Inside Economics: The recovery hits a ‘brick wall' ... why tomorrow's GDP data won't tell the real story
Here's why.
Tomorrow we'll get GDP data for the first quarter, which is expected to be better than expected.
That statement is a non-sequitur for starters.
But that's economics for you, when forecasts are revised sharply before a big data release, we end up with revised expectations, which can sometimes be ... well ... unexpected.
Economists and the RBNZ had all been expecting 0.4% GDP growth for the first quarter. After some pretty good manufacturing data and strong agricultural sector performance, they are now expecting 0.7%.
That's good news. But it's about where the good news ends.
We're already seeing data from the second quarter that is coming in worse than expected.
To quote BNZ senior economist Doug Steel: 'It appears the economy hit a brick wall.'
The 'ugly' data that Steel refers to are the latest Performance of Services and Performance of Manufacturing Indexes.
The two surveys of business performance, run by the BNZ in partnership with Business New Zealand – provide an up-to-date snapshot of business performance.
When they are in negative territory, it suggests recessionary conditions.
The results for both sectors in May were really grim.
After a small expansion in January, the sector has contracted month-on-month since then and has now reached its lowest level of activity since June 2024. That was when New Zealand was in a deep recession (in case your memory needed jogging).
Manufacturing was even more disappointing, in some respects.
It wasn't as bad, but given that in the past few months it had moved into positive territory, the fact it has fallen back into negative is quite a blow to the recovery.
Electronic card data for May also pointed to a stalled recovery.
Card spending in the retail sector fell by 0.2% in May compared to April.
To top it off – and I think this is particularly significant in Auckland – the property market is not coming to the party even as interest rates fall.
The latest REINZ house price index showed just 0.1% growth in May. But in Auckland the price index fell 0.3%, the first fall after several months of very tepid growth.
CV or not CV ... is that even a question?
When we look at confidence drivers in the economy, house prices loom large.
It's not real money, but while it may be sad and true, most homeowners feel wealthier when they see the capital value of their largest asset rising.
On that basis, the latest round of council valuations (CVs) landing in Auckland inboxes is unlikely to do much for consumer confidence in the City of Sails.
Average residential values have dropped 9% since the last CVs were released in 2021.
But some central Auckland areas saw falls of 14%. Any real estate agent will tell you CVs don't really reflect the market value of the house.
However, with the market tracking sideways for months now, the CV will have further undercut the 'wealth effect' that the housing market typically adds to an economic recovery.
What gives?
So what's happened to derail the recovery?
There's the tariff shock we had in April. That may have put a dent in confidence that took a few weeks to transmit to the data.
Markets were rattled, and if you looked at your KiwiSaver balance you probably felt a bit poorer.
The uncertainty may also have rattled business confidence.
Donald Trump campaigned in 2024 on widespread tariffs. Photo / AFP
But as US trade negotiations and policy flip-flops continue, the markets have kind of relaxed and priced in the risk.
KiwiSaver balances have recovered. And while there are still plenty of headaches for local businesses that export to the US, it isn't necessarily a large enough group to dent the whole economy.
BNZ's Steel, in his gloomy research note, argues the stalling recovery is quite a concern when we consider we already have the flow-on from lower interest rates and strong agricultural revenue at play.
'Rather than demand indicators incrementally improving, they have sunk,' he says.
'It looks like the positives have been more than offset by other factors, such as significant uncertainty and a soft labour market.'
Tipping point
In my view, there is a tipping point for economic recovery where momentum should start to build more rapidly.
Clearly we aren't there yet, and it is taking a painfully long time to get there.
The combination of strong export earnings and lower mortgage rates will ultimately prove an unstoppable force.
But it looks like we'll need interest rates to go lower than they are now.
'The big question is whether the suggested softening in recent activity will outweigh the expected starting point optimism in this week's Q1 GDP figures?' Steel says.
