The debate seems to be centered on how bad the economy really is right now. It’s obviously not in great shape. But the big question for the RBNZ is: is inflation safely below 3%? Currently it is 3.3 percent.
Don’t get me wrong. I would really like to see a 50bps cut. Since I’m going to refix my mortgage at the end of this month – exposing the interest – more aggressive cuts will put more money in my pocket.
But we won’t really see what happened in inflation until October 16. Not helpful, I know. A few months ago, this timing mismatch was being talked about as one of the reasons why we didn’t get the first rate cut until November.
Of course, the economy worsened and the RBNZ changed its outlook quite dramatically. The 25bps cut in August was warmly welcomed, but worries over the economy have not subsided, fueling expectations of a double – 50bps cut next week. The markets, as always, are curious.
Pulling the trigger on a 50bps cut before we see that latest inflation number seems risky to me. I know the impact of rate cuts will take time to unfold and inflation data is lagging, but I’m always wary of the final sting.
That’s why I think a 25bps cut is more prudent. The RBNZ gets another shot in November and could offer 50bps to cheer everyone up heading into the summer break.
As ANZ chief economist Sharon Zollner noted after Monday’s upbeat business outlook, the growing confidence of local businesses “highlights the risk that the economy’s response to low interest rates may be more robust than generally expected”.
Or as Stephen Toplis, the BNZ’s head of research, put it: ”If you’re looking for a reason why the RBNZ should cut rates by 50 basis points at its October meeting, this isn’t it.”
Yesterday’s more comprehensive NZIER Quarterly Survey of Business Opinion (QSBO) was a little more upbeat. It still showed a big improvement in confidence, but continued weakness in demand when it came to firms’ own activity.
NZIER’s QSBO is a quarterly survey so responses go back to July (when we’re all pretty gloomy) but it asks businesses about their outlook for the next quarter, unlike ANZ’s survey, which asks about a year ahead. .
That explains why one is more cheerful than the other.
NZIER was so gloomy that he prompted Toplis and the BNZ to call for a 50bps cut next week (although he described it as a line-ball call).
This morning Westpac economists called for a 50bps cut.
Chief Economist Kelly Eckhold put 60% odds on a big cut next week, but said 50bps would be even higher in November.
“The inflation outlook is now set to stabilize closer to 2% from Q3 2024, giving the RBNZ more room to move to neutral settings more quickly,” he wrote.
“We continue to see a terminal OCR at 3.75% – expected cuts by Christmas will push the OCR back to neutral more quickly.”
Hopefully, (for my mortgage payments) he and Toplis are right and I’m wrong!
The rest of the bank’s economists will publish their picks in the coming days. We’ll collect them and run them as a proper OCR preview on Monday.
Meanwhile, the global economy is already looking much better, and those fair winds may begin to rub off on us.
The good news is a double whammy
In some respects, the big stimulus package unleashed in China could be the best thing to happen to the New Zealand economy all year.
In recognition of the government’s strong efforts to improve the economic policy, there is a lot of discussion on boosting foreign investment.
The 25bps rate cut in August is significant but only the beginning. Cuts at some point are widely expected and are only taking us back from a post-epidemic inflationary mess.
But China’s economic slowdown is very real, dampening export demand and dampening hopes for a tourism comeback this year.
The People’s Bank of China (PBoC) cut its main policy interest rate to 1.5% from 1.7%. It also reduced the amount of reserve capital banks were required to hold.
The cut would add one trillion yuan (¥1t or $225b) in liquidity to the banking system.
The PBoC has reduced mortgage down payments for second homes from 25% to 15%. It also eased restrictions on loans to invest in stocks and shares on Chinese exchanges.
Markets rallied. China’s blue-chip CSI 300 index rose 8.5% on Monday, its best day since 2008.
Suddenly the global powerhouses of the US and China have delivered a double whammy of good news in the past few weeks, buoying markets and raising hopes for global economic growth.
The US economy posted a strong GDP result of 3% year-on-year in the second quarter.
