Riding the Waves: Navigating New Zealand's Economic Tides
New Zealand's economy to see slow growth, gradual recovery from mid-2025. Inflation to decline, reaching target by mid-2026. Outlook subject to risks.
Saturday, August 10, Week 32
Navigating New Zealand's Macroeconomic Landscape: A Forex Trader's Guide
This report provides a comprehensive analysis of New Zealand's macroeconomic environment, tailored specifically for forex traders. It delves into the recent developments in fiscal and monetary policy, assesses the current economic situation, and outlines the key factors shaping the macroeconomic outlook. The report also highlights crucial economic indicators and potential risks that forex traders should monitor in the coming month and quarter.
Over the past quarter, New Zealand's economy has shown signs of slowing down, with GDP growth moderating to 0.2% in the December 2023 quarter. While the labour market has eased, inflation remains persistent, exceeding the Reserve Bank of New Zealand's (RBNZ) target range. The RBNZ has maintained a restrictive monetary policy stance, keeping the OCR at 5.50%. Looking ahead, economic growth is expected to remain subdued in the near term, with a gradual recovery projected from mid-2025. Inflation is forecast to gradually decline, returning to the RBNZ's target midpoint by mid-2026. Forex traders should closely monitor upcoming economic data releases, particularly inflation and labor market indicators, as well as the RBNZ's policy decisions, for potential trading opportunities.
Balancing Act: Fiscal Prudence Amidst Economic Headwinds
New Zealand's fiscal policy is currently focused on balancing tax relief measures with responsible fiscal management. The Budget 2024, announced on May 30th, introduced a $14.7 billion tax relief package, fully offset by reprioritization, savings, and new revenue measures. This approach aims to provide relief to households without increasing government borrowing and adding to inflationary pressures.
The government's debt level is projected to remain stable as a percentage of GDP. However, the RBNZ has noted that the timing difference between the implementation of lower government spending and the impact of tax cuts poses an upside risk to aggregate demand, which could have implications for inflation and monetary policy decisions in the coming quarters. Forex traders should be aware of this potential inflationary pressure and monitor upcoming inflation data releases closely.
A Slow Climb: Economic Growth Faces Multiple Challenges
New Zealand's economy is currently facing a period of subdued growth, with GDP growth moderating to 0.2% in the December 2023 quarter. High interest rates, implemented by the RBNZ to curb inflation, have dampened household spending and business investment. Despite strong population growth fueled by high net immigration, economic activity remains weak.
Key economic indicators have generally underperformed market expectations in recent months. The unemployment rate was 4.6% in the June 2024 quarter. Annual CPI inflation declined to 3.3% in the June quarter, but remains above the RBNZ's target range. Looking ahead, economic growth is projected to remain subdued in 2024, with a gradual recovery expected from mid-2025 as the impact of high interest rates fades and global economic activity strengthens. Forex traders should pay close attention to upcoming data releases, including the June 2024 quarter GDP figures (due on September 18th, Wednesday, Week 38) and the July 2024 labour market report (due on August 6th, Tuesday, Week 32), for further insights into the economic trajectory.
Holding the Line: RBNZ Maintains Restrictive Stance
The RBNZ's current monetary policy stance is focused on bringing inflation back within its 1-3% target range. The central bank has maintained a restrictive policy setting, keeping the OCR at 5.50% in both its May and July 2024 meetings. This decision reflects the RBNZ's assessment that inflation remains persistent, exceeding its target range, and that monetary policy needs to remain restrictive to ensure inflation returns to target within a reasonable timeframe.
The RBNZ's mandate is to maintain price stability and contribute to the stability of the financial system. While the central bank acknowledges the impact of high interest rates on borrowers, it emphasises the need to avoid unnecessary instability in output, employment, interest rates, and the exchange rate. Market expectations are currently divided on the timing of future OCR cuts, with some analysts anticipating a reduction later this year, while others expect the RBNZ to hold the OCR at its current level until mid-2025. Forex traders should closely monitor the RBNZ's policy statements and speeches for any shifts in its assessment of the inflation outlook and potential changes in its monetary policy stance. The next RBNZ interest rate decision is scheduled for August 14th, Wednesday, Week 33.