'There seems every possibility that it will, keeping the output gap heavily negative into the middle of the year. Moreover, the trajectory of the timely indicators suggest the balance of risk is downward.'
That's bolstering the case for the OCR to be cut twice more (as BNZ forecasts) to 2.75%, or even to 2.5% as ANZ and KiwiBank are advocating.
Wholesale markets had only one more 25 basis-point (bp) cut by the Reserve Bank (RBNZ) priced, which would only lower the OCR to 3%.
'That's not enough, in our view. We're likely to need another 50bps beyond that, to get the economy humming once more,' wrote Kiwibank senior economist Mary Jo Vergara.
'The RBNZ may pause in July at 3.25%, but we expect the data to evolve in a way that demands more rate relief.'
Inflation risk
Arriving yesterday, to further complicate the equation for the Reserve Bank, the latest Stats NZ Selected Price Index showed food prices are still rising.
This is combined with concerns about petrol prices spiking because of the Israel/Iran conflict, which has economists worrying about inflation risk again.
Sluggish demand in the economy is expected to keep inflation subdued in the medium term, but short term, it may be at risk of breaking out of the Reserve Bank's 1-3% target range.
Westpac senior economist Satish Ranchhod revised his forecast for the second-quarter inflation up to 2.8% yesterday.
BNZ head of research Stephen Toplis went further.
'We had warned there was a risk that annual CPI would push through 3% some time this year. We are now formally forecasting that to be the case. We now pick annual inflation to peak at 3.1% in [the third quarter] of 2025,' he said yesterday.
And yes, that is the same BNZ team who were so gloomy about growth prospects at the start of this column.
'We still believe annual inflation will remain relatively well contained over the medium term and should get back towards the mid-point of the RBNZ's target band,' Toplis said.
'We think slowing global demand, ongoing spare capacity in the New Zealand economy, slowing commodity price inflation and the potential reversal of any near-term oil price increases could well see inflation fall below 2% for a period of time.'
A short-term spike just increases the complexity of things for the RBNZ.
'The current inflationary noise will intensify the RBNZ's headache,' says Toplis.
He also sees strong odds of the RBNZ pausing cuts in July, to wait and see which way things break.
Meanwhile, I fear that rising food prices, which consumers tend to feel most acutely, will further dampen confidence and deter domestic retail spending.
Falling forecasts
It can be hard to keep track of all the changes to economic forecasts. So it's helpful that the NZ Institute of Economic Research (NZIER) aggregates them every three months to give us an overview.
The latest NZIER Consensus Forecasts show a downward revision to the near-term growth outlook relative to the previous release of Consensus Forecasts.
Annual average growth in GDP is forecast to contract by 1.1% in the year to March 2025 before picking up to 1.9% in the following year.
Previous consensus forecasts had annual average growth of -0.8% in the year to March 2025, before picking up to 2.1% in the following year.
'Following the contraction in the June and September quarters of 2024, recovery in the New Zealand economy has been fragile,' says NZIER senior economist Ting Huang.
But there is still a broad consensus that the economy is gradually recovering and that over the longer term, lower interest rates will support a pick-up in growth.
'The soft labour market is driving continued caution amongst households,' Huang said.
'With over half of mortgages due for repricing within the next six months, many households will face further relief in the form of reduced mortgage repayments. This is expected to support a continued recovery in discretionary spending over the coming years.'
Painfully slow it may be, but it seems the consensus of economists still sees things improving over the coming years.
Here's hoping!
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select 'My newsletters'. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Scoop
a day ago
- Scoop
How Bad Is The Tariff News For NZ, Really?
