ANZ economists give economic update
ANZ’s top economists have delivered an update suggesting New Zealand's economy may be headed for a softer landing than previously thought.
During a podcast, Sharon Zollner, chief economist at ANZ, highlighted the potential for disinflation and earlier interest rate cuts than what is forecasted by the Reserve Bank of New Zealand (RBNZ).
“Although there is a lot of noise in the data, we are optimistic that the RBNZ will be able to cut rates sooner than they think,” said Zollner (pictured above). “We’ve got cuts in February whereas the RBNZ is now not forecasting cuts until about August.”
On the other hand, the market continues to punt on a rate cut later this year. Zollner said this forecast remains unlikely.
“Although local markets are pricing in much more easing than we expect (with 25 basis point cuts now basically fully priced in for November, February, and May), we don’t expect that to change given the gloomy domestic activity backdrop.”
Soggy housing data shows modest rise in property prices
The update came after “soggy” housing data from the Real Estate Institute of New Zealand showed downside risk for property prices.
In a separate update, senior ANZ economist Miles Workman said the seasonally adjusted REINZ House Price Index fell 0.4% month-on-month in May as sales came in on the softer side for this time of year.
“Downside risks to our forecast for a modest 3% rise in house prices over 2024 appear to be materialising,” Workman said.
“All in all, today’s data point to some downside risk to our house price forecast for a modest 3% rise over 2024. Our forecast does have some near-term weakness baked in, but with a very gradual recovery towards the end of the year.”
Workman said this profile may well come to pass, but later than previously thought.
“There’s certainly plenty to weigh up, as the labour market continues to loosen, recent policy changes (DTI and LVR restrictions, Bright Lines test, and interest deductibility) push and pull on supply and demand, and fixed mortgage rates gradually fall,” Workman said.
“Fair to say that if the economy is rolling over faster than previously thought (which some activity indicators suggest), then the household income and sentiment channels could become more potent drivers of house prices than our forecast assumes.”
Inflation to ease
Part of what ANZ had based its most recent forecast on is the latest select price indexes data.
Making up around 45% of monthly CPI data and 15% of quarterly CPI data, the select price indexes monitor the more volatile components of the CPI indicator.
Zollner said there’s always a dilemma as a forecaster where if you see a surprise, it could just as well reverse the next month.
“Should you revise your forecast or not?” Zollner said. “Overall, they were weaker than we expected in May but it was in those most volatile components.
“We’ve left our CPI forecasts for Q2 unchanged, 0.6% quarter-on-quarter, and 3.5% year-on-year.”
This sits slightly below the RBNZ's projection of 3.6% YoY, hinting at a potential faster cooldown in inflation.
“But we would now characterise the risks as skewed to the downside around their number,” Zollner said.
For RBNZ however, Zollner said it’s not the headline that matters so much – it’s the details.
“They are most worried about domestic inflation – that non-tradeable inflation that’s coming off much more slowly than they had expected, particularly on the last read,” she said.
“But our business outlook survey’s show disinflation is evident in a lot of the components.”
Looking ahead: GDP data
Looking ahead, the most important indicator to keep an eye on this week, according to Zollner, is the nation’s gross domestic product (GDP) reading.
The range of domestic forecasts for this Thursday’s GDP data drop are -0.2 and +0.2.
“For our part, we are on the +0.2 – the more optimistic end of expectations but it is because the components that we don’t really have any good indicators for fell last month and are likely to have a technical bounce back,” Zollner said.
For the RBNZ, the headline figure is, again, not that important. Instead, Zollner said it’s all about the details and the economic story.
“I would say there’s not actually very much difference in the stories out there between that -0.2 and +0.2,” Zollner said. “There’s just technical accounting spreadsheet numbers rather than an economic story that accounts for the differences.”
For overall GDP, Zollner said anything less than 0.7% is going to be seen as disinflationary by the Reserve Bank.
“It just comes down to the speed of disinflation and how rapidly inflation is going to come down,” Zollner said.
“It could be one of those days where the market reacts to the headline and then takes time to digest the details.”
