research strategist - bnz · 2017. 11. 30. · strategist bnz.co.nz/research 30 november 2017 page...

30 November 2017

bnz.co.nz/research

Strategist RESEARCH

More Than Political Protest by

NZ Firms? 2

International Article 4

NZD/EUR: Downward trend intact 8

The BNZ OIS-ter: Fed to hike in

December 10

Interest Rate Strategy: Still waiting

for inflation 11

NZ Economic Review 13

NZ Upcoming Data/Events 15

Quarterly Forecasts 16

Annual Forecasts 17

Calendar 18

Contact Details 19

Economic Outlook

Political protest noted, the extent of the drop in today’s ANZ

business survey, so soon, means we also need to wonder what

might be bugging NZ firms from a practical point of view. To be

clear, we are not about to slash our economic growth forecasts on

the basis of today’s survey. However, it surely makes us

comfortable keeping our GDP forecasts on the conservative side

for the near term (as does the suddenly dry weather). As such,

there seems further reason to question the strength of the Reserve

Bank’s latest GDP forecasts, as well as Treasury’s (with an eye on

its Economic and Fiscal Update, expected ahead of Xmas). Today’s

news is certainly no reason to back off our story of inflation picking

up – something that the inflation gauges in today’s ANZ survey

gave more life to, in fact. This is consistent with the business costs

portended by the new government’s policy manifesto, reinforced

by the still-abating currency. While we watch for the possibility of

the HYEFU over the coming fortnight, there are no significant NZ

data over the period otherwise.

Interest Rate Outlook and Strategy

The global economic backdrop remains conducive to higher

interest rates but a lack of measured inflation to date is keeping

global bond yields in check. This dynamic continues to weigh on

NZ yields. But as global economic expansion continues at pace,

the odds gradually increase for an uplift in inflation pressure and

global bond yields. That’s our 2018 view. Higher German rates

next year could play a key role in driving US (and NZ) rates higher.

Our view of higher US yields points to an eventual steepening in

the NZ 2s10s swap curve and ultimately wider NZ-US 10-year

government bond spreads as NZ government bond issuance is

expected to step up next year.

Currency Outlook

The NZD has pushed lower over recent months. There has been

some fundamental basis for the weakness with some wobbles in

global risk appetite, weaker international dairy prices, a narrowing

in the gap between NZ and US short term interest rates (as the

Fed is expected to hike interest rates again in December), and

the uncertainty raised by the change in NZ government. But we

feel a lot of this news is now priced in by the market. Regards

NZD/EUR, the cross has spent much of 2017 on a downward

path, to be down 12% year-to-date. But this move was from a

very high level and the cross remains some 6% above our long-

term purchasing power parity estimate. The ECB’s gradual move

away from quantitative easing and expectations of an eventual

removal of the negative deposit rate, are likely to drive EUR

higher and be the key factors supporting further weakness in the

NZD/EUR cross.

Contents

bnz.co.nz/research

30 November 2017 Strategist

ANZ business survey slumps majorly

As it tends to do with Labour-led governments

But reasons for genuine caution too

Jump in survey's inflation gauges also an issue

As NZD continues to abate

Well, well, well. What a big hole this afternoon’s ANZ

business survey fell into. Of course, the real question is

the extent to which it simply reflects political protest

about the new Labour-led government. Today’s issue was

the first to be canvassed entirely after the new

government was announced (19 October). And the survey

has a history of reacting very negatively to centre-left

regimes, only for the economy to hold up, even look good.

On political considerations alone, we expected net

confidence in today’s ANZ business survey to fall, but not

quite as much as it did. It dropped to -39.3, from -10 in

October. Activity expectations were also weaker than we

figured on, coming in at +6.5, from +22.2. The falls are

more noticeable when we seasonally adjust the series,

and the levels lower than the headline outcomes portray.

The role of some over-arching factor, such as politics, was

consistent with the fact that the weakening, and outright

weakness, was well spread across the ANZ survey,

whichever way you sliced and diced it. Nothing else stood

out as a heavily negative explanatory factor.

Politics noted, the extent of the drop in the ANZ survey, so

soon, means we also need to wonder what might be

bugging the business sector from a practical point of view

too – whether by way of identifiable policy or anything else.

In this vein, it seems fair to say that some of the new

government’s policies will be a direct impost on private firms,

especially those of small to medium size, and away from the

major metropolis areas. The policy around the minimum

wage is a good example of this. And we have certainly heard

a great deal of concern about the ripple effects of this on

business, amongst many others policy measures.

Another issue we wondered about was the suddenly dry

weather. Yet agriculture respondents in today’s ANZ

survey had the strongest view on own-activity compared

to all the others. If this is simply a timing issue, beware

next month’s survey in this regard. But there might well

have been a creeping concern about a potentially lower

Fonterra milk price forecast amongst rural respondents,

given their profits expectations turned slightly negative

this month.

To be clear, we are not about to slash our economic

growth forecasts – or anything else for that matter – on

the basis of today’s ANZ business survey. However, its

latest readings definitely make us glad we have kept our

GDP forecasts on the conservative side for the near term.

As such, there seems further reason to question the

strength of the Reserve Banks’ latest GDP forecasts, as

well as Treasury’s (with an eye on its upcoming Economic

and Fiscal Update).