, Money Correspondent New Zealand has been hit with a higher tariff rate than Australia on exports to the US - but economists say the situation could have been worse. It was revealed on Friday that New Zealand exports would have a 15 percent tariff applied, up from 10 percent announced earlier. Australia remains at 10 percent. Brad Olsen, chief executive at Infometrics, said that was a clear challenge for New Zealand. "There is now a wedge between us and Australia." There were other parts of the world that previously had a higher tariff rate that were now on the same level as New Zealand, such as Europe. "Wine, for example, under the original tariffs, we might have had a slight advantage. Now we don't." But he said it was not necessarily true that the country would have been better off had it negotiated a deal. He said New Zealand did not have a lot to "give up" in those negotiations, and it could have ended up being costly. "I'm a little bit surprised by comments, including from the opposition's trade spokesperson, that the government failed to achieve a lower tariff rate. "The comments seem to make the implication that New Zealand could have found a way to come up with a trade agreement that might have given us a lower tariff rate. "That might be true, but we have no idea what we would have had to give up to achieve that… some of what had to be given up by other countries to get a 15 percent tariffs rate is consequential - Japan and other countries had to give up to half a trillion dollars of further investment into the US." He said the impact on New Zealand's trading partners might not be as bad as had been expected, which should prove positive for the economy. "It will be slightly more challenging to export to the US from a New Zealand point of view, but our trading partner activity might not be hit as bad as was feared in April. That's probably a net benefit for us." Mike Jones, chief economist at BNZ, said the increase was not unexpected given indications of the past few weeks. "It's obviously unhelpful for NZ exports into the US, particularly how we line up with those coming from Australia and the UK, given the lower 10 percent baseline tariff rate for those countries. "Beef and wine exports could be affected. It's interesting in this context that we've seen the NZD/AUD exchange rate fall a little today in the wake of the announcements." Kelly Eckhold, chief economist at Westpac, said he thought New Zealand was in roughly the same position as in April. "On one hand, the tariff is higher, so there is a bigger direct cost, but it's a bit lower for a lot of our trading partners, so it's better for the economy than would otherwise be the case." He said how the lingering elements of uncertainty played out over the coming weeks would be important. "The legal basis of these tariffs, whether they're going to be able to continue or need to be replaced with a different type of tariff, is an issue. And the sectoral tariffs have not yet really been negotiated. "While I don't think these things affect the sort of goods New Zealand trades with the US, there may be some impact on our trading partners." He said it seemed strange that the US was calculating tariffs based on which countries exported more than they imported. "The concept that US authorities have had of countries ripping them off by selling more stuff to America than they're been buying is quite myopic. "We're only talking about goods trade here, we buy a lot of services from the US. "In large part, the trade imbalance is a cyclical rather than a structural story. "In the last few years, the economy has been relatively weak compared to the US. We're not sucking in as many imports, and the exchange rate has been lower than would normally be the case, which has encouraged export revenues. "I would have thought trade policy metrics like tariffs would be determined on the basis of structural, not cyclical factors. "All those things could easily be the other way around in a few years' time."
Newsroom
5 days ago
- Newsroom
NZ's wobbly economy steadying?
