Market participants in the week ahead will receive further insights into New Zealand’s economy, including updates on the country’s housing sector, consumer confidence and gross domestic product (GDP).
New Zealand has generally been suffering from the recent deterioration in global economic activity, which has hampered demand for the nation’s goods and services.
Reserve Bank of New Zealand (RBNZ) governor Adrian Orr said that heightened “uncertainty and declining international trade have contributed to lower trading-partner growth.” In turn, this has led to the slowing domestic growth in the country over the past year, amid rising headwinds.
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The RBNZ at its monetary policy meeting in August elected to slash its Official Cash Rate (OCR) by 50 basis points to a record low of 1.0%, joining a chorus of central banks across the Asia-Pacific region that have been easing monetary policy in 2019, including the Bank of Korea, the Reserve Bank of India, the central banks of both Malaysia and the Philippines, as well as the Bank of Thailand and Bank Indonesia.
New Zealand’s central bank said it expects its monetary stimulus to spur growth from late 2019. Also, market interest rates have declined since the start of this year, which supports both consumption and investment, and has helped keep the New Zealand dollar exchange rate lower.
In the RBNZ Survey of Expectations for the three months to September 2019, while businesses generally anticipated the New Zealand dollar and U.S. dollar exchange would dip from 0.671 in mid-July 2019 to 0.66 at the end of December 2019 and at the end of June 2020, the pair stood at around 0.64 intraday Wednesday, according to the IBKR Trader Workstation.
In the Q1’19 survey, NZD/USD was expected to fall from 0.677 in late January to 0.67 at the end of June 2019, and 0.66 at the end of December 2019.
Credit Profile
Moody’s Investors Service, which has assigned its pristine ‘Aaa’ sovereign credit rating on New Zealand, recently noted that the country’s “very strong” credit profile enables it to “mitigate external and domestic vulnerabilities related to the economy’s high reliance on external financing and its elevated level of household debt.”
Market participants’ perceptions of the nation’s creditworthiness has generally remained stable, with spreads on its five-year credit default swaps (CDS) roughly 2.0 bps tighter over the past three months.
Moody’s analyst Matthew Circosta said while “the potential for further trade-restrictive policies around the world remains a threat to export growth,” that relatively “inelastic global demand for the country’s food exports, in particular, high-quality dairy products, mitigates this risk relative to other Asia-Pacific economies.”
However, he added that business confidence weakness “remains a risk to investment and hiring.”
Economic Calendar
Meanwhile, economic releases in the week ahead get underway Monday with fresh housing sales figures from the Real Estate Institute of New Zealand (REINZ), as well as an updated gauge on consumer confidence.
Monday, Sept 16
- Real Estate Institute of New Zealand (REINZ) House Sales (Aug)
- Westpac McDermott Miller Consumer Confidence Index (Q3)
Housing
While the housing sector has softened over recent months – stirring some jitters about the prospects for household spending — home sales had picked up in July, according to REINZ, with a 3.7% year-on-year increase in residential properties.
The number of homes sold rose to 6,118 (up from 5,897), the highest for the month of July in three years. Furthermore, median house prices across New Zealand climbed 4.5% in July to $575,000, up from $550,000 in the same year-ago month – in line with the REINZ House Price Index (HPI), which saw property values increase 1.5% annually.
Bindi Norwell, REINZ chief executive, said that this is “the first time in eight months that we’ve seen the number of properties sold around the country increase on an annual basis suggesting that we’re starting to see some early signs of growth.”
Norwell attributed some of the activity to “more certainty post the removal of the Capital Gains Tax, but it’s also about pockets of renewed confidence and parts of the market finding its new normal in terms of pricing.”
She also waxed optimistic about the sector, adding that with August’s “surprise” 50 bps drop in the OCR, “going forward we expect to see even more signs of growth – especially as we move towards the warmer weather when we tend to see more activity in the market.”
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Consumer Confidence
However, the overall softness in the housing sector appears to have contributed to the broader, risk-averse sentiment that seems to have seeped into an already downbeat economic backdrop.
The negative tone was reflected in the latest Westpac McDermott Miller Consumer Confidence survey, which fell 0.3 points in June to a level of 103.5. Although the decrease was relatively small, it had deepened an already sour mood and left confidence well below average levels.
