New Zealand: Domestic demand still strong

According to the analysts at Amplifying Global FX Capital, New Zealand’s domestic economic conditions remain generally buoyant and supportive for the NZD but the most recent GDP outcome (+2.7%y/y in Q4) GDP was much below 3.2% expected.

Key Quotes

“However, this reflected falls in production that are likely to reverse. The weak primary production, including dairy, says little about underlying demand in the economy.”

“In fact, stripping out net exports, a measure of domestic demand, GNE rose 6.0%y/y Q4-2016; a high since 2007. Private consumption was modest in Q4 (+0.4%q/q), but only after recent strong quarters; it rose 4.3% from a year-earlier.”

“Recent activity and survey indicators suggest the pace of growth in New Zealand remains on a solid path. GDP is likely to recover from the modest outcome in Q4.”

“The RBNZ policy assessment on Thursday falls between quarterly statements on monetary policy. It is unlikely to deliver any surprises. The key message of a stable rates outlook, and a desire for a weaker exchange rate should remain. The statement hardly needs to be changed.”

“In its previous 9 Feb policy statement, the RBNZ was less hawkish than expected. It acknowledged that that inflation pressures were building and the global economy had improved. But it did not forecast any rise in rates until Q3-2019, toward the end of its three-year horizon.”

“Since February, global economic conditions appear to have firmed further, global inflation pressure may have lifted somewhat, and the NZD is modestly weaker. As such, the RBNZ may feel that the inflation outlook in New Zealand is somewhat higher. On the other hand, dairy prices have fallen significantly, weakening the domestic income outlook. On balance, the RBNZ would be cautious not to change its language too much in this statement. It would fear generating upward pressure on its exchange rate should it remove the cautious language in its policy assessment.”

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