1. Tariffs, but with happy markets US tariffs and trade negotiations are back on the front page. That's dashed some hopes the prior 90-day tariff pause might slide into permanency. But a string of recent trade deals has helped produce a vastly different reception amongst financial market participants and forecasters this time around. Indicators of global risk appetite remain healthy and global equity markets have blasted through record highs. That's helpful for confidence, to the extent it lasts. Alongside this and, most importantly for NZ's economic plight, the recent trend stabilisation in global growth expectations has held. Consensus forecasts for global growth were even nudged up a touch this month, for both 2025 and 2026 (to 2.3%= percent year on year and 2.4 percent respectively). Continued resilience in the global economic data pulse, particularly in the US, has helped. We won't add to speculation on whether this is all too optimistic ahead of another trade deal deadline on Friday, and the effective US tariff rate rising above 15 percent. Suffice to say, the dragging uncertainty associated with US trade policy, while lower than previously, looks set to stick around, a negative impost on investment particularly. 2. Investment appetites stirring? Despite this uncertainty, we're encouraged by a sprinkling of indications NZ investment appetites may at least be stirring. Surveyed investment intentions have not only established a foothold at above-average levels but have pushed on further in recent months (ANZ survey, July edition out Wednesday). Admittedly, buoyant rural sector cash flows are having an outsized impact here, per the chart. Boosting the odds these intentions are ultimately acted upon is anecdote suggestive of reasonable interest in the Government's Investment Boost scheme. And perhaps also the lift in investment-related imports we noticed in last week's merchandise trade figures. There's a heap of month-to-month volatility in these data, but in June we saw plant and machinery imports up 13 percent year-on-year imports of transport equipment rising 19 percent, and those for intermediate goods up 21 percent. It's all partial stuff but, taken together, helps assuage some of our prior concerns sluggish business investment might be a dragging anchor for the broader recovery. 3. Steadying of the wobble Other June economic data to hand paint a picture of a partial steadying from May's surprise and unwelcome wobble. Most 'high-frequency' indicators have pulled back a bit from the brink. The underlying sense of the recovery so far failing to launch remains though. Indicative of such, two of the better monthly indicators we watch – the Performance of Manufacturing and Performance of Services indices – continue to openly question the extent of growth uplift we've got on the board. And that's even after our second quarter GDP forecast was pruned to -0.2 percent quarter on quarter. The Reserve Bank's new Kiwi-GDP 'nowcast' sits at -0.3 percent. We still think the mid-year activity air pocket will pass. The underlying drivers of the recovery remain in place and should reassert themselves in coming quarters. But the recent weakness does push back the likely timing of the eventual labour market recovery. We doubt the current undershoot of firms' labour requirements relative to worker availability will change appreciably this side of Christmas. Our forecast peak in unemployment has been shunted out to 5.4 percent in the final quarter of the year. Wage growth should thus continue to slow through to the middle of next year. 4. Inflation (slightly) less threatening We think the supply overhang in the labour market is symptomatic of what's going on in the broader economy. And it's central to our expectation the current burst of inflation will peter out early next year. Our updated forecasts have CPI inflation peaking at 2.9 percent year on year in the current (third) quarter (forecast table at back of document). That's a touch lower than previously and follows the nudge up to 2.7 percent in Q2 revealed by Stats NZ last week. Hikes in food and energy prices are expected to feature prominently again in Q3, as well as this year's annual rates increase. Thereafter, a brisk return to the mid-point of the Reserve Bank's 1-3 percent target range is anticipated through the first half of 2026. An eye-catching but perhaps not surprising feature amongst the detail of the June inflation numbers was the downward pressure on many of the components linked to the sluggish housing and construction markets. Construction costs fell outright in Q2 for the first time since 2011. We've got additional declines pegged for the next two quarters, in part reflecting past weakness in house prices. Annual inflation in property maintenance prices fell to 1.4 percent, with that for household supplies and services at 1.5 percent. Meanwhile, household appliances and domestic accommodation experienced annual deflation in Q2 of 0.9 percent and 6.3 percent and respectively. Notably, these CPI subgroups comprise five of the top 10 most sensitive to interest rates, according to recent research by the Reserve Bank. 5. Rent declines confirm excess supply Annual rent inflation was marked at a still robust 3.2 percent year