RESEARCH NEW ZEALAND AT A GLANCE 2 February 219 Overview New Zealand is vulnerable to an offshore shock. Trading partner growth is slowing and inflation indicators (particularly amongst emerging markets) are weak. In the event of a serious deterioration adversely impacting asset prices, activity and commodity returns, New Zealand would suffer the consequences. But barring that eventuality, the domestic economy looks well positioned for a further period of expansion only held back by capacity constraints and slowing population growth. Given that the pace of expansion should be sufficient to maintain near-full employment and inflation at target, there will be no pressure on the RBNZ to move its cash rate any time soon. The NZD will suffer if global activity stumbles but remain well supported if not. International The risks around the New Zealand trading partner growth outlook continue to wax and wane. On balance, the expectation is that moderate global growth will continue to support our exporters but there are numerous potentially negative outcomes that need to be watched closely. Our biggest concern is the apparent slowdown that is underway in Australia. This will be exacerbated if fears about China prove warranted. Then there s Brexit, European weakness and a United States softening to contend with. Equally as importantly, is the fact that global inflation remains moribund and acts as a cap on price increases domestically. Growth Domestic growth is moderating and threatens to slow more aggressively than we are forecasting. International factors will have an impact but the biggest driver of the slowdown is likely to be diminished population growth as a result of reduced net migration inflows. This will adversely impact household consumption and residential building. Capacity constraints are an issue too. On the flip side: there is still plenty of momentum in the economy; commodity prices (especially dairy) are holding up well; real wage growth is elevated; consumer confidence is robust; business expectations are recovering; and both fiscal and monetary policy will remain stimulatory. Key Indicators Trading Partner Growth Under Pressure Growth Resilient December Years Actual 21 216 217 218 219 22 GDP production (an avg %) 3. 3.9 3.1 2.8 2.6 2.6 Consumers Price Index (ann %).1 1.3 1.6 1.9 1.7 1.7 Unemployment Rate (end qtr %) 4.9.2 4. 4.3 4.1 4.1 Current Account (% of GDP) -3. -2.2-2.9-3.8-2.9-3.2 Fiscal Balance (% GDP June Yr).2.7 1. 1.9.8 1. NZD/USD (Dec mth avg).68.7.7.68.7.73 Overnight Cash Rate (Dec mth end %) 2. 1.7 1.7 1.7 1.7 2.2 1 Year Govt Bond (Dec mth avg %) 3.4 3.3 2.8 2.4 2. 2.6 2 Ann % change 8 7 6 4 3 2 1-1 -2 Tourism weighted NZ's Trading-Partner Growth Merchandise trade weighted Consensus -3 81 83 8 87 89 91 93 9 97 99 1 3 7 9 11 13 1 17 19 21 Source: Macrobond, Statistics NZ, Consensus Economics, BNZ % change 8 7 6 4 3 2 1-1 -2-3 -4 Annual average Gross Domestic Product Annual - 99 1 2 3 4 6 7 8 9 1 11 12 13 14 1 16 17 18 19 2 21 Source: BNZ, Statistics NZ bnz.co.nz/research Page 1
