BNZ chief economist Mike Jones thinks the RBNZ has made progress bringing the runaway economy back under control

The Reserve Bank of New Zealand’s efforts to bring economic demand in line with available supply appear to be working, according to BNZ’s chief economist Mike Jones.

In a report simply titled ‘Progress’, Jones said inflation had peaked, the labour market was slackening, and interest rates and house prices appeared to be at a turning point. 

“There’s clearer evidence emerging of the economic rebalancing we’ve been anticipating, and that the Reserve Bank is trying to deliver”. 

Over the past weeks, a number of promising indicators have started to move in the direction economists and the central bank were hoping they would. 

Migration data was perhaps the biggest surprise. Jones said February estimates showed that inward migration was “going bananas”. 

Approximately 52,000 migrants have settled into NZ in the 12 months to February, and monthly arrivals are still accelerating. This number could climb as high as 70,000, which would be equal to about 1.8% of the working age population. 

“More people in the country means more economic activity, more spending, extra available workers, and additional pressure on the country’s housing resources,” Jones said. 

This surge of new New Zealanders has likely been the driving force behind other positive developments seen in the economy; such as easing staff shortages, solid spending levels, and some stabilisation in the falling housing market. 

“We still think the NZ economy is destined for recession this year. But if anything was to pull us back from the brink, all the extra people in the country, both migrants and tourists, stand out as the most obvious candidate”. 

Prime Minister Chris Hipkins called attention to the inflow of migrants in a pre-budget speech to the Employers and Manufacturers Association on Thursday.  

To help offset worker shortages, the government has adjusted immigration settings to create easier pathways to residency, more holiday working visas, and increased the cap on RSE workers. 

The prime minister said a recent OECD report ranked NZ as the number one country in the world for attracting highly skilled workers.

“Now I know many businesses are still facing worker shortages, and I’m not suggesting the changes we’ve made, or the OECD ranking, mean the issue is fixed.

But you asked the Government to take steps to attract more labour to New Zealand --- and we have”.

Workers need houses 

High levels of migration has caused ANZ to back away from their house price forecast of a 22% peak-to-trough decline. Their economics team now predicts a total fall of 18% is “the most likely of many plausible outcomes”.

However, good news always comes with its own set of risks. If the housing market was much more resilient than that, the RBNZ may decide another rate hike might be needed to kill inflation.

ANZ attributed the better forecast as being due to new migration and a stabilisation in wholesale interest rates which means fixed mortgage rates may have peaked. 

On Thursday, Westpac estimated the average mortgage rate currently being paid by borrowers was approximately 4.1% in February, and would rise to just under 6% next year. 

This average is an estimate of the rate on all outstanding mortgages, taking into account that most loans are on fixed terms. This has the effect of smoothing out rate peaks and troughs. 

Monetary policy lags mean that despite the central bank beginning to lift interest rates 18-months ago, only now is the average mortgage rate climbing above pre-pandemic levels.

This delayed reaction will occur in reverse when the RBNZ begins to loosen its restrictive policy, meaning it could cut rates as soon as mid-2024. 

Helping to cement this expectation was first quarter consumer price index data which showed the annual inflation rate falling from 7.3% to 6.7%, with the slowest quarterly rate since 2021. 

BNZ’s Jones said weaker March quarter numbers had prompted his team to trim 0.6% off of its 2023 inflation forecasts; now predicting an annual rate of 4.7% across 2023. 

Eventual central bank rate cuts are already being priced into long term mortgage rates, which have been falling since December, even as short term rates have crept higher. 

This suggests market participants have some confidence that inflation will come under control with the official cash rate at 5.5%, with no need to go higher. It's currently 5.25%.

Missing puzzle pieces 

While there are sure signs demand in the domestic economy has been slowing, this has not translated into a weaker labour market. 

This is good news for workers, of course, but bad news for the RBNZ which wants more slack to reduce the likelihood of wage increases. 

Monthly employment indicators released on Friday morning showed strong hiring, with the number of jobs filled up 0.9%in January, then another half percent in February and in March.  

Sharon Zollner, ANZ’s chief economist, said the labour market traditionally lagged behind changes in economic activity, which itself lags behind monetary policy. 

In its February monetary policy statement, the RBNZ had forecast unemployment to rise to 3.5% in the first three months of this year. Zollner said this was unlikely to pan out. It was 3.4% in the December quarter according to Statistics NZ.

“While we don’t see that forecast eventuating (yet),the RBNZ can take some comfort from forward-looking indicators of employment and wage growth moving in the right direction.

Job advertisements, while elevated, are trending down, and employment intentions in our ANZ Business Outlook have been negative for six months now”. 

Labour market tightness was a key input to the inflation outlook, but the central bank’s next decision will also be contingent on fiscal policy released at Budget 2023 on 18 May