But today’s news is no reason to back off our story of

inflation picking up - something that the inflation gauges

in today’s ANZ survey gave more life to, in fact. For

example, own pricing intentions sprang to +30.9, from

+20.2. And excluding the volatile agriculture component

More Than Political Protest by NZ Firms?

In the Red

-80

-60

-40

-20

0

20

40

60

80

Mar-88 Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15

Net % expecting an improvement

Monthly

Business ExpectationsSeasonally Adjusted

Source: ANZ, BNZ

Economy-wide

Own activity

ANZ Bank Business Outlook

Net balance - next 12 months

(All sectors) Nov Oct Change Average

General business outlook -39.3 -10.1 -29.2 11.1

Own business 6.5 22.2 -15.7 27.8

Profits -12.5 11.7 -24.2 10.4

Employment -2.7 14.2 -16.9 8.7

Investment 3.6 12.3 -8.7 14.2

Pricing intentions 30.9 20.2 10.7 21.1

Inflation expectations 2.34 1.93 0.41 2.61

Exports 13.2 20.0 -6.8 30.4

(Own activity outlook)

Retail -14.3 9.4 -23.7 25.4

Manufacturing 4.6 22.2 -17.6 29.6

Agriculture 21.0 17.7 3.3 23.2

Construction 14.3 31.5 -17.2 19.6

Services 10.6 25.9 -15.3 30.9

Above Trend

1.00

1.50

2.00

2.50

3.00

3.50

4.00

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17

Annual %change

net % expecting to increase in next 3 months

Monthly

Business Inflation Pointers

Source: ANZ, BNZ

Own pricing Intentions

General Inflation Expectations (rhs)

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they averaged +37.7 in November, from +20.3 last

month. Within this, retailers jumped to +34.6, from +15.1,

while construction maintained the lead with a hefty +53.5,

compared to +36.9 in October. This is something to

watch for in the CPI.

General inflation expectations also strengthened

noticeably in today’s ANZ survey – to 2.34%, from 1.93%

last month. This was a common theme across the various

sectors rather than isolated to one or two. This, along with

the behaviour in near-term pricing intentions, would seem

consistent with the business cost pressures implied by

new government policies, as well as the recent fall in

currency (overlaid on an economy that is running at or

near full capacity).

Speaking of which, NZD has fallen 30-odd pips on this

afternoon’s news – a measured fall, suggesting markets

see the slump in this latest ANZ survey as the over-

reaction to a Labour-led government that it probably

(mostly) is. NZ wholesale interest rates hardly bothered

[email protected]

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Korean economy has accelerated in 2017

After generally sluggish growth post GFC

Investment stronger, but consumption lagging

Positive growth expected, albeit with demographic

headwinds

Gross Domestic Product

Korea’s economic growth has accelerated in recent

quarters (from recent lows in Q4 2016) – with growth of

3.6% yoy in Q3 2017. This was the strongest increase

since Q1 2014.

On an expenditure basis, recent growth has been driven

largely by investment (particularly in the construction

sector) and a partial recovery in exports (with trade

gradually recovering from the slump recorded between

late 2014 and early 2016). In contrast, consumption has

remained relatively weak.

While economic growth has picked up recently, the trend

rate of growth in the post-GFC period has been

comparatively weak. Since the start of 2011, growth has

averaged around the 3.0% yoy mark – compared with

almost 5.0% yoy between 2001 (once the economy had

fully recovered from the late 1990s Asian financial crisis)

and 2007.

There are two major factors contributing to this trend.

First is the comparatively weak growth in consumption in

key export markets – with Korea’s economy being highly

export dependent. Second is the impact of demographics.

This factor is set to remain a key headwind for the

economy going forward – with growth expected to trend

around 3.1% over the next few years.

Industrial Production

Manufacturing remains a key component of Korea’s

economy – at almost 30% – albeit this share has eased a

little over the past few years as output growth has slowed.

From early 2012 onwards, growth in Korean industrial

production has stalled– averaging around 1.5% yoy

(compared with around 6.5% yoy between 2001 and

2007). Over this period, Korean manufacturers have faced

the challenges of comparatively weak consumption in key

export markets such as the United States and European

Union, while competition from producers in China and

Japan has intensified.

Recent growth has remained near trend – with seasonally

adjusted output rising by 1.7% yoy in September 2017.

Trends differ considerably by industry– with stronger

growth in automotive output (up 13% yoy in September),

electronics (up 5.6% yoy) and chemicals (4.9% yoy), while

traditional heavy industrial sectors have declined.

Shipbuilding output fell by 33% yoy in September and

crude steel output declined by 3.7% yoy.

By broad industrial category, trends have differed

considerably in the post- GFC period. Production of

consumer goods has remained comparatively unchanged

from pre-GFC levels (reflecting weak consumption in the

advanced economies), while production of capital goods

has declined from peak levels in early 2012. These

declines were largely offset by growth in intermediate

International Article

Korean Economic Growth Trending Higher in Q3

Contribution to Growth

Industrial Production

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goods – with rising demand from China a key contributor

to this trend.

Household Sector – Consumption, Demographics and

Labour Market

The consumer sector has remained comparatively weak in

recent years – with consumption’s contribution to GDP

growth remaining below 2.0% yoy since the latter part

of 2010.

The weakness in domestic demand has been a concern

for the Korean government. In response, it released a five

year economic plan mid-year, which included a KW 11.2

trillion stimulus program focussed on public sector job

creation and social welfare (particularly maternity leave

and medical care for the elderly). It is unclear whether

this will be sufficient to overcome significant headwinds

to consumption.