New Zealand At A Glance 2 February 219 Labour Market The labour market remains very tight with near record numbers of businesses reporting increased difficulty in finding labour and one in five businesses saying that labour constraint is the single biggest factor preventing expansion. This is not surprising given that the unemployment rate currently sits at 4.3%, which must be very close to the RBNZ s target of maximum sustainable employment. Despite this, wage growth remains relatively muted with the private sector labour cost index inflating at just 2.y/y. Nonetheless, this is a pace of change consistent with the RBNZ achieving its CPI inflation goal. We expect conditions to remain at least as tight as they currently are for some time. Inflation Maximum Sustainable Employment? % (s.a.) 7. 6. 6... 4. Non-inflationary Rate? 4. 3. RBNZ Feb 219 MPS BNZ 3. 6 7 8 9 1 11 12 13 14 1 16 17 18 19 2 21 22 Source: BNZ, Statistics NZ, RBNZ Inflation On Target Unemployment Rate Annual headline CPI inflation currently sits at 1.9%. It may well fall over the next few quarters thanks, largely, to recent past declines in oil prices but, commodity price fluctuations aside, annual inflation looks likely to settle near the mid-point of the RBNZ s target band over the medium term. Additionally, measures of core inflation also seem to be converging on this point. At face value this all looks very comfortable for the RBNZ but the fact that nontradables inflation appears to be heading inexorably towards 3.y/y will still provide some apprehension. Annual % change 6.. 4. 3. 2. 1.. Target peak Target low Consumers Price Index Target mid-point BNZ RBNZ Feb 219 MPS External Accounts New Zealand s current account deficit has been steadily rising as a percentage of GDP. It hit a low of 2.2% back in the fourth quarter of 216 and was last marked at 3.6% in September 218. We are expecting it to have nudged higher still by Q4, 218 but believe that will be as high as it gets during our forecast horizon. The domestic softening will likely see the pace of increase in goods imports fall behind exports. At the same time, stagnating oil prices and weak global inflation should support our terms of trade. With the current account deficit (as a percentage of GDP) remaining below nominal GDP growth, the net international investment position should improve further. Fiscal Policy The Government is in an enviable position when it comes to the state of its accounts. For all intents and purposes, its net debt target of 2% of GDP has already been met. Moreover, surpluses continue to be forecast for as far as the eye can see. In reward for this, Standard and Poor s recently upgraded New Zealand s credit rating from AA(stable) to AA(positive). Perhaps the most important aspect of the fiscal position is that the Government is well placed to provide further fiscal stimulus in the event that the economy started to show signs of duress. -1. 97 98 99 1 2 3 4 6 7 8 9 1 11 12 13 14 1 16 17 18 19 2 21 Source: RBNZ, Statistics NZ, BNZ Stable External Position Annual total % of GDP -1-2 -3-4 - -6-7 -8-9 1 2 3 4 6 7 8 9 1 11 12 13 14 1 16 17 18 19 2 21 Source: Statistics NZ, BNZ Fiscal Ammunition Available % of GDP 6. 4. 2.. -2. -4. -6. -8. -1. Current Account Balance 93 94 9 96 97 98 99 1 2 3 4 6 7 8 9 1 11 12 13 14 1 16 17 18 19 2 21 22 23 Source: Treasury, BNZ Core Fiscal Balance and Net Debt Operating balance (lhs) Net debt (rhs) Fiscal Years % of GDP HYEFU 218 4 4 3 3 2 2 1 1 * Operating balance before accounting and revaluation changes -
