The economic data flow since last week has "fully vindicated" the Reserve Bank's decision to cut the Official Cash Rate, BNZ's head of research Stephen Toplis says.
In a BNZ Markets Outlook publication, Toplis said economic data out since Wednesday, August 14 when the RBNZ reduced the OCR from 5.5% to 5.25% had "provided further evidence the economy is going backwards, that job losses will mount and that inflation is falling rapidly".
"The good news, if you can call it that, is that we believe the third quarter of 2024, the quarter we are in now, will represent the low in the economic cycle. We think Q4 will be modestly positive and quarterly growth next year will be reasonable. Both business and consumer confidence are likely to start rising straight away but the real economy response to easing monetary conditions will take a little longer," Toplis said.
"Be that as it may we are in a big hole and it will take a long time to emerge from it.
"By our estimates it will be the end of the March Quarter 2025 before the economy gets back to its previous peak of the third quarter of 2022. However, if you discount for population growth we’ll have to wait until the end of March 2029 for per capita output to return to previous levels!"
He said the other point to note is that the labour market lags the real economy.
"By our reckoning the unemployment rate will keep rising through to the end of September 2025."
Toplis also commented on the Performance of Service Industries and Performance of Manufacturing Industries indexes for July, which both showed recoveries, but from what were dire June results.
"Put the PMI and PSI together and they are consistent with the economy going backwards at a 4.0% annual pace. We are not forecasting anything like this but these data clearly show where the risks lie," Toplis said.
"The employment indicators also support our view that the unemployment rate is headed higher. We are forecasting a potential peak of over 5.5%. There is nothing in these data to dissuade us from that view."
He said adding to the "soft real economy data" were the Electronic Card Transactions released late last week.
"Compared with year earlier levels sales fell 3.9%. If you adjust this for inflation and population growth then you are looking at a real per capita decline approaching 8.0%!"
Toplis said, however, that the Selected Price Indexes data released also late last week had shown further evidence of reducing inflation.
"We had thought there was upside risk to the RBNZ’s projection that the CPI would increase 0.8% in the September quarter. But we don’t now. Thanks to greater weakness in the monthly indicators than we had anticipated, we have revised down our Q3 CPI expectation from 1.0% to 0.8% matching the Reserve Bank’s forecast of annual inflation dropping to 2.3%."
The BNZ economists along with those at Kiwibank and later ASB had called for the RBNZ to cut the OCR last week.
The Kiwibank economics team of chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado said in their latest First View publication that they applauded the RBNZ's confidence to cut. "And we expect to see many more."
The Kiwibank economists expect last week’s move to be the first in "a twelve step move".
"We expect to see twelve 25bp [basis-point] cuts, so 300bps in total. If the RBNZ wants to remove the restrictiveness of interest rates, they need to go back to a neutral (Goldilocks, not to hot , not too cold) setting. That Goldilocks rate is estimated to be around 2.75%, a long way from 5.25%. And we think they’ll need to go a little below, to get things moving. Mortgage rates, business lending rates have a long way to go, south. And so too do savings rates."
They said it is the magnitude of rate cuts that impacts business decisions, and household confidence. And they forecast - now with a much greater degree of confidence - that 2025 will be a better year than 2024, "and let’s put 2023 behind us".
But they said that as great as the delivery of rate cuts is, "we can’t ignore the complete U-turn that the RBNZ has pulled from May".
"To go from signalling rate hikes to cutting in one forecasting round is a huge shift. And there was a very dramatic downgrade to their forecasts."
Last Thursday Reserve Bank Governor Adrian Orr had told Parliament's Finance & Expenditure Committee that there had not been a U-turn.
However, the Kiwibank economists said that from the RBNZ’s point of view, "they claimed the weakening in high frequency data was one of the main reasons they had the confidence to cut".
"That’s all well and true. But, and here’s the important part, the high frequency data turned and deteriorated a long time ago. It’s why we have called for much earlier cuts from the RBNZ. Back in May, when they signalled a hike (not a cut) and no chance of a cut until the second half of 2025, we pushed back, and highlighted the downside risks. And we recommended a cut last week as well."
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