In the post-GFC period, there has been a steady increase

in both household debt and savings – constraining the

capacity of Koreans to consume. Household debt

climbed to almost 180% of net disposable income in

2016 – among the upper echelon of advanced

economies. Household savings have jumped above 9%

of income (compared with less than 4% in 2012) – with

economic weakness and demographic changes

identified as key drivers.

Demographic pressures are set to be a key constraint on

the domestic economy in coming years. According to the

latest UN Population Prospects, Korea’s working age

population peaked in 2016 and is set to decline in

coming years. As a share of its total population, the

working age population peaked at 73.4% in 2013 and has

fallen since – with a growing pool of retired people to

support.

Unemployment has remained comparatively stable since

the early months of 2014 – trending between 3.5% and

4.0%. In October, the unemployment rate was 3.6%.

Meanwhile, there has been an observable increase in the

participation rate – up from around 61% at the start of

2013 to around 63% in October 2017.

International Trade

Korea’s economy is highly dependent on trade – with

exports accounting for almost 55% of real GDP in 2016.

That said, growth in exports has been very slow in the

post-GFC period, as consumption in key export markets

has been constrained. Trade activity (both imports and

exports) has become more closely tied to China.

Following a dip in exports across 2015, values started to

recover in 2017 – rising toward US $50 billion in October,

Consumption Headwinds

Unemployment Stable Around 3.5%

Trade Surplus has Trended Higher

Mixed Trends in Korean Output

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an increase of 7.1% yoy. That said, this level is not

significantly higher than earlier peaks in 2011, as exports

recovered following the GFC – with electronics, motor

vehicles and refined petroleum products comprising the

largest share of exports.

The largest increase in exports over the past decade has

been to China, which is Korea’s largest export market by a

sizeable margin. Exports to China totalled US$12.6 billion

in October, with the country accounting for just over one-

quarter of Korea’s total exports. Exports to the ASEAN

economies have also risen strongly in recent years,

accounting for around 16% of the total. In contrast, the

value of exports to Japan and the European Union are

currently below their pre-GFC levels.

Import values have also trended higher in 2017, up to

US$38 billion in October 2017 – however values are still

below the levels recorded between 2011 and 2014. In

part, the decline in values reflects movements in

commodity prices, with early 2016 being the trough of the

most recent commodity cycle.

The largest imports in 2016 were crude oil, electronics

and petroleum products. Imports from China have

increased over the past five years, while there have been

declines in imports from Japan and the European Union

over this period.

Australia’s Trade with Korea

Australia has maintained a trade surplus with Korea,

although the scale of this surplus has narrowed from

peaks in 2011. In 2016, the trade surplus totalled $8.4

billion, well below the peak of $17.4 billion in 2011. This

peak coincided with the peak of the last commodity cycle,

with prices for some key commodity exports contracting

since this time.

Korea is a major export market for Australia – the third

largest for merchandise exports in 2016 (behind China

and Japan). Natural resources dominate this category –

particularly coal and iron ore, which accounted for almost

half the total value in 2016-17 – feeding into Korea’s heavy

industrial and electricity generation sectors.

Goods imports have risen sharply in the past few years –

with refined petroleum products and motor vehicles

accounting for the bulk of the total.

The services trade between Australia and Korea is less

significant – overall Korea is Australia’s ninth largest

market for services – and it lags well behind economies

such as China and the United States. Personal travel and

education services account for the vast majority of this

trade. Services imports from Korea have been

comparatively modest – with transport services being the

main contributor.

Exports by Destination

Australia’s Trade Surplus has Narrowed

Merchandise Exports

NZ’s Trade Balance has Shifted to Deficit

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New Zealand’s Trade with Korea

New Zealand’s trade balance with Korea has shifted

noticeably in recent years – driven primarily by an increase

in goods imports. In the twelve months to June 2017,

New Zealand’s trade deficit with Korea totalled NZ$214

million (compared with a NZ$873 million surplus a decade

earlier). Overall, Korea is New Zealand’s sixth largest

export market and eighth largest source of imports.

New Zealand’s goods exports to Korea have not increased

significantly in recent years. The total value of goods

exports was NZ$1.5 billion in 2016-17 – not far from the

value recorded in 2001-02. Key exports include wood and

logs, food products (such as meat, dairy and fruit) and

aluminium. Combined, these products accounted for two-

thirds of the total in 2016-17.

In contrast, goods imports have grown substantially

over the past decade – rising from NZ$1.3 billion in 2006-

07 to NZ$2.0 billion in 2016-17. The profile of New

Zealand’s imports from Korea is very similar to Australia’s

– dominated by refined petroleum products and

motor vehicles.

Korea is New Zealand’s seventh largest export market for

services – although the value of service exports is well

below the largest markets of Australia, the European

Union, China and the United States. In 2016-17, services

exports to Korea totalled NZ$468 million – with education

and personal travel services accounting for the majority.

There has been little increase in imports of Korean

services over the past decade – with imports totalling

NZ$143 million in 2016-17. Transport and personal travel

services were the key sectors.

Monetary Policy

Until today, the Bank of Korea has maintained its policy

rate at 1.25% since June 2016. In its monetary policy

statements, the bank has noted that inflation has

remained relatively modest – finally approaching its 2%

target for headline inflation, largely due to food prices.

