Weekly Economic Commentary 17 June 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Bumping along the bottom
Data last week confirmed that the New Zealand economy continues to move mildly in reverse. This is a continuation of the trend we have seen since mid-2022. Real GDP has gone backwards by around 0.7% since its peak in Q3 2022 – a slow grind backwards at a time when population growth has been significant. The pull-back in GDP has been neither unexpected nor unwanted from the perspective of the Reserve Bank. But it is nonetheless jarring for businesses and households not used to such prolonged periods of stagnant economic activity.
Signs of stagnation were widespread in data released over the past week. May was another tough month for retailers, with card spending down by 1.1%. That was the fourth straight month of decline, and points to further belt-tightening by consumers after a year of already-flat spending over 2023. Spending on groceries is still holding up (+0.1% in May), but it’s a much softer picture in discretionary categories. Spending on durable goods fell 1% in May and is down 8% on a year earlier. There was also further weakness in hospitality and clothing.
The latest migration figures for New Zealand reinforce that the pace of net inflows has passed its peak, though it remains high compared to history. The annual balance slowed to 98,464 people in the year to April, dropping below the 100k mark for the first time in almost a year. There were further downward revisions to the recent history, with last year’s cyclical peak being marked down from 139,075 to 137,736. The slowdown in net inflows is very consistent with the view that the labour market is cooling and hence there are far fewer opportunities for work compared to the very overheated market of a year ago.
The theme of ongoing weakening in the labour market was also reflected in SEEK job ads data which took another leg down in May (-4.8%). Advertising volumes are falling across the country but seem especially weak in Wellington (around 46% of their peak levels in 2022) and Auckland (around 52% of the 2022 peak) while the labour market in the productive heartland of the South Island is holding up a bit better. The numbers of applicants per listing remains very high indicating strong competition for jobs from those currently unemployed.
The weaker New Zealand labour market is also reflected in the further increase in the flow of New Zealanders moving offshore. This reached a new 25 year high in April as over 56,000 New Zealanders left for better opportunities. Most of this lift in departures is cyclical as, rather unusually, the unemployment rate here is tracking higher than that in Australia. Although there is still an element of post-Covid catch-up in the data also. We don’t see this cycle turning around any time soon given our forecasts of a rising unemployment rate in New Zealand that will outpace Australian trends in the year ahead.
Last week we also saw some seasonal moderation in inbound tourism numbers in April. There was a fair degree of easter-related volatility in the monthly numbers, but a key underlying theme was one of moderation in visitor arrivals from the US (airlines are looking to reduce capacity on the US-NZ routes now) and still soft demand from other source markets such as Japan (where the fresh 17 year high in the NZD/JPY will be a significant deterrent), Korea and Europe. The still weak global growth environment is limiting the ability for tourism to push towards and through pre-Covid levels.
This week’s economic news has begun with a similarly subdued tone. Nationwide home sales fell 5% in May (a fall likely slightly overstated by the provisional data). And while sales were 6.8% higher than a year earlier, turnover remains low, especially considering the growth in the housing stock over time. The median days to sell edged down to 42 days – a pace that confirms a lack of urgency to transact compared to normal times. And so perhaps unsurprisingly, house prices fell 0.3% in May after adjusting for seasonal effects, causing annual growth to slow to 2.3% from 2.9% previously. Prices fell for a third consecutive month in the high-priced Auckland market. Recent soft readings suggest that the impact of relatively high mortgage rates is presently outweighing the impact of rapid population growth. As a result, over the coming week we will review our near-term forecasts for house prices.
This weakness in the economy, while unwelcome to most households and businesses, is seem by the RBNZ as a necessary evil to bring still high and sticky inflation to heel.
Perhaps some (thin!) straws in the wind this week came from the release of Stats NZ’s Selected Price Indices which showed some easing in monthly inflation. Particularly interesting was declines in prices for some non-tradable inflation components such as ready-to-eat food, domestic airfares, and domestic accommodation. We reduced our forecast for June quarter inflation from 0.8% to 0.6% which brings Westpac’s forecast in line with the RBNZ’s May Monetary Policy Statement view.
Two key events in the week ahead are worth watching: March quarter GDP is released 10:45 AM Thursday and RBNZ Chief Economist Paul Conway is hosting a webinar at 9:00 AM Wednesday morning.
Westpac sees Q1 GDP falling by -0.2% - the 5th decline in the last 6 quarters. Annual growth should improve(!) slightly to -0.2%. We’re expecting most sectors to do better (or less bad) than they did in the December quarter, but with some pronounced weakness in a few areas driving the overall result. The key areas of weakness are in non-food manufacturing, construction, and wholesale trade – sectors that are especially interest-sensitive and leveraged to the domestic consumption and investment cycle. Our forecast is noticeably weaker than the RBNZ’s forecast of +0.2%q/q which all else equal should help reduce some of those concerns that it could be at late as August 2025 before policy restriction might begin to be removed.
Conway’s webinar will come ahead of the GDP data but seems timely as it will discuss findings from recent RBNZ research into the sources of recent inflation and the likely key drivers of the expected future decline in inflation. We don’t expect any significant deviation from the RBNZ’s hawkish tone regarding the stickiness of domestic inflation that was adopted in the May Monetary Policy Statement.
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