Inflation challenges persist
RBNZ’s Paul Conway’s (pictured above left) recent speech, “The Road Back to 2% Inflation”, focused on recent inflation dynamics and the persistent issue of non-tradables and services inflation, with ANZ's Sharon Zollner (pictured above right) noting it presented balanced risks and unlikely changes to the RBNZ outlook.
“The clear message is that non-tradable services and core inflation matter a great deal when it comes to bringing inflation sustainably lower,” said Zollner, ANZ chief economist.
Challenges in economic balance
The Q1 balance of payments release showed only gradual improvement, with the annual current account deficit narrowing just 0.1% of GDP to 6.8%. This is slightly wider than anticipated and indicates ongoing challenges in achieving a sustainable balance.
“The stalling recovery in short-term visitor arrivals suggests the services deficit may not flip back into surplus as quickly as previously thought,” Zollner said.
ANZ’s updated forecast does not see the services balance sustainably back in surplus over the forecast horizon.
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GDP growth: A mixed picture
The production measure of GDP expanded 0.2% in Q1, aligning with the RBNZ’s forecast.
However, under the surface, the details were softer than expected.
“Services industries contracted 0.1% driven by broad-based weakness,” said Zollner.
This suggests that momentum in the services sector is slowing, corroborated by recent weakness in the performance of services index.
Domestic demand and investment
Headline GDP growth of 0.1% was slightly weaker than anticipated.
“Domestic demand was still on the more robust side of expectations,” Zollner said, although Stats NZ warned that seasonal patterns in expenditure data are still disrupted by travel-related spending not yet normalised.
ANZ’s updated GDP forecast for Q2 is downgraded to -0.1%.
Outlook and policy implications
Looking ahead, the Kiwi economy is expected to struggle to eke out further growth this year.
“Forward-looking indicators suggest that the June quarter will likely be a soft one for economic activity,” Zollner said.
ANZ predicts the economy will grow just 0.2% on an annual average basis over 2024, with a slight acceleration expected in 2025 and 2026 as OCR cuts provide a boost.
Interest rate projections
Zollner predicted that the RBNZ will cut rates sooner than its current guidance of no cuts until August 2025, potentially as early as November.
“Our take is that the economy is soft and well into disinflationary territory, and we’re comfortable predicting that OCR cuts will arrive sooner than the RBNZ has signalled,” the ANZ economist said.
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