Reserve Bank Governor Adrian Orr will make the latest call on the Official Cash Rate next week. Photo / Mark Mitchell
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
We’re just a week out from the last big Reserve Bank Official Cash Rate (OCR) call for 2024 and expectations are that we’ll see another 50-basis-point cut. That would take the rate to 4.25% ahead of the long summer break. From there the Reserve Bank (RBNZ) won’t make another call until February 19, 2025.
Will that be enough to ensure that debt-laden businesses and households can actually “survive to 25″?
It looks like it will need to be. Enthusiasm for a larger 75-basis-point cut (bps) looks to have waned in the past few weeks with unemployment data landing slightly stronger than expected (at 4.8%).
Back in mid-October, there was some gloomy momentum building for a 75bps cut. Singapore-based Abhijit Surya of Capital Economics was one of the first to put it on the table.
“We think that the bank’s concerns about the state of the economy are well founded, especially with new data showing that household incomes continue to be squeezed by the ongoing downturn,” Surya wrote.
“Against this backdrop, there is a growing risk that the RBNZ will pull the trigger on a 75bps cut in November, as opposed to the 50bps cut that both we and markets are anticipating.”
But things have shifted since then.
In an early preview released this week, BNZ head of research Stephen Toplis notes that a reasonable case could still be made for 25, 50 or 75 basis points.
But “we don’t think that what we are experiencing is a shock that requires a knee-jerk response”, Toplis writes.
“We’re not in a GFC or a pandemic but we are in a phase something more akin to a ‘normal’ economic cycle. Consequently, a 75-point move is neither needed nor desirable. Capping things off, the market is currently pricing in a 50-point cut and there is no need for the RBNZ to provide a shock, which could result in unnecessary instability in interest rates, the currency and growth.”
Others may disagree. In fact, Toplis is prepared to make some of their points for them as he canvasses the outside chance of an outsized cut.
“The argument for a 75-point cut revolves around the fact there is little evidence the economy is yet gaining much traction from the easing we have seen so far, annual inflation could well be headed to a sub 2% level, and policy has a long way to go before it is openly stimulatory.”
Westpac chief economist Kelly Eckhold is only giving a 75bps cut a 5% chance in his preview.
If it did that, the RBNZ would be signalling high confidence that inflation will remain no higher than 2% and perhaps concern that the recovery in economic activity might be more sluggish than hoped, he says.
Eckhold is picking a 50bps cut, with the RBNZ using its forecasts to signal how hawkish or dovish it is.
But he still sees some chance they’ll opt for a 25bps cut, “noting that the starting point for the economy has not been quite as weak as depicted in the August MPS [monetary policy statement] and that downside risks appear less prominent”.
“The RBNZ’s projections will likely suggest further OCR cuts in 2025 and a 3.5% OCR by year-end (around 35bps lower than they forecast back in August). The RBNZ’s terminal rate will likely still be in the 3-3.5% zone after 2025.”
Recalibration
ANZ has released an updated chart pack to “recalibrate” the baseline after some big data shifts since the August MPS.
Data since the August MPS has been mixed when compared to the RBNZ forecasts, write the ANZ’s Sharon Zollner and Miles Workman.
Here’s their summary:
“Both production and expenditure GDP came in a little stronger than forecast in the second quarter, house prices have been a little weaker, and after being slightly higher in [the third quarter] the dollar was now closer to forecasts. The unemployment rate printed a little lower than forecast in the third quarter but with evidence of weaker demand for labour and weaker supply. Key measures of wage growth were mixed versus forecast, but close overall.
“Headline CPI inflation was a little weaker than forecast in the third quarter owing to weaker non-tradeables.
“Market pricing is consistent with another 50bp cut in November, but expectations for where rates might land going into 2026 is higher,” they conclude.
Poor performance
How bad the economy is right now is a key point of some uncertainty for economists. We don’t get official GDP data for the third quarter of the year until the week before Christmas (December 19), let alone the current quarter, which we won’t see until March 21.
It’s one of the curses of economics that the most robust data is the most historical and real-time data tends to be a bit ropey and subject to revision.
BNZ’s Toplis highlights the ongoing weakness of the Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI) as two pieces of timely data that will be looked at closely by the Reserve Bank.
The PMI and PSI are often overlooked in the cycle of economic releases but they provide an invaluable snapshot of two different ends of the economy. Both have been released in the past week and both point to an economy still very much in recession.
The indexes are measured off detailed surveys asking questions of businesses in the respective sectors about their recent activity levels.
The PMI for October (released last Friday ) revealed that the manufacturing sector has been contracting for 20 consecutive months, production is moribund, and staff are still being let go, Toplis says.
Meanwhile, the October PSI (released on Monday) nudged higher but was still easily sub-50. A reading above 50.0 indicates expansion; below 50.0, a decline).
The combination of the two indicators was consistent with the economy contracting at a sub -1.0% rate, Toplis says.