New Zealand At A Glance 2 February 219 Interest Rates Financial markets appear keen to price in a significant chance of the RBNZ cutting its cash rate within the next twelve months. This is conceivable was New Zealand to be hit by an international shock but, barring such a development, we think it is most likely the cash rate stays where it is for at least another year. The hurdle to move in either direction is high. In short, for the Bank to move, forecast outcomes for the labour market and inflation have to deviate from their respective targets, and the deviation has to be in the same direction. For the RBNZ to cut rates, inflation must settle below the 2.% target and employment fall shy of its maximum stable level. As things stand, both inflation and employment are forecast to remain very close to target for some time to come. Exchange Rates The New Zealand Dollar is expected to drift lower over the next twelve months, on a Trade Weighted Basis. A modest increase against the USD is expected to be offset by relatively significant declines against the Euro and Pound. Implicit in this is our assumption that worst case scenarios have been priced in for the UK and Europe and that trade tensions between China and the US will ease. If, on the other hand, there is a serious economic shock offshore, and that elevates global risk, then a much weaker New Zealand dollar trajectory might be expected, especially against the USD. Rates On Hold % 1 9 8 7 6 4 BNZ 3 2 1 RBNZ Feb MPS 4 6 7 8 9 1 11 12 13 14 1 16 17 18 19 2 21 22 Source: RBNZ, BNZ Relative Stability Cash Rate NZ Dollar NZ TWI NZD/USD 8.9 8 NZD/USD (rhs).8 7.7 7 6.6 NZ TWI (lhs) 6..4 4.3 22 24 26 28 21 212 214 216 218 22 Source: BNZ, Bloomberg stephen_toplis@bnz.co.nz
New Zealand At A Glance 2 February 219 as at 2 February 218 Key Economic % change unless otherwise specified Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 GDP (production s.a.).9.7.6 1..3.7..7.7.8 Retail trade (real s.a.).6 1.2.1 1.1..7.7.6.6.6 Current account (ytd, % GDP) -2.7-2.9-3. -3.3-3.6-3.8-3. -3.3-3.2-2.9 CPI (q/q)..1..4.9.1.2.6.8.1 Employment 1.9.6..6 1.1.1.6..4.4 Unemployment rate % 4.7 4. 4.4 4.4 4. 4.3 4.1 4. 4.1 4.1 Avg hourly earnings (ann %) 2. 3.1 4. 3.3 3.6 3.7 3.4 4.1 3.6 3.8 Trading partner GDP (ann %) 4.1 3.9 4.1 4. 3.6 3.6 3. 3.4 3.6 3. CPI (y/y) 1.9 1.6 1.1 1. 1.9 1.9 1.6 1.8 1.7 1.7 GDP (production s.a., y/y)) 3. 3.4 3. 3.2 2.6 2.6 2.6 2.3 2.6 2.7 Interest Rates Historical data - qtr average Government Stock Swaps US Rates Spread Forecast data - end quarter Cash 9 Day Year 1 Year 2 Year Year 1 Year Libor US 1 yr NZ-US Bank Bills 3 month Ten year 217 Dec 1.7 1.9 2.3 2.9 2.2 2.6 3.1 1.6 2.4.4 218 Mar 1.7 1.9 2.4 2.9 2.2 2.7 3.2 2.2 2.8.1 Jun 1.7 2. 2.3 2.9 2.2 2.7 3.1 2.3 2.9 -.6 Sep 1.7 1.9 2.1 2.6 2. 2.4 2.9 2.3 3. -.4 Dec 1.7 1.9 2. 2. 2. 2.3 2.8 2.8 2.8 -.42 219 Mar 1.7 1.9 1.9 2.4 2. 2.2 2.7 2.7 2.7 -.3 Jun 1.7 1.9 2. 2.4 2.1 2.2 2.7 3. 2.7 -.3 Sep 1.7 2. 2. 2.4 2.2 2.2 2.7 3. 2.7 -.3 Dec 1.7 2.3 2.1 2. 2.3 2.3 2.7 3.3 2.7 -.2 22 Mar 1.7 2.4 2.2 2. 2.4 2.3 2.7 3. 2.7 -.2 Jun 2. 2.4 2.2 2. 2.4 2.3 2.7 3. 2.7 -.2 Sep 2.2 2.4 2.2 2. 2.4 2.3 2.7 3. 2.7 -.2 Dec 2.2 2.4 2.2 2. 2.4 2.3 2.7 3. 2.7 -.2 221 Mar 2.2 2.4 2.2 2. 2.4 2.3 2.7 3. 