Now let’s be clear, ANZ Research is not forecasting recession. But we’re not forecasting the economy to recover speed any time soon either.
And that means inflation pressures are going to wane. ANZ Research expects the RBNZ will use up its entire conventional fuel supply keeping the ship on course and preventing inflation expectations from sinking.
ANZ Research expects cuts in November, February and May, to take the OCR to just 0.25 per cent – which the team thinks is around its useful limit.
All hands on deck
Migration-led population growth has been one of the most dominant drivers of economic growth in recent years.
The recent susceptibility of these data to substantial revisions month-on-month is a broken anemometer for anyone trying to keep tabs on the economy’s momentum.
On the latest estimates, net migration has not declined at all over the past 18 months. However, the broad-based slowing in the economy alongside non-existent growth in light traffic (and a range of other weakening indicators) does raise some questions. Traffic growth and population growth can diverge markedly, but when they do, it sends pretty strong signals about the state of the economy.
In fact, if net migration is holding up as much as the latest data suggests then the underlying productivity picture (a sad tale to start with) is looking dismal, suggesting GDP per capita is very weak, if not outright contracting.
It might be but ANZ Research suspects there are probably a few more people jumping ship than the data currently suggest and the migration cycle is turning a little faster.
If correct, that implies a little less housing demand but a little more wage pressure than otherwise. But it wouldn’t be a game changer from a monetary policy perspective.
A merry crew beneath the setting sun
ANZ Research’s view that the economy is not about to capsize depends very much on the household sector’s pulling power.
Lower interest rates are keeping debt servicing costs contained and the labour market is “tight” with real incomes gradually lifting and the unemployment rate recording an 11-year low in the June 2019 quarter.
That said, the labour market tends to lag economic activity, suggesting the June quarter’s 3.9 per cent unemployment rate is probably as good as it’s going to get for a while.
ANZ Research is forecasting the unemployment rate to average 4.4 per cent over the next couple of years which in our view is still within the range of maximum sustainable employment – and consistent with ongoing gradual growth in real wages.
And while consumer sentiment has slipped a little recently, there are still a few gold nuggets in the cargo hold. The proportion of households who think it’s a good time to buy a major household item is holding up. Combined with still positive (albeit uncertain) net migration inflows, private consumption should remain buoyed.
But there are a few ominous signs emerging from under the surface that Kiwis need to keep a close eye on.
Employment indicators, including job ads, surveyed experienced employment and employment intentions all suggest jobs growth could disappoint ANZ Research’s expectation.
Should slack in the labour market open up, further increases in the minimum wage could end up becoming an additional anchor on employment growth, which in aggregate could have a net negative impact on household incomes. But ANZ Research notes further minimum wage increases were made conditional on the economic situation for exactly this reason.