Bleak manufacturing numbers signal New Zealand's economy may be slowing further
Sunday, 16 June 2019
Downbeat manufacturing data is stoking concern that New Zealand's economy in sinking into a deeper than expected trough, with economists trimming forecasts in the lead up to official figures.
On Thursday Statistics New Zealand is expected to release figures showing gross domestic product (GDP) expanded at around 0.6 per cent in the first three months of the year, which would see annual growth remain below 2.5 per cent.
Economists at BNZ had been generally more upbeat than their counterparts for growth at the start of the year, picking 0.7 per cent growth, based on expectations of a solid number in the bank-sponsored PMI index, a long running monthly picture of New Zealand's manufacturing sectors.
But on Friday the PMI recorded the largest monthly drop since 2012, from 52.7 for the month of April to 50.2 in May. A figure above 50 represents expansion. The figures, released jointly with BusinessNZ showed a contraction in employment and production.
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BNZ's warned the result was a warning for growth in the coming months.
'As a growth risk indicator it may not be flashing bright red just yet, but it is moving in that direction in taking on a darker shade of amber,' BNZ economist Doug Steel said.
While economic growth in the first three months of the year would be solid, Steel said there were 'accumulating downside risks' for its forecast that annual economic growth would bottom out at 2.1 per cent in the year to June 30, 2019.
On the same day as the manufacturing figures were released, Kiwibank's economists issued equally downbeat predictions.
In a note which drew heavily on the lyrics of British rock group Radiohead, Kiwibank said talk that the global economy was showing green shoots of recovery was nothing more than 'fake plastic trees'. Further interest rate cuts needed here and overseas to stimulate demand.
Kiwibank now sees New Zealand's GDP growth dropping to 2 per cent in the middle of the year, with lower growth rates over the next two years. Growth peaked at around 4 per cent in 2017.
Low inflation and plans to require banks to hold more capital would force the Reserve Bank to continue to cut interest rates, Kiwibank said. Economists Jarrod Kerr and Jeremy Couchman see the Reserve Bank cutting the official cash rate to 1.25 per cent, with a healthy chance of two further cuts to a low of 0.75 per cent.
Parts of the New Zealand economy performed strongly at the start of the year. Sunny, settled weather at the start of the year led to a boom in the construction industry, with a 6 per cent jump in activity in the quarter.
The dry summer weather hit agriculture production, however as dairy volumes dropped.
Overall, growth is likely to be muted, with ANZ also trimming its growth expectations on Thursday.
'Economic momentum has been slowing for a while now, and we suspect this process has continued into 2019,' ANZ economist Miles Workman said. Healthy domestic demand, positive migration and two further interest rate cuts 'should prevent growth from rolling over' Workman said.
Politically, the slowing economy is a headache for the Government, with lower growth rates putting pressure on its debt targets and a risk that job creation continues to stutter.
New Zealand continues to grow faster than Australia, where growth per person is contracting slightly. But more Australian weakness will hit New Zealand eventually.
Finance Minister Grant Robertson has maintained that Treasury's forecasts are not too optimistic, but even before recent trimming, bank economists were more conservative than the much criticised economic advisory.
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