NZ: Growth stronger, inflation weaker – BNZ

Stephen Toplis, Head of Research at BNZ suggests that we are in a rather unusual environment for New Zealand’s economy where growth continues to escalate, capacity is being fully utilised, businesses are investing and hiring, and yet inflation remains an abstract concept. This, again, was the message from today’s ANZ Survey of Business Opinion, he further adds.

Key Quotes

“At the headline level, both business confidence about the wider economy and its own-activity outlook diminished. But this is purely a seasonal phenomenon with optimism usually hitting its depths as winter does likewise. What proved surprising wasn’t that the confidence measures drifted lower but that they didn’t fall by more. Indeed, with rising uncertainty around the upcoming election, the possibility of a large decline loomed large. But when adjusted for seasonality, optimism actually rose - so much so that own-activity expectations climbed back to the highest level seen over the last twelve months and back to the heady levels previously observed back in late 2014.”

“All this growth continues to impose capacity pressures with the expected increase in capacity utilisation continuing to trend higher. Given increased growth, solid profitability and rising capacity utilisation, it should be no surprise to learn that businesses continue to intend taking on more staff and to invest more. Notwithstanding this, there was a sharp drop in employment expectations. There is some evidence to suggest this is predominantly seasonal in nature but we will keep an eye on it, nonetheless. And, anyway, the series is still strong enough to suggest upside risks to our employment forecasts and further declines in the unemployment rate.”

“What the strength in activity is not doing is converting into higher prices. Pricing intentions actually dropped to +20.5 from +27.6 a month earlier. Moreover, the total is being held up by heightened expectations for future agriculture prices. Pricing intentions for both retail and manufacturing have fallen to levels well below their norms.”

“Today’s survey did little for fixed interest markets but the trend decline in the NZD got another boost from those more interested in the inflation story than the growth story. Of course, the irony in this is that if the currency falls when the economy remains strong, the potential for future rate increases rises. As things stand, the NZD TWI is sitting at 75.5, some 3.0% lower than the level the RBNZ has assumed for Q4. If sustained, this is worth 0.3% on the inflation forecasts and 30 basis points on the interest rate track.”

“For now, though, it was yet another piece of data confirming the relative strength of, and confidence in, the New Zealand economy.”