With the update on the OCR and results from the NZIER’s latest quarterly survey of business opinion (QSBO) last week, the talk this week has been all about what we should be expecting, with the top 5 New Zealand banks all releasing overviews of their professional opinions.
The one thing that all the experts and economists have agreed on was that the QSBO result was very weak. New Zealand's Gross Domestic Product (GDP) growth and business confidence from the survey were lower than what the banks had predicted. It is clear that the global growth itself is prolonged, and even though commodity prices have held their own, other factors have weighed in on the result. The 50bps cut in the OCR back in August has affected a few things. We're now seeing the lowest housing interest rates of all time, the unemployment rate has remained low, and inflation has been under control. So why is it that the latest QSBO showed that 11% of businesses had experienced a downturn in trading activity?
Here are a few factors that banks and economists saw from the latest surveys and what we think it means from a growth and business confidence point of view.
Commodity prices
As mentioned above, commodity prices have been shown to have held their own. The survey indicated that the manufacturing sector is under pressure and the global market is not the most pleasant place for trades, but the slowed growth in New Zealand has been relatively mild compared to the rest of the world.
The current trade war between China and the US isn't helping with China being one of our most prominent export destinations (where 27% of our goods go). In saying that, as a result of a few factors such as the African Swine Flu epidemic which wiped out most of China's pig farms, our prices are still holding their own. This has also helped lift the export of beef and lamb.
With commodity prices not being the issue, it's our tourism and other exports that have felt the heat. Although tourism is content right now, the survey showed that the momentum is slowing. Also, the latest ANZ Business Outlook Survey found that other export intention is sitting at its lowest since the GFC and, because of this, it has offset what our meat and dairy is doing, hence our slow growth.
Low exports and tourism, of course, translate to low business confidence, as businesses aren't able to commit and show the willingness to expand and employ.
Net Migration
Since the removal of departure cards, estimating migration has been tense. Although the latest survey showed that our net migration hasn't declined in the last year, some signs were worrying. It seems that the growth in traffic has dropped significantly, which can sometimes indicate a decrease in GDP per capita. Migration is an interesting topic as fewer people would mean a low unemployment rate and less stress on the housing market. However, with fewer people, this would mean less economic activity and therefore, slower growth. If people aren't demanding new homes, then there would be less construction and therefore less spending and job opportunities.
If there are fewer demands for construction, then businesses aren't likely to expand and hire more people. There are, however, some great outlooks ahead for migration, especially in the trans-Tasman movement. With construction activities across the ditch looking to be very grim, we may start to see more skilled Kiwis move back home.
Other factors
Business confidence is one of the keys in the GDP growth slowing, and we predict that it will stay that way for the time being. Yes, exports and migration are significant contributors, but from the latest QSBO, it seems that businesses are also wary about other factors like the pay rate, low turnover, weak profitability, lack of skilled labour, and regulations. Right now, operating costs are on the high side, thus making the profit margins very slim. We've seen some changes in regulations for landlords, water regulations and the employment relations bill and changes can create uncertainty which naturally leads to disruptions.
Going forward
The general feeling is that a further cut in the OCR is a must. If another cut sees an increase in household consumption, which is the most significant contribution to GDP, we may start to see a more rapid increase in growth. If household consumption is slow to react, we may then see a further cut early next year. ANZ has predicted that the OCR could be as low as 0.25% by May 2020 and with that comes a sacrifice in an increase of the unemployment rate. The November OCR announcement should see a cut in the OCR, but will it be a -0.25% or a -0.50% drop?