Comment: The Middle East ceasefire proved regrettably short-lived, curtailing tanker crossings through the Strait of Hormuz and sending energy prices higher again.
The more recent news flow has markets hopeful of an imminent reopening. Who knows if that will transpire. The uncertainty isn’t helpful for growth prospects.
Sharp falls in refined fuel costs over the past week may at least provide a short-term cap on retail fuel prices, which until recently looked likely to rise.
Chart 1: Strait talk continues
Geopolitics will continue to command headlines and cloud the outlook, but global growth forecasts, for now, are fine.
Downgrades on the back of the March-May oil shock were small and proved fleeting. The consensus has reverted to a trend-like 2.6 percent forecast expansion for the coming 12 months.
It’s not just that negative impacts from the war have been less than feared. The positive offset from the AI capex boom, particularly on North Asian manufacturing and exports, has been material. It’s a solid backdrop for NZ trading partner growth and export demand.
Chart 2: Global growth on trend
Change is the only constant in a world of almost 10 percent average weekly changes in oil prices.
But we do know that, as of July, the frayed nerves of the business community were rapidly on the mend. Most of the February-April decline in business activity expectations has reversed.
Those in the manufacturing sector are the most optimistic. That sentiment was matched by a cracking 59.7 June read from the Performance of Manufacturing index – a high-water mark not seen in almost five years. The retailing sector remains the least upbeat about activity prospects, albeit they’re still close to average.
Chart 3: Keeping the faith
The signs of life in the domestic data pulse support our view an underlying recovery in NZ’s economy is underway.
It is debatable whether the economy contracted or expanded in Q2, but we are confident there is growth in the current (third) quarter. Momentum is expected to build from there with growth of 1.6 percent year-on-year forecast for this calendar year, and 2.2 percent for 2027.
Threats and potential disruptions to the expansion continue to loom large, with a strong El Nino weather pattern, election uncertainty, and unpredictable geopolitics a few of the bigger ones.
Chart 4: Growth resuming
Against a backdrop beset with risk, the question of “where are the supports?” frequently crops up.
Supportive financial conditions – low interest rates and NZ dollar – and a buoyant primary sector, are the key foundations. Sectors displaying brighter signs recently include tourism, manufacturing, and even residential construction.
The strength of the upturn in residential building consents has surprised, but it’s a story (still) concentrated in Canterbury, Auckland, and Otago.
Chart 5: Narrow building
Marked regional variation remains an undeniable feature of the economic landscape. Signs of convergence have so far proved few and far between.
The regional heatmap below provides a high-level snapshot of relative strength/weakness across the indicators we’re able to cut by region.
It shows the ‘North vs South’ refrain oversimplifies things a little, with Auckland/Waikato/BoP creeping into the top half. Canterbury and, to a lesser extent, Otago nonetheless maintain a clear relative advantage.
Chart 6: Mainland momentum
The second quarter unemployment rate was yesterday reported to have climbed to 5.6 percent. We now think we’re at or close to the peak.
Hiring trends appear to be turning, indicative of jobs growth remaining positive. Witness the tentative but continuing uptrend in job ads (note inverted scale).
For unemployment to start falling though requires sufficient employment growth to soak up the labour market capacity that exists. Our best guess is that this occurs from mid-2027. The labour market lags, so the economy getting back on its feet properly is an important precondition.
Chart 7: Jobs growth, but not enough
Whichever wage measure you looked at in the Q2 figures (and there are lots), there was confirmation that wage growth is a) soft and b) tracking below inflation.
The latter thematic, on our forecasts, is likely to continue for the remainder of this year.
It’s part of the real disposable income hit that we fear will continue to hold back household confidence and spending, adding a layer of fragility to the more general economic recovery.
Chart 8: Inflation > wage growth
Annual inflation was 4.1 percent in the second quarter. Some normalisation is expected from here. We forecast 3.7 percent for Q3.
Fuel-price hikes played a major role in the Q2 spike. But even a 10-year average of CPI inflation prints at 3.2 percent, and the core measures designed to strip out volatility are looking entrenched in the top half of the Reserve Bank’s 1-3 percent target range.
Inflation is anticipated to fall back from here, but it’s still not a comfortable outlook given the risks in play.
Chart 9: The core issue
The inflation outlook doesn’t gel with interest rates at highly stimulatory levels. The Reserve Bank has consequently begun to tab back on that stimulus.
The OCR is now 2.5 percent following July’s +25 basis points adjustment. Absent another shock turning up, we see a 3-3.5 percent ‘neutral’ OCR setting as the initial target.
It’s a view long forecast and now well priced. That will reduce some of the upward pressure on longer-term wholesale and retail interest rates as the OCR rises. They’ve been rising for eight months now in anticipation. Some modest further upside is nonetheless anticipated.
Chart 10: So it begins
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