Economy on recession tightrope
Is the economy slipping into recession? Or is it rebounding and causing even more inflation pressure? Right now things seem to be on tightrope with risk on both sides.
The run-up to next week’s Reserve Bank Monetary Policy Statement has delivered a few more clues with a range of data points showing signs of some slowdown in activity.
Latest card transaction data shows consumer spending dipped in July. ANZ’s Truckometer shows traffic volumes were light across the month.
The Reserve Bank’s own inflation expectation survey showed some promising signs — although not yet enough for it to feel comfortable taking its foot off the rate-hike pedal.
On balance recent data suggested New Zealand may manage to avoid recession, ANZ concluded in its latest outlook report.
However but that was based on expectations of a strong recovery in net exports (as demand for imports wanes goods and tourism bounces back). From a domestic (gross national expenditure) perspective, we do expect a contraction over the first half of 2023, ANZ said.
“If international tourism and education don’t pick up as quickly as we’re hoping, the whole economy could easily slip into recession.”
Conversely, though, a more moderate economic growth path would do little to help the Reserve Bank in its inflation fight.
“We may have downgraded our outlook for activity, but a decent slowdown will be needed to bring inflation under control,” ANZ economists said.
“Hopefully, it will take an OCR of only 4 per cent to achieve it. But 7 per cent wage growth certainly takes the edge off the tightening delivered so far.”
Retail card spending data out yesterday showed a dip of $11 million (0.2 per cent) between June 2022 and July 2022, when adjusted for seasonal effects, Stats NZ said.
The largest increase was consumables (groceries and liquor), up $52m (2.2 per cent), which was partially offset by the decrease in fuel, down $39m (6.1 per cent).
That was slightly softer than Westpac economists had forecast.
“It highlights the flagging momentum in household spending,” said Westpac senior economist Satish Ranchhod.
“Nominal spending levels have effectively held flat for the past three months. But that’s despite strong increases in retail prices. High inflation has eroded households’ purchasing power. That means that, although nominal spending levels have held up, the actual volume of goods that we’ve been purchasing has gone backwards.”
The pressure on household budgets was likely to become even more pronounced, Ranchhod said.
“Consumer prices are continuing to climb. In addition, many households will see the costs of servicing their mortgages push higher over the next few months.”
The fall in spending on fuel was mirrored in the ANZ’s latest Truckometer.
The series — now running for a decade — is derived from traffic volumes monitored and collected by the New Zealand Transport Agency.
It measures light traffic (motorbikes, cars and vans) and heavy traffic (trucks).
While the heavy traffic index captured production, variation in light traffic was a good indicator of consumers’ willingness to spend (eg on weekends away),” said ANZ chief economist Sharon Zollner.
“The Light Traffic Index has fallen 5 per cent over July and August, even as petrol prices retreated. But that fall is off what was a high level, and just takes it back to trend,” she said.
But disappointing activity data couldn’t be read as pointing to lower inflation pressures down the track, she warned.
A more promising piece of data was the Reserve Bank’s own survey of inflation expectations.
It showed firms starting to look through a peak in inflation out beyond the coming year.
“There would have been sighs of relief all round at Number 2 The Terrace yesterday following a surprisingly benign set of inflation expectations figures,” said ASB senior economist Mike Jones.
The RBNZ had been losing sleep about rising inflation expectations given the risk they added a selfsustaining process to inflation, as firms and workers factor in higher expected future inflation into wage and price-setting behaviour, he said
The all-important two- and fiveyear inflation expectations estimates both fell (to 3.1 per cent and 2.3 per cent respectively), despite headline inflation sitting at 30-year highs above 7 per cent.
“There’s still work to do for the RBNZ in realigning domestic demand with constrained supply — so rate hikes will continue with another 50bps next week — but the data should scratch out speculation of a larger 75bps hike,” Jones said.