on year in June. Rents in the CPI are measured on the stock of all rental properties. But note that rents for new tenancies – a flow measure collected by MBIE more closely aligned to market conditions – are now deflating at a (smoothed) annual rate of around 2 percent. That's around the weakest in the history of a series going back to the mid-90s. It puts the median new tenancy rent back at late 2023 levels around $560/week. It fits with the general state of rental market oversupply highlighted in our recent research, a development noted as most obvious in Auckland and Wellington. Heightened supply, alongside the fact net migration remains, not only weak, but also subject to continued downward revisions, points to the strong likelihood CPI rental (stock) inflation falls back towards 2 percent over the coming 12 months. Still, one development worth highlighting is that available rental listings, according to the data we collect from Trademe, appear to have stopped rising. On our estimates, rental vacancy rates have tracked roughly sideways at 3.3 percent for the past two months. If sustained, this would cap a multi-year uptrend and mean rental supply capacity, while still large, is no longer expanding. 6. Runway to a sub-3 percent OCR looking clearer It's been relatively quiet on the interest rate front recently. There's been a pause in the trend declines in most retail interest rates (chart below). However, the net of recent growth and inflation goings on described above is sufficient in our view to reintroduce some gentle downward pressure, should the RBNZ resume Official Cash Rate cuts in August as we expect. A 25bps cut in August is as close to fully priced as it gets and we think the combination of sputtering demand and contained inflation supports the case for a follow up in October. That is, there's no change to our long-held forecast for a 2.75 percent low in the OCR cycle. At a high level we still think the risks are falling evenly either side of this view but more recently there's probably been more of a skew to the downside. Disclaimer: This publication has been produced by Bank of New Zealand. This publication accurately reflects the personal views of the author about the subject matters discussed, and is based upon sources reasonably believed to be reliable and accurate. The views of the author do not necessarily reflect the views of BNZ. No part of the compensation of the author was, is, or will be, directly or indirectly, related to any specific recommendations or views expressed. The information in this publication is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. Any statements as to past performance do not represent future performance, and no statements as to future matters are guaranteed to be accurate or reliable. To the maximum extent permissible by law, neither BNZ nor any person involved in this publication accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.
Scoop
6 days ago
- Scoop
Duck, Dive…Revive?
Press Release – BNZ Indicators partially correct May's stumble But sense of the recovery failing to launch remains, pushing back timing of labour market recovery Sluggish property market turns up in Q2 inflation figures Downtrend in rent inflation has further to run Runway to a sub-3% OCR looking clearer Here's our take on the learnings and implications from the past few weeks' worth of econo-news. 1. Tariffs, but with happy markets US tariffs and trade negotiations are back on the front page. That's dashed some hopes the prior 90-day tariff pause might slide into permanency. But a string of recent trade deals has helped produce a vastly different reception amongst financial market participants and forecasters this time around. Indicators of global risk appetite remain healthy and global equity markets have blasted through record highs. That's helpful for confidence, to the extent it lasts. Alongside this and, most importantly for NZ's economic plight, the recent trend stabilisation in global growth expectations has held. Consensus forecasts for global growth were even nudged up a touch this month, for both 2025 and 2026 (to 2.3%y/y and 2.4% respectively). Continued resilience in the global economic data pulse, particularly in the US, has helped. We won't add to speculation on whether this is all too optimistic ahead of another trade deal deadline on Friday, and the effective US tariff rate rising above 15%. Suffice to say, the dragging uncertainty associated with US trade policy, while lower than previously, looks set to stick around, a negative impost on investment particularly. 2. Investment appetites stirring? Despite this uncertainty, we're encouraged by a sprinkling of indications NZ investment appetites may at least be stirring. Surveyed investment intentions have not only established a foothold at above average levels but have pushed on further in recent months (ANZ survey, July edition out Wednesday). Admittedly, buoyant rural sector cash flows are having an outsized impact here, per the chart. Boosting the odds these intentions are ultimately acted upon is anecdote suggestive of reasonable interest in the government's Investment Boost scheme. And perhaps also the lift in investment-related imports we noticed in last week's merchandise trade figures. There's a heap of month-to-month volatility in these data, but in June we saw plant and machinery imports up 13%y/y, imports of transport equipment rising 19%, and those for intermediate goods up 21%. It's all partial stuff but, taken together, helps assuage some of our prior concerns sluggish business investment might be a dragging anchor for the broader recovery. 