Core inflation has remained subdued, with little signs of

constraints in the labour market or in terms of production

capacity – with the Manufacturing Average Capacity

Utilization Rate at 71.8% in September according to

Statistics Korea.

Despite the steady drop in the base rate since 2012,

monetary conditions – as measured by our monetary

conditions index – have gradually tightened, reflecting the

declines in inflation and appreciation of the real effective

exchange rate. In contrast, Japanese monetary conditions

have exhibited an easing trend over this period.

The Bank of Korea lifted its benchmark interest rate today

to 1.50%, a sign of confidence in the nation’s economic

acceleration that will help inflation settle near its 2%

target rate.

[email protected]

New Zealand’s Exports by Product

Korean Official Interest Rates Remain Low Monetary Conditions Index

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NZD/EUR has spent much of 2017 on a downward

path and is currently down 12% year-to-date. But

this move was from a very high level and the cross

remains some 6% above our long-term purchasing

power parity model estimate.

The strong economic fundamental forces that have

been in play over recent years and supported a rich

NZD/EUR cross rate have been gradually unwinding.

The ECB’s gradual move away from quantitative

easing and expectations of an eventual removal of the

negative deposit rate, are likely to drive EUR higher

and be the key factors supporting further weakness in

the cross.

The model we introduced earlier this year still shows

fair value heading steadily lower to EUR 0.54 when

the ECB’s (shadow) policy rate reaches zero. The

NZD/EUR downward trend still looks intact until we

reach that sort of level. It would be prudent for

corporates to take advantage of any short-term rallies

to hedge positions in anticipation of further downside

potential.

Breaching the 5-year range

The NZD/EUR exchange rate has spent most of the last

five years trading in a range of EUR 0.59-0.68. Since the

end of February the cross rate has depreciated by 15% to

take it just below the bottom of that broad range. The 5-

year low (excluding the NZD flash crash in August 2015) of

0.5550 is the next level of technical support. A key

question now is whether the fall in NZD/EUR has done its

dash and the familiar range will be soon back in play, or

whether the cross heads even lower.

Cross rate still richly priced on a long-term model

From a long-term perspective, the cross rate remains richly

priced. NZD/EUR has been consistently above our rolling

long-term purchasing power parity estimates for the past

eight years. Our current PPP estimate is EUR 0.55

Strong relative terms of trade

NZ’s strong relative terms of trade goes a long way in

explaining why the cross rate has been relatively strong

over the past eight years. The fall in NZD/EUR this year

has been against a backdrop of more stable relative terms

of trade using Citigroup’s commodity terms of trade

indices. Over the past few months, NZ’s commodity

terms of trade have slipped a little against the euro area.

NZ-euro area interest rates differentials narrowing

Since towards the end of last year, NZ-euro area interest

rate differentials have been closing. We looked at spreads

at both the short end (NZ 1-yr swap less Krippner’s euro

area shadow short rate) and mid curve (5-year swap rates)

and the same conclusion can be reached. Declining rate

spreads go a long way in explaining the weaker NZD/EUR

exchange rate this year.

NZD/EUR: Downward trend intact

NZD Near the Bottom of its 5-year Range

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

2006 2008 2010 2012 2014 2016

NZD/EUR

Source: BNZ, Bloomberg

0.59-0.68 range

5-yr average

NZD/EUR Still Trading Above Long-term Fair value

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

1996 1999 2002 2005 2008 2011 2014 2017

NZD/EUR

PPP

NZD/EUR

Source: BNZ

2 stdev error bands

Real Exchange Rate Has Tracked Relative Terms of Trade

-8

-3

2

7

12

70

80

90

100

110

120

130

140

1998 2000 2003 2005 2008 2010 2013 2015

Real NZD/EUR (lhs)

NZ-EU CTOT (rhs)


bnz.co.nz/research


Euro-area economy running hot compared to potential

The declining interest rate spread can be explained by

relative economic performance. Real economic indicators

suggest that the euro area economy is booming, as

evidenced by the suite of PMI indicators and a record level

reached by Germany’s IFO business climate index.

Meanwhile, NZ economic growth has been solid, but

unspectacular.

We looked at relative output gaps, calculated by simple

HP-filters on real GDP series. NZ’s output gap relative to

the euro-area has been falling and can explain a weaker

NZD/EUR exchange rate. It suggests that the euro-area

economy has been running stronger relative to potential

growth compared to the NZ economy. Ultimately that

means higher euro-area rates compared to NZ.

Meanwhile, the ECB is (arguably mistakenly) fixated on

achieving its 2% inflation target which means that it

continues to expand its balance sheet. Its purchase of

euro-area bonds will halve from 1 January to €30bn a

month but it has outlined a plan to continue buying euro-

area bonds right through to at least September 2018 to

keep interest rates suppressed. In a free market, euro-

area interest rates would be a lot higher than they are

currently. The market is not stupid. By suppressing rates,

we see the ECB as simply putting more upward pressure

on the euro. The euro is moving up well in advance of

higher interest rates, as the currency does the heavy

lifting to act as an automatic stabiliser for the economy.

In our last major note on NZD/EUR in April we introduced

a model that explained the cross rate using risk appetite,

NZ commodity prices and relative NZ-euro area short

rates. At the time NZD/EUR was at 0.65 and we illustrated

a scenario where the cross could head lower to EUR 0.54

simply on the basis that the ECB deposit rate heads from

a modestly negative level to zero (on Krippner’s shadow

short rate model, the effective policy rate heads from

minus 4½% to zero).