“One of the features of the PSI is the ongoing weakness in hiring intentions. For the last 11 months, the employment index has been below 50. In theory, this means that, on balance, the sector is laying off staff. This is consistent with our view that the unemployment rate has some way to go before it peaks.”
Job ads still falling
Toplis notes that this is consistent with another set of timely second-tier data – the latest Seek Employment Report.
While this data is commercial, it’s useful simply because Seek has such a dominant market position that its numbers provide a sizeable sample of the total market.
The latest report showed Job ads fell 1.4% in October to be 26.2% down on a year ago.
“There are signs the drop in job ads might soon reverse but given the level was last this low in 2014 (excluding the Covid lockdown) ads will have to rise substantially before we get excited about them,” Toplis said.
Adding to the tight labour market was rising applications per job, which was up 1% in September (a lag month) when compared with August.
“After breaking the trend in August and dropping 2%, applications per job ad rose again in September and are still extremely elevated compared to pre-Covid averages,” Seek’s report said.
Applications per job ad have risen year on year in all industries except farming, animals and conservation.
Roles in retail and consumer products have attracted the most interest in the past year, up 108%. This was followed by communication services and development (+96%).
ANZ also released its quarterly economic outlook this week and it threatened us with some good news.
A faster withdrawal of monetary restriction by the RBNZ is expected to have economic activity recover faster than previously expected, ANZ economists said.
“Lower interest rates, house price falls petering out, easier credit conditions, a softish NZD and more have all contributed to easing financial conditions that suggest better times ahead,” the report says.
“While economic conditions remain challenging here and now, and in fact we have revised our near-term GDP forecast marginally lower, the RBNZ’s signalled preference to return to a neutral policy stance quickly has laid the path for a faster recovery from the second half of 2025.”
ANZ has forecast full-year real GDP to come in at a recessionary -1% for 2024, followed by an anaemic 1.1% growth in 2025, but with a healthy-looking 3% growth in 2026.
Okay, so sort of good news. At least there is some growth expected next year – but those who’ve clung on with the “survive til 25″ mantra this year might find there’s still some clinging to do next year.
Perhaps we can start talking about an economy that’s “finally fixed in ′26″.
A sliver of more good news emerged last week, but again you had to look below the topline numbers. Overall immigration numbers still looked pretty grim as new records were surpassed for the departure of Kiwis.
Data for the year to September showed a net migration loss of 54,700 New Zealand citizens.
This record net loss of New Zealand citizens was driven by a record 79,700 migrant departures, which more than offset the arrival home of 24,900 Kiwis.
The figure surpassed the revised figure of 54,378 in the year to August.
Meanwhile, total net migration dropped to 44,900 in the September 2024 year. Annual net migration gains continued falling from the record of 136,300 in the October 2023 year.
But there are signs that the great exodus of Kiwis is starting to ease. When economists looked at the trend in the most recent months, they saw that the departure of New Zealand citizens has finally started to fall.
“The slowdown in departures is notable given that job prospects in Australia (the most common destination) remain significantly more positive than in New Zealand,” noted Westpac senior economist Michael Gordon. “However, some of the surge in departures will have reflected catch-up activity after the border was reopened – and perhaps to a greater degree than we had assumed.”
“We’ve been forecasting net migration to slow to zero over the 2025 calendar year (which would likely come with some negative monthly balances over that period). The apparent stabilisation of net flows over recent months makes it less likely that we’ll get all the way to zero next year. That in turn means some modest upside risk to our forecasts for both actual and potential growth in the economy.”
It should be remembered that immigration data is pretty volatile and subject to revision. So it will be a couple of months before we can say for sure that the big brain drain is easing. But broadly this is a good sign.
While the rate at which Kiwis are departing may have started easing, departures of non-New Zealand citizens have picked up sharply since the start of this year, Gordon notes.
On that note, a reader wonders ...
Q: Is there any way to measure the number of people leaving to Australia but who have migrated here as a pathway to Australia? For example, those that came originally from China and then once getting NZ citizenship, they had left to Australia? I have worked with many who have done this so always wondered what the figures were per year in those stats that are in your article. Thanks, keep up the good work,
– Duane
A: Well thanks Duane.
This one is hard to answer definitively. We do get some general data about the number of non-New Zealand citizens (ie recent immigrants) who are leaving.
Stats NZ’s release last week showed that for migrant departures in the September 2024 year (other than citizens of New Zealand, which were the largest group with 79,700 departures), the largest groups were citizens of China, with 7,300 departures. They were followed by British citizens with 5100 departures and Australian citizens, with 4900.
There is not so much detail about where those migrants are headed too but Stats NZ has pointed me to some data for departures to Australia by non-New-Zealand-born citizens.
It shows that some 5301 non-New-Zealand-born Kiwi citizens headed to Australia in the first quarter of 2024. That was about the same number as the first quarter of 2023 but was a bit up on the pre-Covid numbers, which seemed to average about 4000 a quarter.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on his user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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