Navigating Uncertainty: Macroeconomic Outlook and Risks
The macroeconomic outlook for New Zealand is for subdued growth in the near term, with a gradual recovery projected from mid-2025. Inflation is expected to gradually decline, returning to the RBNZ's target midpoint by mid-2026. However, several risks could impact this outlook:
1. Persistent Inflation: Despite recent declines, inflation remains above the RBNZ's target range. Persistent inflation could lead to further interest rate hikes, potentially delaying economic recovery.
- Annual CPI inflation at 3.3% in June 2024 quarter.
- Non-tradables inflation remains elevated at 5.8% in March 2024 quarter.
- RBNZ maintains restrictive monetary policy stance.
2. Global Economic Uncertainty: While current forecasts suggest modest growth for New Zealand's trading partners, uncertainties remain, including the potential for escalating geopolitical tensions and trade disputes. A significant deterioration in the global economic environment could negatively impact New Zealand's export-oriented economy and weaken the New Zealand dollar.
- Ongoing geopolitical tensions in the Middle East.
- Trade tensions between major economies persist.
- Potential for further disruptions to global supply chains.
3. Policy Uncertainty Following the Election: The recent general election in October 2023 resulted in a change of government. While the new government has outlined its broad policy direction, specific details and implementation timelines for some key policies remain unclear. This policy uncertainty could impact business and investor confidence, potentially affecting economic growth and currency volatility.
- New government sworn in on October 20th, 2023.
- Ongoing consultations and reviews of key policies.
- Potential for policy adjustments and new initiatives in the coming months.
Action Points for Forex Traders:
Monitor upcoming economic data releases, particularly CPI inflation, labour market reports, and GDP figures.
Pay close attention to the RBNZ's policy statements and speeches for any shifts in its assessment of the economic outlook and potential changes in its monetary policy stance.
Monitor the new government's policy announcements and assess their potential impact on the economy and the New Zealand dollar.
Key Economic Events:
August 14th, Wednesday, Week 33: RBNZ Interest Rate Decision
September 18th, Wednesday, Week 38: GDP Growth Rate QoQ Q2
September 18th, Wednesday, Week 38: GDP Growth Rate YoY Q2
Economic Indicators
Economic Growth:
GDP Growth Rate QoQ: 0.2% in Q1 2024. Projected to remain subdued in the coming months.
GDP Growth Rate YoY: 0.3% in Q1 2024. Expected to remain below trend in the near term, with a gradual recovery projected from mid-2025.
Price Changes (Inflation):
CPI Inflation Rate YoY: 3.3% in June 2024. Projected to gradually decline, but remain above the RBNZ's target range in the near term.
CPI Inflation Rate QoQ: 0.4% in June 2024. Expected to remain moderate in the coming months.
Non-tradables Inflation: 5.8% in March 2024 quarter. Expected to decline slowly, but remain elevated compared to historical levels.
Labour:
Unemployment Rate: 4.6% in June 2024 quarter. Projected to continue to rise in the coming months as economic activity remains subdued.
Employment Change: 0.4% in June 2024. Expected to remain weak in the near term, with a gradual recovery projected from mid-2025.
Labour Cost Index (LCI) Wage Inflation: Declining, but remains elevated compared to pre-pandemic levels. Expected to continue to ease as the labor market softens.
Housing:
House Price Growth: Modest growth in recent months. Projected to remain subdued in the near term.
Residential Construction Activity: Declining, driven by high interest rates and subdued house price growth. Expected to remain weak in the near term, with a potential for a recovery from 2025.
Business Confidence:
Business NZ PMI: 41.1 in June 2024, the lowest reading since August 2021. Expected to remain weak in the near term, reflecting subdued economic activity.
ANZ Business Outlook Index: 27.1 in July 2024, indicating a significant improvement in business sentiment. However, it remains to be seen if this positive sentiment will be sustained in the coming months.
Consumer Sentiment:
Consumer Confidence Index: Not available for recent months. However, declining inflation expectations and easing labour market pressures could contribute to a gradual improvement in consumer sentiment in the coming months.
Trade:
Balance of Trade: Surplus of $699 million in June 2024. Projected to remain volatile in the coming months, influenced by global demand and commodity prices.
Current Account: Deficit of NZD 4.36 billion in Q1 2024. Projected to remain in deficit in the near term, reflecting New Zealand's reliance on imports and ongoing investment income outflows.
Sources
Statistics New Zealand
Reserve Bank of New Zealand
New Zealand Treasury
ANZ Bank New Zealand
Business New Zealand
Trading Economics
Bloomberg