That scenario is playing out before our eyes. We update

the model and illustrate what the future holds making

some appropriate assumptions. The model still says that

the EUR 0.54 level becomes fair value if the ECB takes its

(shadow) policy rate to 0% and risk appetite heads down

to a more normal level of 50% over the next year or two.

Clearly, the model estimate would even be lower if we

assumed a more normal policy rate for the euro-area.

The cross rate is moving down towards the 0.54 level faster

than implied by the model, as the market anticipates the

ECB’s likely policy moves well ahead of time.

The bottom line is that on a 6-month to 24-month view, we

see further downside potential for the NZD/EUR exchange

rate. Fundamental forces can easily explain a move down

towards the mid-0.50s and currencies are apt to overshoot,

both on the upside and downside. Over that timeframe, we

wouldn’t be surprised to see the 2015 level of 0.5550

broken and sustained for a while. Strong euro-area growth,

fuelled by over-stimulatory monetary policy and a central

bank happy to allow those conditions to be sustained, are

the key factors for our still-bullish EUR outlook.

It would be prudent for corporates to take advantage of

any short-term rallies to hedge positions in anticipation of

further downside potential. Given the short-term

unpredictability of exchange rates, one wouldn’t rule out a

return to a EUR 0.60 handle, but as time passes the

pressure is expected to revert towards the downside.

[email protected]

Interest Rate Gap Closing

0

1

2

3

4

5

6

7

8

9

10

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

2004 2006 2008 2010 2012 2014 2016

NZD/EUR (lhs)

NZ-EU rates (rhs)


Euro-area Economy Heating Up Compared to NZ

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

1998 2000 2003 2005 2008 2010 2013 2015

NZD/EUR (lhs)

NZ-EU Output Gap (rhs)


NZD/EUR Model Estimates Still Tracking Lower

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

2004 2006 2008 2010 2012 2014 2016 2018

NZD/EUR (lhs)

Model (rhs)


Scenario

bnz.co.nz/research


There has been no material change in rate expectations since the RBNZ’s November MPS. The market currently

sees a toss-up between November 2018 and February 2019 for the timing of the first rate hike in the cycle, still a long

time away. Expected RBA rate hikes continue to be pushed out, with the first hike now well into 2019.

The market confidently predicts that in December the Fed will raise rates for the fifth time this cycle, and about

another 1½ rate hikes through the following year. A more positive vibe on Brexit talks has seen the next rate hike for

the UK brought forward slightly, but it is still looking like the second half of next year.

[email protected]

New Zealand United States

Australia Eurozone

Cross Country

The BNZ OIS-ter: Fed to hike in December

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Current

16-Nov

Source: Bloomberg

%

MarketExpectations

Market expectations (from OIS rates)

Expectations for BoE Cash Rate

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

Current

16-Nov

Source: Bloomberg

%

Market Expectations


Expectations for RBNZ Cash Rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Jan 20

Current

16-Nov

Source: Bloomberg

%

MarketExpectations

Market expectations (from Fed Fund Futures)

Expectations for Fed Funds Rate

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

NZ (curr) AU (curr) US (curr)

EU (curr) UK (curr)Source: Bloomberg

%

Market Expectations

Market Expectations (from OIS and FFR)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

5-Feb-13 4-Jun-14 7-Oct-15 8-Feb-17 6-Jun-18

Current

16-Nov

Source: Bloomberg

%

MarketExpectations


Expectations for RBA Cash Rate

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Current

16-Nov

Source: Bloomberg

%

MarketExpectations


Expectations for ECB Cash Rate

United Kingdom

bnz.co.nz/research


Solid global backdrop but long-term rates kept in

check as inflation remains absent.

NZ and Australian rate spreads fall relative to US.

Premia getting skinny. Lighten up on the

compression trade.

Higher rates outlook for 2018. NZ-US spread to

eventually widen. NZ bond issuance steps up from

next year.

Global backdrop still positive

The global economic backdrop remains conducive to

higher rates but a lack of measured inflation to date is

keeping global bond rates in check. This week the OECD

reported that the global economy is on course for its best

year since 2010, with the upturn becoming increasingly

synchronised across countries. Its forecasts show strong

growth sustained through 2018 and 2019. Citigroup’s G10

economic surprise index rose to its highest level in seven

years, reflecting the ongoing positive run of data, led by

the US and euro-area. Some confidence indicators in the

US and euro-area reached 17-year highs.

So no question there about the positive global economic

backdrop. The question is, when will inflation turn higher?

One might argue that inflation hasn’t turned up yet

because global excess capacity still hasn’t been soaked

up. But the longer this global economic expansion

continues – and there’s nothing obvious on the short-term

horizon to suggest that growth will be derailed – the odds

gradually increase for an uplift in inflation pressure and

global bond yields.

While we previously expected this higher inflation/higher

rates theme to develop over the latter part of 2017, our

year-end targets for longer term rates now look like a

stretch. We’ll likely have to wait until 2018 for the theme

to gain traction. We expect another Fed hike in December

and three more rate hikes next year. German bond yields

look increasingly expensive given the recent strength in

euro area activity data and higher German inflation.

Higher German rates next year could play a key role in

driving US (and NZ) rates higher.

