New Zealand's Macroeconomic Balancing Act
This report explores key factors influencing New Zealand's economy and the New Zealand dollar.
Friday, August 23, Week 34
Welcome to this comprehensive report on New Zealand's macroeconomic landscape, designed to provide forex traders with the insights they need to navigate the country's currency market. This report delves into the key drivers of New Zealand's economy, analysing the interplay of geopolitics, fiscal policy, economic indicators, and monetary policy.
This report will equip forex traders with a deeper understanding of the forces shaping the New Zealand dollar, enabling them to make more informed trading decisions. We will explore the escalating trade tensions between major global powers, the impact of New Zealand's recent budget on economic growth, the RBNZ's shift towards a more accommodative monetary policy stance, and the key economic indicators that traders should be monitoring.
For clarity, this report uses the following timeframes:
Near-term: A five-day outlook.
Short-term: A six-week outlook.
Mid-term: A six-month outlook.
Long-term: A five-year outlook.
By understanding these timeframes, traders can better contextualise the information presented in this report and apply it to their trading strategies.
Navigating the Geopolitical Tides
Geopolitics play a crucial role in shaping the global economic landscape, and New Zealand, as a small open economy, is particularly susceptible to these global forces.
Market traders are closely monitoring several geopolitical events that could significantly impact New Zealand's macroeconomic outlook. The escalating trade tensions between the United States, the European Union, and China are of particular concern. The imposition of higher tariffs on Chinese technologies, notably electric vehicles, has raised fears of retaliation from Beijing, potentially targeting New Zealand's exports of agricultural products. "China meanwhile has opened up a probe into certain thermoplastics, and during the third quarter could formally announce that it will implement tariffs on those products against the European Union and/or the United States," the report states. This trade war, coupled with the ongoing supply chain crisis exacerbated by Houthi attacks on commercial shipping, could disrupt New Zealand's trade flows and increase import costs.
The Russia-Ukraine war continues to cast a long shadow over the global economy. The West's ongoing support for Ukraine and tighter sanctions against Russia have prompted Moscow to expand its hybrid warfare campaign against its Western rivals. This has increased the risk of cyberattacks and sabotage targeting critical infrastructure in Western countries, including New Zealand. The report warns, "In response, Russia will likely increase operations inside Western countries, including cyberattacks and even potential sabotage targeting critical infrastructure, government buildings and civilians, in an effort to push back on Western support for Ukraine." Additionally, the war has disrupted global energy markets, leading to higher oil and gas prices, which could further fuel inflation in New Zealand.
In the near term (five-day outlook), market traders will be closely watching for any signs of retaliation from China following the implementation of U.S. tariffs on Chinese electric vehicles and other strategic goods on August 1st. Any retaliatory measures from Beijing could have immediate implications for New Zealand's export sector.
In the short term (six-week outlook), the focus will shift to the busy holiday season shipping, which typically ramps up in the third quarter. The ongoing Houthi attacks on commercial shipping in the Red Sea and Indian Ocean could exacerbate the ongoing supply chain crisis, leading to congestion, higher shipping costs, and more delays. "This will keep shipping prices, which have already doubled since late 2023, at elevated levels and congestion high at Western European ports," the report notes. This could further disrupt New Zealand's trade flows and contribute to inflationary pressures.
In the mid-term (six-month outlook), the key geopolitical risk for New Zealand stems from the potential for a wider escalation of the conflict in the Middle East. Iran's retaliation for the assassination of Hamas political leader Ismail Haniyeh in Tehran could trigger a regional conflict, further disrupting global energy markets and increasing geopolitical uncertainty. The report highlights that "Iran will have an incentive to use allies in Syria, Iraq and Yemen to increase their attacks on Israeli and U.S. targets, and in a less likely scenario, might launch another direct strike on Israel."
In conclusion, the geopolitical landscape presents a complex and evolving set of challenges for New Zealand's economy. The ongoing trade war, the Russia-Ukraine conflict, and the potential for a wider conflict in the Middle East all pose significant risks to New Zealand's macroeconomic outlook. Market traders will need to carefully monitor these developments and adjust their strategies accordingly.
Balancing Act: New Zealand's Fiscal Policy in Focus
New Zealand's fiscal policy is currently under intense scrutiny as the newly elected Labour government seeks to balance its ambitious social spending agenda with the need for fiscal prudence.
Market traders are closely monitoring the government's plans to implement policies such as bolstering workers' rights, cutting red tape, and accelerating the country's energy transition. However, the government faces fiscal and economic constraints, meaning that spending increases will be limited until growth accelerates and borrowing costs decrease. The report states, "During the quarter, the new government will thus likely focus on impactful yet lower cost policies such as bolstering workers' rights, reforming the planning system, raising tax revenues through measures such as fighting tax evasion and ending tax credits for private schools, and repealing the Conservatives' Rwanda refugee deportation plan."
