What to watch in 2019: economists
In a world of full of data it can be hard to know what really matters. We asked a selection of New Zealand’s top economists to tell us what they’ll be paying close attention to in 2019.
FROM a diverse list, five areas stood out as most popular with our economists — Christina Leung, from NZIER; Ganesh Nana, from Berl; Jarod Kerr, at Kiwi Bank; Nick Tuffley, at ASB; Dominick Stephens, from Westpac; ANZ’s Sharon Zollner; Oliver Hartwich, at the NZ Initiative; and Gareth Kiernan, at Infometrics.
The yield curve
A chart which measures the returns on US Treasury Notes over time might sound a bit arcane, but it is very much on trend right now.
In fact, if you drop just one worrying economic statistic into your barbecue conversations this summer (and you know you want to) make it this one.
It was a top pick for three of our economists — Ms Leung, Mr Tuffley and Mr Stephens.
Why is it such a talking point right now?
Because the curve is in danger of inverting, i.e. turning upside down.
When returns for shortterm (twoyear) Treasury notes go higher than returns for long term (10year) notes, it signals a deep pessimism about the economic outlook.
This phenomenon is recognised as one of the most accurate predictors of recession in the statistical canon.
The curve for three and fiveyear notes has already inverted and the two and 10year curve is looking dangerously flat.
‘‘An inverted yield curve doesn’t cause a recession, but is a reflection of concern in the economic outlook,’’ Mr Tuffley says.
‘‘The low longterm bond yield relative to shorterterm bond yield signals a belief that interest rates will ease in the future in response to weak economic conditions.
‘‘Watch this space to see if the yield curve inverts over 2019, and whether or not the US economy does indeed lose momentum in 2019,’’ he says.
Even though he will be watching it closely, Mr Stephens is staying optimistic.
‘‘Markets seem to think that the US economy won’t be able to withstand even a few more Fed rate hikes,’’ he says.
‘‘They expect the yield curve to invert, which is a traditionally thought to be a sign that recession is imminent. We disagree with all of that — we expect neither a curve inversion nor a recession. The issue will come to a head next year.’’
Ms Leung also notes that it is not looking nearly so grim in New Zealand: ‘‘Here, the yield curve remains upward sloping, with indications from the central bank that any interest rate rises would be at least a year away.
‘‘This suggests a reasonably positive growth outlook for the NZ economy.’’
Chinese growth
Our biggest export destination faces big headwinds in 2019 — not least a trade war with the US.
As Mr Kiernan points out it is not necessarily topline GDP we should focus on.
‘‘Any effects of the trade ructions aren’t likely to really show through until 2020 — so perhaps forecasts looking forward another 1218 months will be better,’’ he says.
‘‘But then given the dubious quality of Chinese GDP figures, perhaps the standard mix of electricity production, freight, and lending data is more useful.
‘‘The key for New Zealand is the risks around slowing growth in China undermining the outlook for our exports — particularly in terms of prices.’’
On that basis Mr Tuffley points his China gaze in the direction of retail figures. ‘‘Although you could put down ‘China as a whole’ to monitor, Chinese retail sales are likely to be a good canary in the coalmine given New Zealand’s exports are largely consumerfocused,’’ he says.
Wage inflation
Inflation broadly features heavily in the picks, although like obsessive music fans the economists have divided it into subgenres.
Wage inflation wins by a nose, having been clearly picked by three economists.
The lack of wage inflation over recent years, given low unemployment, has been surprising, Mr Kiernan says.
‘‘In my view, wage inflation looks like being the primary determinant of when interest rates (i.e. the OCR) will start to rise, and whether Adrian Orr’s current view of mid2020 is tenable,’’ he says,
Says Mr Stephens: ‘‘How fast wages accelerate will be crucial for inflation and the RBNZ. We think it will be a slow process.’’
Mr Kerr highlights topline inflation with an eye on both the consumer price index (CPI) and wage growth.
