Monthly Review: 5 Factors Supporting Another RBNZ Rate Cut

Earlier this month, Governor Graeme Wheeler and his gang of RBNZ policymakers decided to cut interest rates in order to keep New Zealand’s economy afloat. However, the latest set of reports seems to begging for another lifeline. Do you think these are enough to support another RBNZ easing move in July?

1. Dismal Q1 2015 figures

New Zealand’s Q1 2015 report card was riddled with so many red marks that it would warrant a very angry “Go to your room! You’re grounded!” from its momma. Its GDP came in at a meager 0.2% for the quarter, lower than the estimated 0.6% expansion, while the previous period’s growth figure was downgraded from 0.8% to 0.7%.

economic stimulusInflation was also considerably subpar, as the CPI chalked up a worse-than-expected 0.3% decline for Q1, marking its second quarterly drop. Leading inflation indicators suggest that price levels could continue to tumble, with producer input prices decreasing by 1.1% and output prices falling by 0.9%.

Headline jobs figures such as the employment change and jobless rate fell short of expectations, but the labor force participation rate did manage to reflect decent improvements. On a more upbeat note, both headline and core retail sales figures surpassed estimates, churning out 2.9% and 2.7% gains respectively.

You have to remember, though, that these are backward-looking data and that the RBNZ has already taken these numbers into account with their recent rate cut decision. Still, these Q1 reports could have an impact on business and consumer sentiment moving forward.

2. Falling commodity prices

While some major economies are starting to climb out of the inflationary rut caused the oil price slump, New Zealand still seems to be struggling to show a pickup in commodity prices. ANZ reported a 4.7% decline in commodity price levels for May, following the 7.4% drop recorded in April.

If you’re wondering why this is such a big deal for New Zealand, then you should know that commodity exports comprises a huge chunk of its overall economic activity. Because of that, falling commodity prices translate to a significant reduction in trade revenues for the country.

Dairy products make up nearly a third of all these shipments, and it doesn’t help that the bi-weekly Global Dairy Trade (GDT) auction has been logging in consecutive declines in prices. Heck, the GDT index based on the weighted average of prices of nine dairy products sold in the auction has been plummeting since mid-March!

3. Weak export levels

In connection to the drop in commodity prices, export volumes have also been on the decline. One would think that cheaper products would encourage importers to buy New Zealand’s goods at a bargain, but it turns out they’re holding out for even lower prices!

The country printed a stronger-than-expected trade balance for the month of April, as the surplus came in at 123 million NZD versus the projected 105 million NZD reading. This upside surprise in the headline figure turned out to be misleading since components of the report revealed a 5.5% annualized slump in exports, thanks to plunging dairy exports to China. This came after a 150 million NZD drop in the value of exported goods for the first quarter.

4. Downturn in manufacturing activity

With smaller revenues and weakening demand, is there any reason for manufacturers to ramp up activity? I think not! Given the bleak economic outlook, business confidence has taken a turn for the worse, prompting some manufacturers to scale down operations.

The government-conducted manufacturing survey for the first quarter reported a 2.8% decline in sales and a 0.3% dip in volumes. Based on ANZ’s business confidence report, optimism has been fading for the past couple of months, as the index fell from 35.8 to 30.2 in April then dropped to 15.7 in May. A separate survey conducted by Business NZ paints a similarly downbeat picture, with their manufacturing index gradually declining since March and hovering just a few notches away from indicating industry contraction.

5. Slump in consumer confidence

Consumers in New Zealand are also feeling the weight of the world on their shoulders, as they’re probably anticipating potential layoffs due to the country’s economic slowdown. This was reflected in Westpac’s latest consumer confidence index, which dropped from 117.4 to 113.0 for the current quarter.

Credit card purchases, which is correlated with financial confidence and is considered a leading indicator of consumer spending, dipped from an annualized 7.2% in April to 7.1% in May. Note that wage growth was feeble in Q1, as the labor cost index rose by 0.3% instead of the 0.4% consensus for the period, which dampens not only consumer confidence but also inflationary prospects.

As you’ve probably noticed, the ongoing economic slowdown is actually a cycle, with declining commodity prices spurring a downturn in exports and manufacturing, which then weighs on hiring and wage growth. In turn, these can hurt consumer spending and inflation. Rinse and repeat… unless the RBNZ steps in with another stimulus effort.

Of course a July rate cut ain’t set in stone yet since RBNZ policymakers also have to consider the potential impact of further monetary policy easing on the housing market. Just recently, property investment lending jumped by 7.6% when homebuyers and housing speculators scrambled to take advantage of the low interest rate environment before the central bank’s lending restrictions start kicking in. RBNZ officials might opt to sit on their hands for a while if they believe that a property price bubble poses a larger threat to the economy.