The government's budget for the next fiscal year, to be finalised in July, will be a key indicator of its fiscal policy stance. The budget is expected to include an uptick in populist spending on welfare schemes and subsidies to appease coalition allies, potentially putting pressure on the country's fiscal deficit.
Fiscal Outlook
In the near term, market traders will be watching for any announcements from the government regarding its plans to raise tax revenues. The government has indicated that it will explore measures such as fighting tax evasion and ending tax credits for private schools. These measures could provide a short-term boost to government revenues but may also have implications for business confidence and investment.
In the short term, the focus will be on the government's plans to stimulate private sector investment and growth. The government has indicated that it will pursue state-driven supply-side policies, but the details of these policies remain unclear. The success of these policies will be crucial for accelerating economic growth and easing fiscal constraints.
In the mid-term, the key fiscal challenge for New Zealand will be managing the country's soaring budget deficit. The government's ability to balance its social spending agenda with the need for fiscal consolidation will be crucial for maintaining macroeconomic stability and investor confidence. The report highlights that "In Germany, the low popularity of the three members of the coalition government will increase tensions between them, even though the collapse of the government and early parliamentary elections are unlikely. Government infighting over spending priorities will likely intensify as the coalition finalises a federal budget proposal for 2025 amid weaker than expected tax revenue projections, reluctance to increase taxes and constitutional borrowing limits."
In conclusion, New Zealand's fiscal policy is at a crossroads. The new government's ambitious social spending agenda faces significant fiscal and economic constraints. The government's ability to navigate these challenges and strike a balance between fiscal prudence and social spending will be crucial for New Zealand's macroeconomic outlook.
Assessing New Zealand's Economic Situation
New Zealand's economic situation presents a mixed picture, with signs of both resilience and vulnerability.
Market traders are closely monitoring key economic indicators, including GDP growth, inflation, labour market conditions, and business confidence. While the economy has shown resilience in recent quarters, there are growing concerns about the impact of high interest rates, slowing global growth, and geopolitical uncertainty.
New Zealand's GDP grew by 0.2% quarter-on-quarter in the first quarter of 2024, exceeding market expectations. However, recent indicators suggest that GDP contracted in the June 2024 quarter. The persistence of this weakness is uncertain, but the Reserve Bank of New Zealand (RBNZ) projects a further decline in GDP in the September 2024 quarter.
Inflation has declined significantly since the beginning of 2023, falling to 3.3% in the June 2024 quarter. This is within the RBNZ's 1-3% target range, but non-tradables inflation remains elevated. The RBNZ expects inflation to fall further to 2.3% in the September 2024 quarter, returning to the 2% target midpoint in the June 2026 quarter.
The labour market has continued to ease, with the unemployment rate increasing to 4.6% in the June 2024 quarter. Businesses are reporting that it is much easier to find workers, and other measures of spare capacity in the labour market have also increased. Wage growth has slowed, reflecting the easing labour market and declining headline inflation.
Economic Outlook
In the near term, market traders will be watching for the release of the July Business NZ Performance of Manufacturing Index (PMI) on Thursday, August 15th. The PMI is a key indicator of manufacturing sector activity, and a further decline in the index would reinforce concerns about the weakening economy.
In the short term, the focus will be on the release of the second quarter GDP figures on Wednesday, September 18th. The GDP figures will provide a clearer picture of the extent and persistence of the economic slowdown.
In the mid-term, the key economic challenge for New Zealand will be navigating the impact of slowing global growth and geopolitical uncertainty. The ongoing trade war between the United States, the European Union, and China, as well as the Russia-Ukraine conflict, pose significant risks to New Zealand's export sector and could further dampen economic activity.
In conclusion, New Zealand's economic outlook is clouded by uncertainty. While the economy has shown resilience in recent quarters, there are growing concerns about the impact of high interest rates, slowing global growth, and geopolitical uncertainty. The RBNZ's decision to cut interest rates in August suggests that it is taking these risks seriously. Market traders will need to carefully monitor economic developments and adjust their strategies accordingly.
New Zealand's Monetary Policy in a Shifting Landscape
New Zealand's monetary policy is currently undergoing a significant shift as the RBNZ navigates the challenges of slowing economic growth and easing inflationary pressures.
