Monthly Economic Review: New Zealand

Pip Diddy noted in his latest Top Forex Market Movers of the Week that the Kiwi was really giving its forex rivals the boot despite expectations that the RBNZ would be cutting rates this coming Wednesday (Dec. 9, 8:00 pm GMT).

Pip Diddy attributed the Kiwi’s strength to the jump in ANZ’s business sentiment index and speculation that the RBNZ may not be cutting rates anymore. So, what do the most recent data tell us? Should the RBNZ cut rates or refrain from cutting rates? Let’s dive right in and find out.

Trade

New Zealand’s trade deficit for October narrowed from September’s NZD 1,140 million to NZD 963 million, breaking four straight months of ever worsening deficits. It didn’t trigger a reaction from forex traders, however, probably because the better-than-expected figure was pretty close to the forecasted deficit of NZD 1,000 million.

Forex Charts: New Zealand Trade Balance

Anyhow, the narrower deficit was due to exports increasing by 3.99% month-on-month while imports simultaneously contracted by 0.48%. On an annualized basis, however, the value of total exports fell by 4.5%, with the 18% drop in dairy products leading the downhill charge.

It should be noted that the drop was price-driven since the quantity exported was actually up by 1.0% year-on-year. Also, exports to China was up by 9.2% (+8.6% previous), but this was partly offset by the sudden 8.0% drop in exports to Australia (+1.2% previous).

In terms of imports, the value of imports declined by 2.2% due to a 6% fall in capital goods. Interestingly enough, however, imports of consumer goods expanded by 6.9% (+10% previous) “due to increases in a range of commodities.”

Employment

According to the jobs report from Statistics New Zealand, the jobless rate ticked higher from 5.9% to 6.0% in the September quarter, which is the second consecutive quarter of worsening unemployment levels.

Forex Charts: New Zealand Trade Balance

Also, the labor force participation rate dropped for the second straight quarter (68.6 current vs. 69.3% previous), which signals that New Zealand’s economy wasn’t able to keep up with the growth in working age population.

Forex Charts: New Zealand Labor Participation

Furthermore, employment saw a net decrease of 0.4% or 11K instead of seeing further gains of 0.4%, and the unexpected drop in employment is the first ever since the September quarter of 2012. But on a more upbeat note, employment actually rose by 1.5% on an annualized basis.

Business Sentiment & Conditions

Business New Zealand’s (BNZ) manufacturing PMI for October was was still indicating an expansion albeit at a slower rate since it printed a 53.3 reading (55.4 previous). The manufacturing sector “has now been in continued expansion since October 2012,” according to BNZ’s report. All sub-indices obviously took a hit, but inventory levels were noticeably lower when compared with September, which is “a signal for more production ahead,” according to BNZ Senior Economist Doug Steel.

Forex Charts: New Zealand PMI

Also, 61.8% of comments were more upbeat when compared with September’s 55.9 due to “increased offshore orders and new customers.” BNZ’s performance of services index (PSI) for October also eased off last month’s 59.3, an 8-year high, to settle lower at 56.2, which is still a solid rate of expansion.

Looking forward, things could get even better since ANZ’s business confidence survey for November climbed to a six-month high of 14.6 (10.5 previous) after bottoming out at -29.1 back in August.

Forex Charts: New Zealand Business Confidence

Pretty much all sub-indices were advancing. Activity outlook, for instance, jumped from 23.7 to 32.0. Employment intentions also climbed from 13.5 to 12.1. As for outlook on exports, it barely edged higher from 22.4 to 22.8, which hints that businesses in New Zealand are relying more on domestic demand.

In terms of specific industries, the construction (23.5 vs. 5.7 previous) and services industries (26.7 vs. 18.3 previous) were the happiest bunch, with the retail sector (12.7 vs. 14.1 previous) following in their footsteps. The manufacturing sector (0.0 vs. 9.1 previous) was neutral while the agricultural sector was down in the dumps at -12.5. But on a slightly upbeat note, the reading for November is still an improvement when compared to the previous reading of -20.5.

Consumer Spending

Retail sales volume jumped by 1.6% in Q3 after drastically slowing down in Q2, with 10 out of 15 industries posting an increase in sales volume. Sales value also jumped by 1.4% after only increasing by 0.3% in the quarter.

New Zealand Retail Sales q/q

Forex Charts: New Zealand Retail Sales Contribution

And while motor-vehicle sales are the major contributors in terms of both retail sales volume and value, taking out the aforementioned volatile components still yields a positive trend for retail sales. And things also look even better on an annualized basis since retail sales volume grew by 5.7% in Q3, which highlights a robust domestic consumer base.

Forex Charts: New Zealand Retail Sales Trend

New Zealand Retail Sales y/y

Inflation

New Zealand’s headline CPI for Q3 2015 rose by 0.3% quarter-on-quarter, which is slower than the previous quarter’s 0.4% increase. But it increased by 0.4% year-on-year, which is the same rate of increase as in Q2 2015 and still abysmally low.

Forex Charts: New Zealand CPI y/y

The main driver for inflation was “housing and household utilities” component which had a positive contribution of 0.29% to quarterly CPI. This was mainly due to the 1.4% national increase for newly built houses.

Looking forward, the input PPI for Q3 was up by 1.6%, which was a very welcome surprise since the consensus among forex traders and economists was a 0.1% increase (-0.3% previous) and it broke five consecutive quarters of declines to boot. Output PPI was also higher-than-expected at 1.3% (+0.2% expected, -0.2% previous), which hints that CPI in Q4 may get a nice boost. However, the PPI report made it clear that “the rises were influenced by a depreciating New Zealand dollar.”

Summary & Conclusion

Overall, the most recent data dump for New Zealand shows that New Zealand is doing okay since consumer spending remained robust despite the relatively poor jobs data.

And while the trade deficit will continue to weigh down on GDP growth, it’s still good to know that the deficit is mainly due to imports of capital goods such as factory equipment and commercial aircraft for the booming tourism industry, so they’ll eventually (and hopefully) help to boost GDP growth down the road. Plus, the fact that imports of consumer goods remains robust is a hint that consumer demand is healthy.

The only bad thing is CPI since it’s really low and has been below the RBNZ’s 2.0% target since 2012.

Forex Charts: New Zealand CPI 10 yrs

Also the headline reading of +0.3% is not yet adjusted – the seasonally adjusted reading is only a measly 0.1% increase. And RBNZ Governor Graeme Wheeler has made it clear in his previous rate statement that “some further reduction in the OCR seems likely” in order to meet the RBNZ’s inflation target.

But the RBNZ has a problem because the  main driver for CPI has been housing-related and Wheeler also noted that “House price inflation in Auckland remains strong, posing a financial stability risk,” so cutting rates would only encourage people to borrow more in order to buy more houses like it’s a game of Monopoly.

The recent appreciation of the Kiwi is a problem, too, since it would hurt exports down the road. In the end, it’s a pretty tough call to make, with arguments both for and against a rate cut. Or maybe the powers that be are pumping up the Kiwi to force the RBNZ to cut rates? Nah. That’s tinfoil hat kind of thinking.