3. Steadying of the wobble Other June economic data to hand paint a picture of a partial steadying from May's surprise and unwelcome wobble. Most 'high frequency' indicators have pulled back a bit from the brink (chart next page). The underlying sense of the recovery so far failing to launch remains though. Indicative of such, two of the better monthly indicators we watch – the Performance of Manufacturing and Performance of Services indices – continue to openly question the extent of growth uplift we've got on the board. And that's even after our second quarter GDP forecast was pruned to -0.2%q/q. The Reserve Bank's new Kiwi-GDP 'nowcast' sits at -0.3%. We still think the mid-year activity air-pocket will pass. The underlying drivers of the recovery remain in place and should reassert themselves in coming quarters. But the recent weakness does push back the likely timing of the eventual labour market recovery. We doubt the current undershoot of firms' labour requirements relative to worker availability will change appreciably this side of Christmas. Our forecast peak in unemployment has been shunted out to 5.4% in the final quarter of the year. Wage growth should thus continue to slow through to the middle of next year. 4. Inflation (slightly) less threatening We think the supply overhang in the labour market is symptomatic of what's going on in the broader economy. And it's central to our expectation the current burst of inflation will peter out early next year. Our updated forecasts have CPI inflation peaking at 2.9% y/y in the current (third) quarter (forecast table at back of document). That's a touch lower than previously and follows the nudge up to 2.7% in Q2 revealed by Stats NZ last week. Hikes in food and energy prices are expected to feature prominently again in Q3, as well as this year's annual rates increase. Thereafter, a brisk return to the mid-point of the Reserve Bank's 1-3% target range is anticipated through the first half of 2026. An eye-catching but perhaps not surprising feature amongst the detail of the June inflation numbers was the downward pressure on many of the components linked to the sluggish housing and construction markets. Construction costs fell outright in Q2 for the first time since 2011. We've got additional declines pegged for the next two quarters, in part reflecting past weakness in house prices. Annual inflation in property maintenance prices fell to 1.4%, with that for household supplies and services at 1.5%. Meanwhile, household appliances and domestic accommodation experienced annual deflation in Q2 of 0.9% and 6.3% and respectively. Notably, these CPI subgroups comprise five of the top ten most sensitive to interest rates, according to recent research by the Reserve Bank. 5. Rent declines confirm excess supply Annual rent inflation was marked at a still robust 3.2%y/y in June. Rents in the CPI are measured on the stock of all rental properties. But note that rents for new tenancies – a flow measure collected by MBIE more closely aligned to market conditions – are now deflating at a (smoothed) annual rate of around 2%. That's around the weakest in the history of a series going back to the mid-90s. It puts the median new tenancy rent back at late 2023 levels around $560/week. It fits with the general state of rental market oversupply highlighted in our recent research, a development noted as most obvious in Auckland and Wellington. Heightened supply, alongside the fact net migration remains, not only weak, but also subject to continued downward revisions, points to the strong likelihood CPI rental (stock) inflation falls back towards 2% over the coming 12 months. till, one development worth highlighting is that available rental listings, according to the data we collect from Trademe, appear to have stopped rising. On our estimates, rental vacancy rates have tracked roughly sideways at 3.3% for the past two months. If sustained, this would cap a multi-year uptrend and mean rental supply capacity, while still large, is no longer expanding. 6. Runway to a sub-3% OCR looking clearer It's been relatively quiet on the interest rate front recently. There's been a pause in the trend declines in most retail interest rates (chart opposite). However, the net of recent growth and inflation goings on described above is sufficient in our view to reintroduce some gentle downward pressure, should the RBNZ resume Official Cash Rate cuts in August as we expect. A 25bps cut in August is as close to fully priced as it gets and we think the combination of sputtering demand and contained inflation supports the case for a follow up in October. That is, there's no change to our long-held forecast for a 2.75% low in the OCR cycle. At a high level we still think the risks are falling evenly either side of this view but more recently there's probably been more of a skew to the downside.