Market traders are closely monitoring the RBNZ's interest rate decisions and forward guidance, seeking clues about the future path of monetary policy. The RBNZ's unexpected decision to cut the Official Cash Rate (OCR) by 25 basis points to 5.25% in August, defying market expectations, has signalled a shift towards a more accommodative stance. The RBNZ statement notes, "The Committee agreed to ease the level of monetary policy restraint by reducing the OCR to 5.25 percent. The pace of further easing will depend on the Committee’s confidence that pricing behaviour remains consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target."
The RBNZ's primary mandate is to maintain price stability, targeting an inflation rate of 1-3%. The central bank has acknowledged that inflation is returning to within its target band, with annual CPI inflation declining from 4.0% in the March 2024 quarter to 3.3% in the June 2024 quarter. However, the RBNZ has also expressed concerns about the persistence of domestic inflation and the pace at which price-setting behaviour will adjust to a low-inflation environment.
Charting the Course
In the near term, market traders will be watching for the release of the August Business NZ PMI on Thursday, August 15th. The PMI is a key indicator of manufacturing sector activity, and a further decline in the index could reinforce the RBNZ's concerns about the weakening economy.
In the short term, the focus will be on the RBNZ's next interest rate decision, scheduled for Wednesday, September 18th. The RBNZ's forward guidance will be crucial for gauging the central bank's outlook for the economy and the likely path of future interest rate cuts.
In the mid-term, the key challenge for the RBNZ will be balancing the need to support economic growth with the need to keep inflation under control. The central bank will need to carefully monitor economic developments, particularly inflation and labour market data, and adjust its monetary policy stance accordingly.
In conclusion, New Zealand's monetary policy is at a pivotal point. The RBNZ's decision to cut interest rates in August signals a shift towards a more accommodative stance, but the central bank remains vigilant about the risks of persistent inflation. Market traders will need to closely monitor the RBNZ's actions and communications to anticipate future policy changes.
New Zealand's Macroeconomic Outlook
New Zealand's macroeconomic outlook is currently characterised by a high degree of uncertainty, with both opportunities and challenges on the horizon.
Market traders are closely monitoring a confluence of factors, including slowing economic growth, easing inflationary pressures, a shifting monetary policy landscape, and a complex geopolitical backdrop. These factors are shaping the near-term, short-term, and mid-term outlook for New Zealand's economy.
The RBNZ's recent decision to cut the OCR, coupled with the government's fiscal stimulus measures, are expected to provide some support to economic activity in the coming months. However, the outlook for GDP growth remains subdued, with the RBNZ projecting a contraction in GDP over the middle of 2024. The persistence of this weakness is uncertain, and the outlook for economic growth will depend on a number of factors, including the effectiveness of the government's fiscal stimulus measures, the pace of global economic recovery, and the evolution of geopolitical risks.
Inflation is expected to continue to decline in the coming months, returning to within the RBNZ's 1-3% target band. However, the RBNZ remains vigilant about the risks of persistent inflation, particularly in the non-tradables sector. The central bank will be closely monitoring inflation and labour market data to assess the need for further monetary policy easing.
Navigating the Storm
Several risks could derail New Zealand's macroeconomic outlook. The ongoing trade war between the United States, the European Union, and China, as well as the Russia-Ukraine conflict, pose significant risks to New Zealand's export sector and could further dampen economic activity. Additionally, the potential for a wider escalation of the conflict in the Middle East could disrupt global energy markets and increase geopolitical uncertainty.
Domestically, the key risk to the outlook stems from the potential for a sharper-than-expected slowdown in economic activity. The recent weakness in timely indicators of economic activity suggests that the economy may be slowing more quickly than anticipated. If this weakness persists, it could lead to a more prolonged period of subdued economic growth and put pressure on the labour market.
In conclusion, New Zealand's macroeconomic outlook is characterised by a high degree of uncertainty. The RBNZ's decision to cut interest rates in August signals a shift towards a more accommodative stance, but the central bank remains vigilant about the risks of persistent inflation and a sharper-than-expected slowdown in economic activity. Market traders will need to carefully monitor economic developments and adjust their strategies accordingly.
Economic Indicators of New Zealand
Economic Growth
Gross Domestic Product (GDP): New Zealand's GDP grew by 0.2% quarter-on-quarter in the first quarter of 2024, exceeding market expectations. However, recent indicators suggest that GDP contracted in the June 2024 quarter. The RBNZ projects a further decline in GDP in the September 2024 quarter, before increasing slightly in the December 2024 quarter. In the short term, GDP growth is expected to remain subdued, reflecting the impact of high interest rates, slowing global growth, and geopolitical uncertainty. In the mid-term, GDP growth is expected to recover gradually, supported by falling interest rates and a recovery in house prices.