Downward pressure on Australian rates

While 10-year US rates have been tightly range bound

during November – spending much of the time between

2.30-2.40% – some softer Australian data has seen the

Australia rates market outperform, with the 10-year rate

down by 16bps for the month.

RBA Governor Lowe has clearly indicated where his bias

is – a higher cash rate rather than lower if the economy

keeps improving. But rates are likely to remain firmly on

hold for some time. A rate hike is unlikely until the second

half of next year. While there is scope for a further rally in

short end rates we see yields near the lower end of

expected trading ranges, with limited further downside

risk to OIS pricing.

Spilling over into NZ rates

Lower Australian rates through November have spilled

over into the NZ curve. An added force was the DMO’s

pushing out of the expected syndication of a new 2029

bond until next year. This has increased the scarcity value

of NZ bonds, with limited issuance at this time of year.

Short end rates have been dragged lower by a domestic

banking system flush with cash which recently saw record

lows in the 90-day bank bill rate and government rates like

T-bills and RB Bills. With the RBNZ on hold for some time

yet and the next MPS not until February, the temptation

has been to ride the carry for the likes of 2-year swap.

The 2-year swap rate fell to 2.15% this week, trading near

the bottom of its range this year. September’s low of

Interest Rate Strategy: Still waiting for inflation

German Rates Suppressed Amidst Economic Boom

-0.2

0.0

0.2

0.4

0.6

0.8

-60

-40

-20

0

20

40

60

80

100

Jan-16 Jul-16 Jan-17 Jul-17

Eco Surprise Indicator vs Germany 10-yr


Germany10-yr (rhs)

Euro area surpriseindex (lhs)

NZ and AU Rates Fall Relative to US

-30

-20

-10

0

10

20

30

30-Jun 30-Jul 29-Aug 28-Sep 28-Oct 27-Nov

10-yr Govt Bond Yields


Change in bps relative to 30 June

NZ

Aust.

US

bnz.co.nz/research


2.13% remains under threat over the short term but the

further one looks ahead the more likely one ultimately

sees a break to the upside.

The RBNZ has eased macro-prudential policy, making its

first step towards relaxing restrictions on loan-to-value

ratios. We see further easing over the next year or two, as

the RBNZ gets more comfortable with the idea that house

prices aren’t about to take off again. The banking system

is much better placed compared to when LVR restrictions

were introduced in 2013.

This easing in macro prudential policy helps support the

housing market and greases the wheels for an eventual

tightening in monetary policy. Monetary policy tightening

is still a distant prospect – 2H18 in our view – so remains

off the radar at present. The theme of higher short term

swap rates won’t likely develop until next year.

Our medium term view for higher US yields points to an

eventual steepening in the NZ 2s10s swap curve. We look for

a 90-120bps range. NZ 5 year swap remains rich relative to

curve moves and paying the belly in 2y5y10y or establishing

a 2y5y curve steepening trade remain attractive.

The NZ-US 10-year government bond differential has

broken below the lower end of its expected 50-80bps

trading range. Lower short end spreads have been a key

driver, as the Fed continues along its tightening path while

RBNZ monetary policy remains decisively on hold.

Spreads could easily narrow a bit further, but at current

levels we recommend looking to lighten up on the

compression trade.

The government’s fiscal update (likely sometime around

mid-December) is expected to show government bond

issuance step up from next year. The current “scarcity”

premium built into the curve will eventually fade.

Furthermore, as 2018 progresses the RBNZ’s first

tightening for the cycle will come into focus. Both factors

should eventually work towards higher, not lower, NZ-US

spreads.

[email protected]

[email protected]

NZ 2s5s10s Curve

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Jan-16 Jul-16 Jan-17 Jul-17

NZ 2s5s10s Butterfly


NZ-US 10-year Spread Driven by Short End

0

100

200

300

400

2010 2011 2012 2013 2014 2015 2016 2017

NZ-US spreads

Source: BNZ., Bloomberg

NZ-US 10-yr govt

NZ-US 2-yr swap

mailto:[email protected]

bnz.co.nz/research


BNZ PMI (Oct) – 17 November

Straddling the announcement of the new government, the

Performance of Manufacturing Index for October

remained relatively robust. It printed at a seasonally

adjusted 57.2, from 57.6 in September.

PPI (Q3) – 17 November

Producer output prices rose 1.0% in the September

quarter (5.3% y/y). This reflected a 6% increase in on-farm

dairy prices and a further strong lift in electricity prices (as

hydro-generation lakes ran low). Electricity prices also

featured in the 1.0% rise in producer input price index in

Q3, with the latter’s annual inflation 4.3%.

CGPI (Q3) – 17 November

Prices for plant, machinery and equipment eased 0.6% in

the September quarter, to be down 0.4% y/y. But with

building cost inflation still strong, the Capital Goods Price

Index, overall, increased 0.5% (2.9% y/y).

Household Inflation Expectations (Q4) – 17 November

Median wise, households’ perception of current inflation

stayed at 2.0%, their 1-year view increased to 3.0% (from

2.5%) while their 5-year outlook remained at 3.0%.

BNZ PSI (Oct) – 20 November

Sure, October’s Performance of Services Index (PSI) at

55.6 was marginally lower than September’s 55.9.

However, as such, it remained well above the 50 mark

delineating growth from contraction (and so, like we also

saw in the PMI, was not put off by the election cycle).

