New Zealand: land of the long white, but darkening, cloud

ANZ Research has been seeing it in the leading indicators for a while; it’s now been confirmed in the hard data; and the view from the crow’s nest is there’s a little more softening to come. 

"Let’s hope the Government can see the darkening clouds on the horizon and is readying its fleet to lend a hand.”

While ANZ Research expects growth will stabilise and begin to recover gradually in early 2020, this is contingent on a couple of key economic drivers holding steady as the swell continues to pick up.

And with the Reserve Bank of New Zealand (RBNZ) expected to use up all of its conventional fuel just keeping the ship on course, the Kiwi economy is only one storm away from being blown into the uncharted territory of unconventional monetary policy.

Let’s hope the Government can see the darkening clouds on the horizon and is readying its fleet to lend a hand if the SOS goes from monetary policy needing friends to New Zealanders’ wellbeing needing a lifebuoy.

Adrift on a southern explorer

This ship is slowing. The pace of headline gross domestic product (GDP) growth has almost halved from around 4 per cent year-on-year in 2016 to 2.1 per cent in June 2019 – and the slowing has been broad-based.

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Growth for the September quarter is poised for another soft print with the range of indicators ANZ Research is monitoring suggesting quarterly growth will come in somewhere between 0.1 and 0.5 per cent quarter-on-quarter. ANZ Research has pencilled in 0.4 per cent quarter-on-quarter. While this would see annual growth pick up slightly (from 2.1 per cent year-on-year to 2.2 per cent), this shouldn’t be thought of as a turning point for economic momentum.

Looking at the current quarter, tailwinds are yet to show any sign of picking up.

ANZ Research expects annual growth will be running at just 2.0 per cent by the end of the year and will feature a 1-handle in the first half of 2020 – with risks skewed towards this happening sooner.

Thereafter, growth is forecast to recover gradually as easier monetary conditions kick in. But it’s nothing like the recovery baked into the RBNZ’s August Monetary Policy Statement forecasts which once again are ripe for a downgrade.

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Now let’s be clear, ANZ Research is not forecasting recession. But we’re not forecasting the economy to recover speed any time soon either.

And that means inflation pressures are going to wane. ANZ Research expects the RBNZ will use up its entire conventional fuel supply keeping the ship on course and preventing inflation expectations from sinking.

ANZ Research expects cuts in November, February and May, to take the OCR to just 0.25 per cent – which the team thinks is around its useful limit.

All hands on deck

Migration-led population growth has been one of the most dominant drivers of economic growth in recent years.

The recent susceptibility of these data to substantial revisions month-on-month is a broken anemometer for anyone trying to keep tabs on the economy’s momentum.

On the latest estimates, net migration has not declined at all over the past 18 months. However, the broad-based slowing in the economy alongside non-existent growth in light traffic (and a range of other weakening indicators) does raise some questions. Traffic growth and population growth can diverge markedly, but when they do, it sends pretty strong signals about the state of the economy.

In fact, if net migration is holding up as much as the latest data suggests then the underlying productivity picture (a sad tale to start with) is looking dismal, suggesting GDP per capita is very weak, if not outright contracting.

It might be but ANZ Research suspects there are probably a few more people jumping ship than the data currently suggest and the migration cycle is turning a little faster.

If correct, that implies a little less housing demand but a little more wage pressure than otherwise. But it wouldn’t be a game changer from a monetary policy perspective.

A merry crew beneath the setting sun

ANZ Research’s view that the economy is not about to capsize depends very much on the household sector’s pulling power.

Lower interest rates are keeping debt servicing costs contained and the labour market is “tight” with real incomes gradually lifting and the unemployment rate recording an 11-year low in the June 2019 quarter.

That said, the labour market tends to lag economic activity, suggesting the June quarter’s 3.9 per cent unemployment rate is probably as good as it’s going to get for a while.

ANZ Research is forecasting the unemployment rate to average 4.4 per cent over the next couple of years which in our view is still within the range of maximum sustainable employment – and consistent with ongoing gradual growth in real wages.

And while consumer sentiment has slipped a little recently, there are still a few gold nuggets in the cargo hold. The proportion of households who think it’s a good time to buy a major household item is holding up. Combined with still positive (albeit uncertain) net migration inflows, private consumption should remain buoyed.

But there are a few ominous signs emerging from under the surface that Kiwis need to keep a close eye on.

Employment indicators, including job ads, surveyed experienced employment and employment intentions all suggest jobs growth could disappoint ANZ Research’s expectation.

Should slack in the labour market open up, further increases in the minimum wage could end up becoming an additional anchor on employment growth, which in aggregate could have a net negative impact on household incomes. But ANZ Research notes further minimum wage increases were made conditional on the economic situation for exactly this reason.

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If employment growth falls as fast as some of the indicators suggest (and does so persistently), the drag on economic growth will be significant.

Fewer employment opportunities mean the migration cycle would turn much faster. Household incomes could be lower than otherwise. But perhaps most importantly, household sentiment could deteriorate quickly – particularly if the same thing is happening in other parts of the world (a typical late-cycle move).

If households begin to question their employment prospects, they might mutiny against the RBNZ’s instruction to “go out and spend” and decide rather to pay down that rather uncomfortable pile of debt – currently sitting at an all-time high of 164.4 per cent of disposable income.

The household sector is currently in fine spirits but is nonetheless vulnerable. Any labour market spill-overs from weakness in construction or manufacturing (for example) could see the ship go from making slow but steady progress to drifting well off course.

Miles Workman is Senior New Zealand Economist at ANZ