Price Changes (Inflation)
Consumer Price Index (CPI): Annual CPI inflation declined from 4.0% in the March 2024 quarter to 3.3% in the June 2024 quarter. This is within the RBNZ's 1-3% target range, but non-tradables inflation remains elevated. The RBNZ expects inflation to fall further to 2.3% in the September 2024 quarter, returning to the 2% target midpoint in the June 2026 quarter. In the short term, inflation is expected to continue to decline, reflecting the impact of weaker demand and falling import prices. In the mid-term, inflation is expected to remain close to the RBNZ's target midpoint.
Labor
Unemployment Rate: The unemployment rate in New Zealand picked up to 4.6% in the three months to June of 2024, following an upwardly revised 4.4% in the previous quarter. It marked the highest figure since the first quarter of 2021 and slightly below market expectations of 4.7%. The underutilisation rate, which is a broader measure of spare labour capacity than unemployment alone, rose to 11.8% from 11.2% in the prior quarter. In the short term, the unemployment rate is expected to increase further, peaking at 5.4 percent in early 2025. In the mid-term, the unemployment rate is expected to decline gradually as economic activity recovers.
Housing
House Price Growth: House prices in New Zealand have been declining since late 2021, reflecting the impact of high interest rates and a softening housing market. The RBNZ expects house prices to decline further over the coming year, recovering thereafter as interest rates decline and economic activity increases. In the short term, house prices are expected to continue to decline, reflecting the impact of high interest rates and a softening housing market. In the mid-term, house prices are expected to recover gradually, supported by falling interest rates and a recovery in economic activity.
Business Confidence
ANZ Business Outlook Index: The ANZ Business Outlook Index in New Zealand jumped sharply to 27.1 in July 2024 from 6.1 in June, pointing to the first rise in 6 months and the highest level since February amid hopes that the RBNZ will start trimming cash rates later this year. In the short term, business confidence is expected to remain volatile, reflecting uncertainty about the economic outlook. In the mid-term, business confidence is expected to improve gradually as economic activity recovers.
Consumer Sentiment
Consumer Confidence Index: There is no specific consumer confidence index mentioned in the provided text. However, the text notes that "survey measures of household and business inflation expectations have declined." This suggests that consumer sentiment may be weakening, reflecting concerns about the economic outlook. In the short term, consumer sentiment is expected to remain subdued, reflecting uncertainty about the economic outlook. In the mid-term, consumer sentiment is expected to improve gradually as economic activity recovers.
Trade
Balance of Trade: New Zealand logged a trade deficit of $0.963 billion in July 2024, narrowing from a $1.174 billion in the corresponding month of the previous year and compared to forecasts of a $331 million surplus. It was the lowest reading since January as exports rose at a faster pace than imports. In the short term, the balance of trade is expected to remain volatile, reflecting fluctuations in global demand and commodity prices. In the mid-term, the balance of trade is expected to improve gradually as economic activity recovers in New Zealand's key trading partners.
Conclusion
This report has provided a comprehensive overview of New Zealand's macroeconomic landscape, highlighting the key factors that are shaping the country's economic outlook and influencing the New Zealand dollar.
Key Takeaways for Forex Traders:
Geopolitical risks: The escalating trade war between the United States, the European Union, and China, as well as the Russia-Ukraine conflict, pose significant risks to New Zealand's export sector and could further dampen economic activity.
Fiscal policy: The government's recent budget includes a mix of spending cuts and tax increases, which are expected to have a broadly neutral impact on inflation. However, the government's ability to manage the country's soaring budget deficit will be crucial for maintaining macroeconomic stability.
Economic slowdown: New Zealand's economy is slowing, with GDP growth projected to contract over the middle of 2024. The persistence of this weakness is uncertain, and the outlook for economic growth will depend on a number of factors, including the effectiveness of the government's fiscal stimulus measures, the pace of global economic recovery, and the evolution of geopolitical risks.
Easing inflation: Inflation is expected to continue to decline in the coming months, returning to within the RBNZ's 1-3% target band. However, the RBNZ remains vigilant about the risks of persistent inflation, particularly in the non-tradables sector.
Shifting monetary policy: The RBNZ's decision to cut interest rates in August signals a shift towards a more accommodative stance. The central bank will be closely monitoring economic developments, particularly inflation and labor market data, to assess the need for further monetary policy easing.
Forex traders should carefully monitor these developments and adjust their strategies accordingly. The New Zealand dollar is likely to remain volatile in the coming months, reflecting the uncertainty surrounding the country's economic outlook.
Sources
Stratfor Worldview
Reserve Bank of New Zealand
New Zealand Treasury
Statistics New Zealand
ANZ Bank New Zealand