Food Price Index (Oct) – 20 November

The 1.1% fall in October’s Food Price Index was largely

seasonal and broadly what we anticipated. So it was no

cause to amend our reckoning that the Q4 CPI will

increase 0.6%, taking its annual inflation up to 2.1%.

GDT Dairy Auction – 22 November

The GDT weighted Price Index fell 3.4%, its fourth

consecutive decline taking the cumulative drop to nearly

10% since September. Prices are now 7.4% below year

earlier levels – indicative of the downward pressure we

see on Fonterra’s 2017/18 milk price forecasts of $6.75.

Int’l Travel and Migration (Oct) – 22 November

While we believe net inward migration is broadly rolling

over, October’s number wasn’t giving in without a fight. It

increased to a seasonally adjusted +5,580, from

September’s 27-month low of +5,220. As for short-term

visitor arrivals in October, these were up 4% y/y – about

what we anticipated.

Retail Trade (Q3) – 23 November

Statistics NZ reported a 0.2% increase in September

quarter retail trade volumes. At first blush this doesn’t

sound impressive. But really it was, considering it

followed a 1.8% jump in June quarter spending that was

demonstrably boosted by New Zealand’s hosting of some

major sporting events.

NZ Economic Review

Election, What Election?

35

40

45

50

55

60

65

Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

Index

Monthly

PSI and PMI - Seasonally Adjusted

Source: Business New Zealand, BNZ

Manufacturing (PMI)

Services (PSI)

-40

-20

0

20

40

60

80

100

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Net inflow (000s)

Monthly

Net Immigration

Source: Statistics New Zealand, BNZ

Annual running total

Mthly SA Annualised

Going Down Fighting

Strong Considering

-8

-6

-4

-2

0

2

4

6

8

10

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

% change Real Retail Sales

Quarter

Annual

Source: BNZ, Statistics NZ Quarterly

bnz.co.nz/research


Hangover from the Q2 sports events was writ large in the

respective Q3 falls in accommodation services (-4.4%) and

food and beverage sales (-3.1%). There was also a dip in

auto sales that was in line with our thinking. However, the

corrective moves in these hospitality and auto

components were offset by some exceptionally strong

increases in other retail categories – notably in electronics,

apparel and footwear – even after adjusting these for still

relatively rapid population growth.

National Accounts (March Year 2017) – 24 November

The bottom line was that Statistics NZ revised up nominal

GDP all of 2.2% as a year-to-March 2017 level. So $270.6b

compared to $264.7b pre-revisions. This 2.2% gap has

built up over the four years to March 2017, in fact, leaving

a trail of higher nominal GDP growth in each of 2013/14

(7.0%, from 6.8%), 2014/15 (4.1%, from 3.7%), 2015/16

(5.1%, from 4.1%) and 2016/17 (6.2% from 5.6%).

Of course, these are dollar value results. So it’s not clear

how much of it represents stronger activity versus

stronger prices. But these annual revisions have a habit of

proving more volume than price. So there seems a good

chance that much of this extra growth will be “real”, when

the full splits are revealed in the next (quarterly) GDP

release, which is due 21 December.

Merchandise Trade (Oct) – 24 November

The news in October’s merchandise trade was the

outperformance in both exports and imports, which are

obviously fillips regarding views on economic activity.

Exports came in at $4.56b, compared to market

expectations of $4.20b (BNZ $4.39b). Imports came in at

$5.43b, compared to market expectations of $4.95b (BNZ

$5.20b). October’s trade deficit, of $871m, was slightly

wider than the market expected (-$760m) but nothing to

threaten the narrative that the annual current account

deficit will keep reducing over the near term (as a

proportion of GDP).

New Residential Lending (Oct) – 24 November

In line with house sales, new residential lending in

October registered less of an annual decline. The fall was

14.1%, compared to September’s drop of 21.7% y/y. This

further supports the idea that the outstanding stock of

household credit is recovering in its speed, month on

month. The Reserve Bank’s decision to start loosening its

LVR restrictions can only aid these residential lending

figures ahead.

RBNZ Financial Stability Report – 29 November

Earlier than we imagined, the Reserve Bank committed

itself to relaxing its loan-to-value ratio (LVR) restrictions.

However, the changes that the Bank announced in this

FSR – due to come into effect 1 January – will be

marginal. Mainly, they will reduce investor deposit

minimums to 35%, from 40%, while leaving those for non-

investors at 20% (alongside giving a little more scope for

local banks to lend outside of these prescripts, with

discretion). The Reserve Bank looks to be running the

argument that because the current mortgage book, in

total, is looking good (after the recent surge in house

prices) then that is the basis for starting to ease the LVR

restrictions (albeit marginally). The Reserve Bank, with

Governor Wheeler gone, appears more comfortable in

charting an exit from the distortive LVR policy (providing

there are no more flare up in house price and credit

growth). Interestingly, the RBNZ noted it would be

reviewing the LVR settings quarterly.

Building Consents (Oct) – 30 November

The 9.6% drop in new dwelling consents in October

looked a concern, until one recognised the main

protagonist…a giant sag in apartments, which Statistics

NZ suggests is mainly a timing issue. We agree. Consents

for non-residential work, meanwhile, have maintained

momentum. At least in a value sense, with October’s lot

up 11% on a year ago.