Westpac senior economist Satish Ranchhod noted that the continued slide in household confidence
“follows a more general cooling in the economy over the past year, and households are feeling it. In fact, in annual terms, per-capita GDP growth has now fallen to its slowest pace since 2011, and it effectively stalled through the back half of last year.”
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Ranchhod continued that households’ confidence about the economic outlook has been trending down for around 18 months and is now weighing on spending appetites. He said that the number of households “who think now is a good time to purchase a major item has fallen to a two-year low. That’s already been reflected in spending on household durable items, which has essentially been flat since late 2018.”
He added that households are also reporting that they have been “scaling back their spending on entertainment activities and dining out.”
While lackluster confidence among New Zealand’s consumers has not deterred the country’s stocks from remaining at lofty levels, amid the RBNZ’s economic stimulus measures, they have had a rocky ride in recent months.
Although certain of the nation’s equities – as evidenced by iShares MSCI New Zealand ETF (Nasdaq: ENZL), which has as its top holding a2 Milk Company (OTCMKTS: ACOPF) – have climbed roughly 27.4% from their most recent 52-week low set in late October 2018, prices have more recently been more volatile.
To date, ENZL has retraced nearly all of its losses from its peak in late July to late August and has also reached overbought territory, according to its Relative Strength Indicator (RSI).
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Following the consumer confidence numbers, investors will also receive an update on New Zealand’s current account for the second quarter, as well as a fresh gauge of GDP growth.
Tuesday, Sept 17
- Current Account (Q2)
GDP
The pace of economic growth in New Zealand remained at a five-year low in the three months to March 2019, having inched up 0.6% over the prior quarter and 2.7% above the same year-ago period, according to Stats NZ.
The March quarter’s rate of growth marked the slowest annual advancement for New Zealand’s economy since December 2013.
Wednesday, Sept 18
- GDP (Q2)
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Among the slower-growth sectors contributing to the malaise, activity in the service industries rose only 0.2% in the March 2019 quarter, the slowest rate of advancement since the September 2012 quarter. On a year-over-year basis, service industries grew 3.1%.
Of the 11 service industries, seven recorded growth, with the main drivers being health care and social assistance, up 1.7%, as well as transport, postal, and warehousing, up 1.2%.
However, retail, accommodation, and restaurants fell 0.5%, likely due to cautious household spending, as well as fewer visitor arrivals to New Zealand in February and March 2019. Rental, hiring, and real estate services declined by 0.2% on the back of lower property sales.
On a more upbeat note, goods-producing industries, which had the strongest growth in the March 2019 quarter, climbed 2.0% — mainly driven by increased activity in the construction industry, up 3.7%, its largest uptick since the September 2017 quarter. The rise in construction was reflected in a 9.9% surge in non-residential building investment and a 2.7% increase in residential buildings.
Also, among the more positive contributors, manufacturing activity rose 1.4% in the three months to March 2019, after a 0.4% drop in the December 2018 quarter. Increased food, beverage, and tobacco manufacturing contributed “strongly” to the rise, according to Stats NZ.
Creating a Spark
Continued slowness in the rate of New Zealand’s economic growth is likely to lead the RBNZ, as well as the country’s government, to inject more stimulus.
For the central bank’s part, the RBNZ said that additional monetary stimulus is needed to achieve its objectives of ensuring inflation increases to its 2% mid-point target, and employment remains around its maximum sustainable level.
The RBNZ noted that without additional stimulus, inflation and employment are likely to be below their targets over the medium-term, and as a result, “a lower OCR is necessary to achieve our objectives.”
The bank anticipates GDP growth to remain “soft” over the middle of 2019, but expand later as fiscal and monetary stimulus increases, while stronger GDP growth over 2020 is expected to encourage firms to increase investment.
The RBNZ expects GDP growth to come in at around 2.7% in the March 2020 quarter and lift to 3.0% in 2021, with 0.5%, 0.6%, 0.7% and 0.8% of quarterly growth in the June 2019, September 2019, December 2019 and March 2020 quarters, respectively.
Market participants will likely be paying close attention to the RBNZ’s next rate decision on September 25 for any signs of a further dovish tilt, as well as on fiscal policy and government spending plans, for additional insights into the country’s general economic and financial well-being.
In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.
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