The US Federal Reserve’s 50bps rate cut caught a lot of attention. Since the big Fed call on September 18, Wall Street has been on a roll. The benchmark S&P 500 index has hit record highs in the past two weeks.
This is good news for our KiwiSaver accounts but the US economy is having little direct impact on New Zealand these days.
China’s stimulus, on the other hand, could directly boost GDP here if it succeeds in boosting consumer spending and keeping GDP growth up to this year’s official target of 5%.
Big bazookas
At this point, keen readers may recall that last week’s column quoted an economist predicting little appetite in Beijing for large-scale economic stimulus.
The narrative – that Chinese authorities wanted to organically stop the property market’s supply problems – really caught on with commentators. Beijing’s move was surprising, and even after the initial announcement, there were indications that it was not really a full-scale stimulus.
ANZ economists (outside Australia) described it as “far from a bazooka”. Others aren’t so sure: “Did China just launch a bazooka?” asked Yahoo Finance.
For some reason, the World War II-era rocket launcher has become the primary unit of measurement for Chinese stimulus.
A quick Google search reveals a similar division Economist, South China PostBloomberg et al Wall Street Journal All pro-Bazooka coming down.
It’s strange how memes can catch on even in economic coverage.
Military enthusiasts may note that the bazooka is a popular single-barreled weapon, but with fiscal and monetary policy support for the economy, China has released two-barreled weapons.
As reported by Reuters, the financial measures will include the issuance of special sovereign bonds worth about ¥2t ($450b).
Some of those funds are used to increase subsidies for consumer goods renovations and to fund large-scale business equipment. Some funds are used to provide a monthly allowance of ¥800 ($180) per child to all families with two or more children, excluding the first child.
It is good for milk consumption.
Prosperity deficit
Last week I previewed Statistics NZ’s latest “prosperity” data release. Inflation and recession have hit the country in the last couple of years and I thought the numbers were pretty good.
We went back, but not much.
People age 15 and older reported an average life satisfaction score of 7.6 out of 10 (where 0 is low and 10 is high), which is similar to the average rating of 7.7 out of 10 in 2021.
But other commentators were worse. Columnist Matthew Hooton says we should be a little happier by 2023, as we’re in the grip of lockdown and pandemic restrictions.
I’m not so sure. People don’t back down from miserable events. It takes years to overcome them. For example, it is a common myth that after World War II the world came to life and we entered a golden age of economic growth and social stability. The post-war boom did not begin until about 1952. New Zealand experienced a depression in 1946 and 1947. The second half of the 1940s was so difficult that the era looms large in our collective cultural memories.
Columnist Richard Preble finds that social institutions — on the courts, the police, parliament, the media, and the health and education systems — have never declined.
Individuals rated organizational trust on a scale of 0 to 10. With an average rating of 7.4 out of 10 in 2023, a drop to 7.7 in 2021, most people report having more trust in the police than other institutions. The public has less trust in the media, down from 4.3 in 2021 to 4.7 in 2021. Trust in Parliament decreased the most in 2023 compared to other institutions, from 5.7 in 2021 to 4.9.
Building compliance will decrease
Annual housing numbers in New Zealand are down by 20%. According to figures released by Statistics NZ, 33,632 new homes were consented in New Zealand in the year ending August 2024.
In the year ending August 2024, 15,597 detached houses were consented, a decrease of 9.7% compared to the year ending August 2023. 18,035 multi-unit homes were approved, down 27% over the same period.
“The number of multi-unit homes consented in the year to August 2024 was the lowest in three years,” said Michael Heslop, manager of construction and property statistics.
Low interest rates and the government’s new, more streamlined compliance rules are expected to help reverse this trend. But as I’ve written over the past few weeks there could be a bigger problem – our immigration rate will drop. If the current trend continues we will see a “net-zero” migration rate next year, meaning construction firms will have little incentive to come out of hibernation and start building again.
Liam Dan is the business editor New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003. To sign up for my weekly newsletter, click on your user profile 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 liam.dann@nzherald.co.nz Or leave a message in the comments section.
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