David Chaston from Interest.co.nz believes that the Reserve Bank has been placed in a difficult position on interest rates, caught between a recessionary economy and stubborn services inflation.
Chaston notes that New Zealand’s economy faces a “severe slowdown”.
The economy is already experiencing a technical recession:
And per capita outcomes are much worse given New Zealand’s population has expanded by a lofty 2.7%:
“March retail spending (using electronic cards) fell a worrying -0.7%, which follows an even worse -2.0% downwardly revised drop in February”, noted Chaston.
“Analysts had expected a +0.8% rebound in March. These levels are terrible when you realise that inflation has been running at way north of 2% and population growth has been +3% on top of that”.
The following chart from Justin Fabo at Antipodean Macro shows that “domestic spending using credit and debit cards in New Zealand has been broadly unchanged for a year in nominal terms”. This means that spending has fallen sharply in real, population-adjusted terms.
Meanwhile, Chaston argues that “inflation updates look toppy”.
“Analysts are now expecting Q1-2024 CPI to rise by +4.0%, to 4.2%, which is down from the Q4-2023 rate of 4.7% but still far above where the RBNZ wants it to be (and even above the RBNZ’s own MPS forecast for Q1 of 3.8%)”, Chaston says.
Accordingly, financial markets have tempered their forecasts for rate cuts.
“This time last week, money markets were pricing in three OCR rate cuts in 2024”, Chaston notes.
“But sticky inflation in the US, and here, both have traders changing their tune, so there are now only two cuts priced in for 2024”.
“The October 9 review is where the first is now priced for, the November 27 review for the second”.
“The conviction for these two is easing off too, and kind of quickly. The earlier May or July pricings have now completely vanished and seem a distant memory”, Chaston says.
I will add that New Zealand’s labour market looks sick, with the number of applicants per job ad tracking at record highs amid crashing employer demand (job ads) and surging supply (net overseas migration):
Given the crashing economy, I firmly believe the Reserve Bank will cut rates in the second half.
The deep per capita recession and deteriorating jobs market will force its hand.
