THINGS ARE GOOD, BUT ARE THEY A LITTLE TOO GOOD?
Mark Lister, 4 February 2021
We’ve seen a string of positive economic indicators for the local economy in the past week, all of which suggest the country has started 2021 in much better shape than many might’ve expected.
This doesn’t surprise us at all. We’ve been upbeat on the prospects for New Zealand for some months now and have felt that conditions on the ground were much stronger than the prevailing market views have suggested.
We have hundreds of staff and thousands of clients across every corner of the country, which gives us the privilege of spending time with a wide range of businesspeople, exporters, farmers and everyone in between.
This real-time feedback tells us much more about the outlook for New Zealand than any statistical release or economist report.
The first piece of good news was another positive development for the agricultural sector. The latest global dairy trade auction saw prices continue to rise, the sixth consecutive gain which puts the headline index up 19.3 per cent since the beginning of November, and at the highest levels since May 2014.
On the back of this strength, Fonterra increased its milk price forecast range for the third time in recent months. The co-operative now sees the 2020/21 payout at between $6.90 and $7.50. At the midpoint of $7.20, this would be the fourth highest of the past 20 years.
The December quarter labour force report was also much better than expected. Employment growth was much better than expected, and this saw the unemployment rate fall to 4.9 per cent, in stark contrast to expectations for an increase.
The participation rate increased, while hours worked also saw a solid increase, suggesting a bigger proportion of employees are back to working their usual number of hours.
Having said that, the strength isn't being felt across the board. Jobs are plentiful in the construction industry, while healthcare, education and the public sector are also strong. In contrast, employment numbers remain well down on a year ago in retail, accommodation, and travel.
The first ANZ Business Outlook report of the year also pointed to a strengthening economy. The preliminary survey for February saw headline business confidence improve to 11.8, the highest since August 2017 and the fifth consecutive month of improvement.
However, confidence isn't the only thing that’s going up. Costs are also rising as inflationary pressures bite. ANZ’s survey suggested that 71 per cent of firms are expecting higher costs ahead, and 49 per cent were intending to raise prices accordingly.
Both of those are up sharply from December, although the difference between those two figures suggests that many firms intend to absorb the increasing costs. That means some will face margin pressure and are likely to see profits impacted.
A focus for us is to concentrate on companies and sectors that have an element of pricing power. That means they can increase prices to keep pace with rising costs and maintain margins, without suffering a loss of customers.
While much of this is great news that will be welcomed, many are now questioning whether we need as much monetary stimulus from the Reserve Bank of New Zealand (RBNZ).
If the economy is in pretty good shape, should interest rates be at life support levels? Similarly, if inflation is rearing its head again, should policymakers start thinking about reining it in?
The RBNZ has a target inflation range with a midpoint of 2.0 per cent. Our key inflation measure, the consumer price index (CPI), is running at an annual rate of 1.4 per cent, and we haven't seen two consecutive quarters north of 2.0 per cent since 2011.
RBNZ forecasts suggest the CPI will languish around the 1 per cent level for much of the next two years, and they don't see it rising above the midpoint until late 2023.
However, having be finalised in early November these are looking severely out of date. Most of the local bank economists (who have the luxury of updating their estimates whenever new information comes to light) expect the CPI to rise as high as 2.5 per cent through the middle of this year, before declining again.
The next RBNZ release is on the 24th of this month. That will be a Monetary Policy Statement, which means we will get a fresh set of economic forecasts.
The string of better economic indicators we’ve seen lately ensures these will look a lot more upbeat, and it also removes any risk whatsoever of a lower Official Cash Rate.
Having said that, the RBNZ will be equally reluctant to adjust policy settings too soon. Numerous uncertainties remain, there is a chance our momentum stumbles over the next six months, and some of the inflationary pressures will likely prove transitory.
Like its Australian counterpart noted last week, the RBNZ also won’t want to fuel any further NZ dollar strength by moving too soon and finding itself out of step with global peers.
Watch this space.