month's report was released on Friday, and the labour market is bending, not breaking. Payrolls have softened but not dramatically, with 139k for month of May (with consensus 120k). The unemployment rate was unchanged at 4.2%, while the level of underemployment held steady. That's good. And wages posted a solid gain of 3.9%. Again, that's good. But we're sitting here knowing it's still way too early to see the full impacts of the tariffs. And there are some questions around the strength of the payrolls report, with the ADP (a pre-payrolls payrolls report) declining noticeably this year, to just 37k last month. Conditions have weakened… but we're in the eye of the storm. We felt some tailwinds to start, with pre-loading, and face headwinds ahead, as the full force of the tariffs come through. This week we get the US inflation report for May. We haven't seen impact of tariffs in the data yet. But we're watching. US surveys show higher, or elevated, inflation is expected, but it is not yet in the hard data. Chart of the Week: US firms are feeling the heat. Cracks in the US economy are starting to form. The recent flow of high-frequency data isn't looking too good. The ISM surveys for the month of May were especially disappointing. The manufacturing PMI fell from 48.7 to 48.5, the lowest in six months. And majority of its components also signalled contraction (a reading below 50). The new export orders fell 3pts, while production contracted for the third straight month and remains well below pre-covid levels. At the same time, the prices paid sub-index expanded for the fourth straight month, and the supplier deliveries sub-index rose 2pts suggesting a hoarding of inputs ahead of tariff escalation. The services PMI posted a deeper slide in May. Economic activity in the sector contracted for the first time since June 2024, with the index plunging 1.7pts and slipping into contractionary territory. The drop in the headline index reflected a plunge in the new orders component, down 5.9pts. And the prices paid sub-index increased to the highest level in 30months. Across both surveys, it's clear that output is beginning to slow, while inflationary pressures are heating up.
Scoop
03-06-2025
- Business
- Scoop
May Is Over, The Mayhem Is Not, And Markets Are Muddled
Press Release – Kiwi Economics Tariff volatility continues to dominate financial markets. The RBNZs latest statement alone mentioned the word uncertain, or some or a form of it, 164 times across their 60 or so page statement. Tariff volatility continues to dominate markets and the outlook. We're far from any resolution. And the fragility of the global economy poses significant risk to our recovery here at home. Aware of all the risks, the RBNZ cut the cash rate to 3.25% last week. And despite the uncertain path ahead, there's more cuts coming. That's the key takeaway from the May MPS. Our COTW takes a look at the curious sell off in Kiwi rates following the RBNZ policy decision. Here's our take on current events After a hectic month marked by a whirlwind of trade escalations and de-escalations, the Government's budget release, and last week's RBNZ Monetary Policy Statement, May has officially come to a close. The mayhem, however, is far from over. Tariff volatility continues to dominate financial markets. Whether it's the ongoing legal battle between the Trump administration and the courts over the legality of the 'Liberation Day' tariffs, or the renewed tensions between the US and China – with each side accusing the other of violating their trade truce – or the proverbial (not literal!) shots aimed at the European Union, the economic landscape remains incredibly fragile. There's a lot of noise right now. And it's hard for everyone, including policymakers, to make sense of it all. The RBNZ's latest statement alone mentioned the word uncertain, or some or a form of it, 164 times across their 60 or so page statement. That's about 3 mentions a page… Nevertheless, the RBNZ delivered on expectations and delivered another 25bps cut. The cash rate sits at 3.25%. And there's more cuts coming. That's the key takeaway from the May MPS. Although the path from here is highly uncertain. The OCR track was lowered from a flat lined bottom of 3.10% to a 2.85% trough in March 2026. So now another 25bps cut to 3% is fully baked into the cake. And from there, there's a 60% chance of another 25bps cut to 2.75%. Once again, we would love to have seen a bit more. We're still of the view that a 2.5% cash rate is what the Kiwi economy needs. And an OCR track bottoming anywhere below 2.75% would have signalled what we had hoped to see. But with each MPS, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there. But for now, such heightened uncertainty is making it harder for all policymakers to navigate. So, it's not surprising to see the committee err on the side of caution. The fact the RBNZ 'voted' 5-1, with one member opting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a 'pre-set course', and always data dependent. We think there's enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything. All in all, we think there was a bit in the May MPS for everyone, dove or hawk. The RBNZ's forecasts were markedly revised lower. The expected Kiwi economic recovery is forecast to be slower than projected in the February MPS with the RBNZ now forecasting 0.7% growth this year, down from 1%. And greater spare capacity than previously modelled also sees unemployment stay higher for longer. You can't ignore that. And that's the dovish part. The hawkish part lies in the dissenting 5-1 vote and the accompanying hawkish tone in post MPS media conferences. Comments from Hawkesby including the statement that the Committee will have 'no clear bias' heading into the July meeting, injected a dose of uncertainty. And together, these seeds of doubt gave markets something to run with. Rates, particularly in the short end saw a sizeable jolt higher (see our COTW for move on the move in markets). But we think markets, as they so often do, have gotten a bit carried away. Time will tell. Charts of the Week: A less dovish, highly uncertain, RBNZ bias generated a mixed reaction in markets. If you just read the statement, the RBNZ's easing bias was strengthened. The economic forecasts were cut, and another 25bp rate cut was inserted into the OCR track (from a low of 3.1% to 2.85%). The track shows a clear bias to cut to at least 3% and there's a 60% chance of a cut to 2.75%. That's dovish. Because they're still cutting. Our first chart shows with each MPS over the last year, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there. The FX market read the statement. The Kiwi currency barely moved. The Kiwi currency reacted exactly as you'd expect. It fell. It rose. And then it fell again. It looked like a heart rate monitor around .5950. There wasn't much change at all. There are bigger issues offshore for currency traders to grapple with. If you listened to the press conference, the RBNZ's top brass were crystal clear in their clouded uncertainty. Heightened uncertainty is making it harder for all policymakers to navigate. So, it's not surprising to see the committee err on the side of caution. The fact the RBNZ 'voted' 5-1, with one member voting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a 'pre-set course', and always data dependent. We think there's enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything. It was the 'vote', the first time in two years, that got interest rate traders (re)thinking. That seed of doubt caused a bit of a jolt, especially short end interest rates. The pivotal 2-year swap rate rose 10bps, from 3.16% to 3.26% (now 3.32%), as the implied terminal cash rate lifted from 2.85% to 2.95% (now 3%). See the second chart. It's not a big move… but it was one Governor Christian Hawkesby pushed back on. The telling comment from Hawkesby, when asked about the market reaction, was his reference to the new OCR track matching market pricing prior to the announcement. The RBNZ's OCR track matched market pricing of 2.85%. So they would not have expected much reaction at all. We believe we are seeing some profit taking in wholesale rates markets. Hedge funds would have placed some bets that the RBNZ may have come out a lot more dovish. We think the market will settle down, and end up moving back down to 2.85%, in time (and depending on what happens in offshore markets). And then, we expect another move by markets and the RBNZ down to 2.5%. Content Sourced from Original url