‘‘Sure, we had to bear a surge in petrol prices, but inflation is finally running close enough to the RBNZ’s 2% midpoint.
‘‘Core inflation, which strips out volatile stuff like petrol, is a little more stubborn at 1.7%, but should move higher next year,’’ Mr Kerr says.
‘‘The good news here, is wages are likely to rise in response to rising inflation.’’
The NZ Initiative’s Hartwich picks CPI inflation as one to watch given the changes to the Reserve Bank’s mandate.
Mr Kiernan also recommends keeping an eye on the Producer Price Index inflation relative to output inflation to get a real sense of how much pressure business margins are under.
House prices
As Mr Stephens says: ‘‘It’s hard to divorce the New Zealand economic outlook from the housing market — Kiwis own little other than houses and farms, so when land prices change so do our spending patterns.’’
‘‘Our call for a pickup in the economy over 2019 relies on the housing market lifting a little,’’ he says.
‘‘But that’s an uncertain call — it will be a battle of low mortgage rates and the LVR easing versus the foreign buyer ban and tax changes.’’
Also with a property sector pick, on the supply side, Mr Nana suggests keeping a close eye on new house building consents.
At just under 33,000 (the running 12month total), we have just now matched levels last seen in mid2004.
But Mr Nana says: ‘‘If we keep going up we’ll be in territory not seen since the 1970s [the historic high of 39,700 was in March 1974].’’
‘‘Capacity in the construction sector is definitely stretched, with both house building and infrastructure construction demands intense.
‘‘An easing off in housing consents may signal capacity constraints biting critically.’’
Commodities
So much of New Zealand’s economy remains tethered to the agriculture sector.
With a global slowdown weighing on commodities like oil there is a contagion risk for other products — including dairy.
‘‘A commodity price shock has traditionally been the canary in the coalmine for the end of New Zealand’s economic expansions, with the slowdown in the rest of the data following from there,’’ Ms Zollner says.
Along similar lines, Mr Nana tips Fonterra’s dairy price payout as one to watch.
‘‘This enables us to effectively watch two elements at once — the response and renewal of Fonterra following a period of disappointing results, alongside global commodity price pressures,’’ he says.
‘‘The world is not a happy place — and that’s even before considering the potential impact of Brexit and China/US standoffs.
‘‘Any global slowdown (or worse) will be reflected in commodity prices and should it eventuate will reinforce that NZ cannot escape from its effects.’’
Honourable mentions
Migration: ‘‘Population growth has provided the bulk of New Zealand’s economic growth in recent years. Were it to dry up this economy would feel very different,’’ warns Ms Zollner.
Unemployment: ‘‘The most unbelievable decline in unemployment and surge in jobs is likely to be partially unwound next quarter. But the labour market is undeniably strong,’’ says Mr Kerr.
‘‘We’re near full employment and forecast to go through full employment.’’
Firms’ investment intentions: ‘‘Business confidence is weak and businesses are cautious about investment,’’ Ms Leung says.
‘‘Over time, we expect that as wage growth continues to lift this will incentivise firms to invest in laboursaving technology.’’
Productivity: ‘‘A country cannot be successful without productivity improvements,’’ says the NZ Initiative’s Oliver Hartwich.
‘‘Paul Krugman once said, ’Productivity isn’t everything, but in the long run it is almost everything.’ And Krugman is right.’’
Child poverty: Finally, with an eye a on next year’s wellbeing Budget, Mr Nana will be watching the measures laid out in the Child Poverty Reduction Bill.
‘‘I don’t expect much change or improvement over one single year, but the inclusion of child poverty measures in budget documentation does signal a critical shift to a world where conventional economic indicators should not be seen in isolation from indicators of more general social and community outcomes.’’
Top picks
A US Treasury Yield Curve
A Chinese growth
A Inflation (wage growth)
A House prices (and building consents)
Commodity prices (and dairy payout)
A