We Climbed Out Of A Recession. But Growth Is Weak.

• A trifecta of Central Banks gave us a bit of everything last week. From a hawkish RBA to another cut from the Swiss, and a dovish BoE.
• At home, it was all about the Kiwi economy’s crawl out of recession. Output expanded 0.2% over the March quarter. And it was a stronger number than we had expected. But scratching below the surface the details were very weak.
• Also on display in last week’s GDP numbers was a prevalent shift in consumer spending patterns. As imports of low value goods were up 20% on the quarter while chunkier imports fell.

Here’s our take on current events

Last week we got a bit of everything from the trifecta of Central Banks who took the stage. The RBA was the first of the three, and left the cash rate unchanged. The RBA’s tone pointed to higher for longer rates. And rate hikes are still a risk, not cuts. Rate cuts remain conspicuously absent from their discussions. For now, the RBA remain “vigilant to the upside risks of inflation”.

Moving further abroad, we saw the Swiss National Bank deliver their second rate cut. Following their first 25bps cut in March, the cash rate now sits at 1.25%. More to come. The SNB is wary of currency strength given the concerns over the EU and Euro. Inflation is not a problem either.

The most interesting of Central Banks last week was the BoE. As expected, the BoE left their cash rate unchanged at 5.25%. The BoE’s tone was rather dovish, however, describing the decision not to cut rates as “finely balanced”. The decision followed a much-loved return to 2% inflation, for the first time since early 2021. But analysts and readers beware. Because most of the drop to 2% has come from the base effects of last year’s energy spike. Services inflation continues to run hot at just under 6%, and core inflation remains above target at 3.5%. Nonetheless, the BoE’s dovish tilt has market traders pricing in a 60% chance of a cut come August.

At home, all eyes were on the release of Stats NZ’s GDP numbers. And the Kiwi economy managed to crawl out of recession… barely. The Kiwi economy expanded 0.2% over the March quarter. It might be a positive print, but the details were weak, very weak.

The headline 0.2% gain was better than we had forecast (-0.1%), and bang in line with the RBNZ’s forecast. But the economy remains very weak. Only half (8) of the 16 industries recorded gains. Construction, manufacturing and business services recorded chunky declines, as expected. That’s not good at all. And weak investment intentions are being felt with a 1.3% pull back on investment. Business investment alone contracted 0.5% over the March quarter.

On a per capita (per head basis) the economy declined 0.3% over the March quarter alone. That’s the 6th quarter in a row of consecutive declines. And compared to this time last year output on a per person basis is down 2.4%. So, we’re still hanging around GFC levels when it comes to per person output.

The heavy hand of the RBNZ is still hurting households and businesses. Restrictive monetary policy is clearly squeezing out demand, and will effectively lower inflation… in time. The next move for rates is down, but the timing is difficult to gauge. The path for policy, and interest rates, will follow the path of inflation. Our forecasts have inflation falling back within the RBNZ 1-3% target band by the September quarter. We’ll see that data in mid-October, and hopefully open the RBNZ up to a rate cut as early as November.

Chart of the Week: Weak expenditure and weak consumers.  

The sharp and saddening shift in consumer spending was on display in last week’s numbers. Big ticket imports are down, and low value imports are up.  There was a 1.3% decline in the consumption of durables over the quarter. And on an annual basis, spend on durables declined 2.7%.

Households are being forced to substitute away from large purchases and luxury goods, to meet the growing cost of essentials. Household spending declined for the sixth-straight quarter. High inflation, steep interest rates and weak house prices are weighing on consumption.  

Consumption on services however accelerated at the start of 2024, with a 0.5% increase. However, on an annual basis, spend on services is broadly in decline, and points to some moderation in services inflation in the coming quarters.

Special Topic: Heart-wrenching plummeting pet demand.  

Our Chief economist was a guest speaker at this year’s NZVA conference in Christchurch. It was a massive event, with great attendance. But one discussion stood out, and reflects the severity of current conditions. Apparently, many cat and dog breeders are facing a sharp drop in demand for kittens and pups.  We saw a surge in demand over Covid, as people spent more time at home. But that demand has well and truly unwound.  And in a sad turn, people are being forced to do the absolute minimum when it comes to looking after their pets at the vet. Of all the options they get, many are taking the cheapest option. Read into that what you will. This saddening anecdote is supported by a recent Kiwibank survey, highlighting that about one third of kiwi households will struggle to cover an unexpected expense of $500 (like a vet bill).

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