2.7 -.2 Exchange Rates (End Period) USD NZD NZD/USD AUD/USD EUR/USD GBP/USD USD/JPY NZD/USD NZD/AUD NZD/EUR NZD/GBP NZD/JPY TWI-17 Current.69.71 1.13 1.29 111.69.96.61.3 7.8 74.6 Mar-19.68.71 1.17 1.3 111.68.96.8. 7. 74. Jun-19.67.7 1.18 1.4 112.67.96.7.48 7. 72.8 Sep-19.69.73 1.2 1.43 11.69.94.7.48 7.4 73. Dec-19.7.7 1.23 1.4 18.7.93.7.48 7.6 73.4 Mar-2.7.76 1.24 1.46 17.7.92.7.48 74.9 72.7 Jun-2.71.77 1.2 1.47 1.71.92.7.48 74.6 73.1 Sep-2.72.78 1.28 1.48 14.72.92.6.49 74.9 73. Dec-2.73.79 1.3 1. 11.73.92.6.49 73.7 73.8 Mar-21.72.78 1.3 1. 11.72.92..48 72.7 73.2 Jun-21.72.77 1.32 1.2 1.72.94..47 72. 73.3 Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ TWI Weights 14.% 2.7% 1.3% 4.8% 6.8%
New Zealand At A Glance 2 February 219 Annual March Years December Years as at 2 February 219 Actuals Actuals 217 218 219 22 221 216 217 218 219 22 GDP - annual average % change Private Consumption.8 4. 3. 2.2 1.7.4 4.7 3. 2.4 1.8 Government Consumption 2.1 2.8 1.6 1.3 1.7 2. 2.9 1.9 1.2 1.7 Total Investment 3.6 4.7 2.3 3. 3.8 4.3 3. 3.7 2. 3.6 Stocks - ppts cont'n to growth.1 -.3.2 -.1..2 -.2.3 -.2. GNE 4.7 3.7 3.3 2.2 2.2 4.6 3.9 3.7 2.2 2.2 Exports 1.3 3. 4.7 4.4 3.7 2.1 1.8 4..1 3.7 Imports.1 7.1. 3.1 2. 3.4 6.9 6. 3. 2.3 Real Expenditure GDP 3.7 2.6 2.9 2.6 2. 4.2 2.6 2.9 2.6 2.6 GDP (production) 3.6 3.1 2.7 2.6 2. 3.9 3.1 2.8 2.6 2.6 GDP - annual % change (q/q) 3.1 3. 2.6 2.8 2.4 3.4 3.4 2.6 2.7 2. Output Gap (ann avg, % dev) 1..9.8.7.4 1.1.9.9.7. Household Savings (% disp. income) -2.8-1.8-3. -3.3-2.2 Nominal Expenditure GDP - $bn 269.9 284.7 297.1 312. 323.8 26.6 281.9 293. 38.2 321.3 Prices and Employment - annual % change CPI 2.2 1.1 1.6 2.1 2. 1.3 1.6 1.9 1.7 1.7 Employment.7 3.1 2.4 1.6 1.6.8 3.7 2.3 1.9 1.6 Unemployment Rate % 4.9 4.4 4.1 4.1 4.1.2 4. 4.3 4.1 4.1 Wages - ahote 1.1 4. 3.4 3.9 3.4 1.1 3.1 3.7 3.8 3.6 Productivity (ann av %) -2. -.4 -.3.8.9 -.9-1.1 -.4.6 1. Unit Labour Costs (ann av %) 4. 3. 3.1 2.6 2.4 2.8 3.7 3.6 2. 2.4 External Balance Current Account - $bn -6.9-8. -1. -8. -11.3 -.7-8.2-11.2-9.1-1.1 Current Account - % of GDP -2.6-3. -3. -2.7-3. -2.2-2.9-3.8-2.9-3.2 Government Accounts - June Yr, % of GDP OBEGAL (core operating balance) 1. 1.9.8 1. 1.2 Net Core Crown Debt (excl NZS Fund Assets) 21.8 2. 2.7 2.8 2. Bond Programme - $bn 8. 8. 8. 9. 9. Bond Programme - % of GDP 3. 2.8 2.7 2.9 2.8 Financial Variables (1) NZD/USD.7.73.68.7.72.7.7.68.7.73 USD/JPY 113 16 111 17 11 116 113 112 18 11 EUR/USD 1.7 1.23 1.17 1.24 1.3 1. 1.18 1.14 1.23 1.3 NZD/AUD.92.94.96.92.92.96.91.9.93.92 NZD/GBP.7.2..48.48.6.2.4.48.49 NZD/EUR.66.9.8.7..67.9.6.7.6 NZD/YEN 79.1 77. 7. 74.9 72.7 81.6 78.7 76.4 7.6 73.7 TWI 76. 74.8 74. 72.7 73.2 78.1 73.6 74.6 73.4 73.8 Overnight Cash Rate (end qtr) 1.7 1.7 1.7 1.7 2.2 1.7 1.7 1.7 1.7 2.2 9-day Bank Bill Rate 1.98 1.93 1.9 2.3 2.4 2.2 1.88 1.98 1.9 2.4 -year Govt Bond 2.7 2.3 1.9 2.1 2.2 2.7 2.3 1.9 2. 2.2 1-year Govt Bond 3.2 2.9 2.3 2. 2.6 3.3 2.8 2.4 2. 2.6 2-year Swap 2.3 2.2 1.9 2.1 2.3 2.4 2.2 1.9 2. 2.3 -year Swap 3. 2.7 2.2 2.4 2. 3. 2.6 2.2 2.3 2. US 1-year Bonds 2. 2.8 2.7 2.7 2.7 2. 2.4 2.8 2.7 2.7 NZ-US 1-year Spread.7.1 -.4 -.2 -.1.8.4 -.4 -.2 -.1 (1) Average for the last month in the quarter Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ
New Zealand At A Glance 2 February 219 Contact Details BNZ Research Stephen Toplis Head of Research +64 4 474 69 Craig Ebert Senior Economist +64 4 474 6799 Doug Steel Senior Economist +64 4 474 6923 Jason Wong Senior Markets Strategist +64 4 924 762 Nick Smyth Interest Rates Strategist +64 4 924 763 Main Offices Wellington Level 4, Spark Central 42-2 Willis Street Private Bag 3986 Wellington Mail Centre Lower Hutt 4 New Zealand Toll Free: 8 283 269 Auckland 8 Queen Street Private Bag 9228 Auckland 1142 New Zealand Toll Free: 8 283 269 Christchurch 111 Cashel Street Christchurch 811 New Zealand Toll Free: 8 84 84 National Australia Bank Ivan Colhoun Global Head of Research +61 2 9237 1836 Alan Oster Group Chief Economist +61 3 8634 2927 Ray Attrill Head of FX Strategy +61 2 9237 1848 Skye Masters Head of Fixed Income Research +61 2 929 1196 Wellington Foreign Exchange +8 642 222 Fixed Income/Derivatives +8 283 269 Sydney Foreign Exchange +61 2 929 11 Fixed Income/Derivatives +61 2 929 1166 New York Foreign Exchange +1 212 916 9631 Fixed Income/Derivatives +1 212 916 9677 Hong Kong Foreign Exchange +8 2 226 891 Fixed Income/Derivatives +8 2 226 891 London Foreign Exchange +44 2 7796 391 Fixed Income/Derivatives +44 2 7796 4761 ANALYST DISCLAIMER: The person or persons named as the author(s) of this report hereby certify that the views expressed in the research report accurately reflect their personal views about the subject securities and issuers and other subject matters discussed. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. Research analysts responsible for this report receive compensation based upon, among other factors, the overall profitability of the Markets Division of National Australia Bank Limited, a member of the National Australia Bank Group ( NAB ). The views of the author(s) do not necessarily reflect the views of NAB and are subject to change without notice. NAB may receive fees for banking services provided to an issuer of securities mentioned in this report. NAB, its affiliates and their respective officers, and employees, including persons involved in the preparation or issuance of this report (subject to the policies of NAB), may also from time to time maintain a long or short position in, or purchase or sell a position in, hold or act as advisors, brokers or commercial bankers in relation to the securities (or related securities and financial instruments), of companies mentioned in this report. NAB or its affiliates may engage in these transactions in a manner that is inconsistent with or contrary to any recommendations made in this report. NEW ZEALAND DISCLAIMER: This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. Bank of New Zealand strongly recommends readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication. US DISCLAIMER: If this document is distributed in the United States, such distribution is by nabsecurities, LLC. This document is not intended as an offer or solicitation for the purchase or sale of any securities, financial instrument or product or to provide financial services. It is not the intention of nabsecurities to create legal relations on the basis of information provided herein. National Australia Bank Limited is not a registered bank in New Zealand. bnz.co.nz/research Page 6