ANZ Business Survey (Nov) – 30 November

With the change to a centre-left government, we expected

net confidence in this survey to fall, but not quite as much

as it did. It dropped to -39.3, from -10 in October. Activity

expectations were also weaker than we figured on,

coming in at +6.5, from +22.2. It was all the more

interesting that the inflation gauges in today’s survey

jumped. Own pricing intentions sprang to +30.9, from

+20.2, while general inflation expectations strengthened

to 2.3%, from 1.9% last month. See our main article in

today’s BNZ Strategist for more on this.

Credit Aggregates (Oct) – 30 November

As we anticipated, annual growth in household credit kept

slowing in October, pacing itself at 6.5%, from 6.6%. But

this continued to infer that its monthly growth is, if

anything, picking up. October’s business and agriculture

annual credit growth were largely unchanged at 5.9% and

2.5% respectively.

[email protected]

That’s More Like It

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2012/13 2013/14 2014/15 2015/16 2016/17

NZ Nominal GDP

Pre-revision Post-revisionCumulative difference

Year-to-MarchSource: Statistics NZ, BNZ

Annual % growth

bnz.co.nz/research


Overseas Trade Indexes (Q3) – 1 December

We expect the merchandise terms of trade to rise above

its previous record high level of 1973, with a 1.3%

increase in Q3. Import prices are expected to fall 1.0% in

the quarter, driven by lower oil prices, while export prices

are seen edging 0.3% higher. Also watch for a correction

in the OTI export volume measure after its spike in Q2.

Crown Financial Statements (Oct) – 5 December

These financial statements for the four months to October

will likely see the operating balance close enough to

Budget, if the previous month’s figures are anything to go

by. Regardless, much more interest will be in the Half

Year Economic and Fiscal Update, whenever that sees the

light of day with no firm date yet set, to see how the new

government’s plans shape up.

Building Work Put in Place (Q3) – 5 December

We look for real Building Work Put in Place to show a

bounce back in Q3 from declines in the first half of the

year. Something in the order of 2% would be consistent

with our thinking for the construction sector as a whole,

as per its expected contribution to Q3 GDP growth.

ANZ Commodity Export Prices (Nov) – 5 December

Like October, we expect the influence of a lower NZD to

be evident in these figures for November. We expect NZ’s

major export product prices in world terms to fall by

around 1%, while prices in NZ dollar terms are seen lifting

about 0.5%.

GDT Dairy Auction – 6 December

Early indicators suggest some price stabilisation at this

event. But they suggested that last time only for the GDT

Price Index to fall 3.4%, making for a cumulative 10%

decline since September. European milk production, SMP

stockpile, and proposed changes to the EU intervention

scheme remain headwinds, while spreading dry

conditions in NZ may bring some support to prices.

Wholesale Trade (Q3) – 7 December

We are looking for nominal wholesale sales to increase a

touch under 1% (seasonally adjusted). This would infer

about the same expansion in volumes, which is what we

are working with for the wholesale component of GDP.

QVNZ Housing Report (Nov) – 7 December

A further slowing in the Quotable Value NZ measure on

house price inflation seems inevitable. The only question

is how much. But of more interest will be any anecdotal

reports on the market is faring post government formation

and associated housing policy announcements.

Manufacturing Sales (Q3) – 8 December

We expect the combination of sales and stocks to imply a

moderate production expansion, albeit with a likely drag

from the food processing sectors. This is the last ‘partial’

indicator for Q3 GDP. Even a slight deviation from our

expectations could have consequences for our final overall

pick for GDP growth that currently sits at +0.7%.

Electronic Card Transactions (Nov) – 11 December

We have pencilled in a 0.4% gain for total transactions in

November. Anything short of this would question whether

retail sales volumes are accelerating at all in Q4, following

their 0.2% gain in Q3 (which, itself, was a hangover from

the rapid 1.8% expansion in Q2).

Food Price Index (Nov) – 13 December

Food prices usually decline in November on seasonally

lower vegetable prices. We have a 0.4% fall plugged into

the spreadsheets this time around. Prices could be lower

than expected as prices unwind further from a spike

higher early in the year on inclement weather, but,

conversely, unusually dry weather of late may see the

opposite. Any deviation could have implications for our Q4

CPI pick that currently sits at +0.6% q/q and +2.1% y/y.

That forecast is currently more vulnerable to a downside

surprise in food prices, given rounding considerations.

BNZ PMI (Nov) – 15 December

How did manufacturers perform in November? Activity

certainly wasn’t perturbed by the government formation

process with October’s Performance of Manufacturing

Index coming in at 57.2, close to September’s 57.6.

ANZ-RM Consumer Confidence (Dec) – 15 December

Will some Christmas cheer help consumer confidence

after it eased a bit to 123.7 in November from October’s

126.3? Even if it doesn’t change, confidence would still be

comfortably above its long term average of 119.2.

[email protected]

NZ Upcoming Data/Events

Record High

700

800

900

1000

1100

1200

1300

1400

1500

1600

57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

Index

Quarterly

Terms of Trade - OTI Goods

Source: Statistics New Zealand, BNZ

BNZ Q3 estimate

Record level beckons

bnz.co.nz/research


Quarterly Forecasts

As at 30 November 2017

Key Economic Forecasts

Quarterly % change unless otherwise specified Forecasts

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

GDP (production s.a.) 0.8 0.7 0.4 0.6 0.8 0.7 0.5 0.4 0.9 1.1

Retail trade (real s.a.) 2.1 1.0 0.9 1.6 1.8 0.2 0.5 0.7 0.7 1.3

Current account (ytd, % GDP) -2.7 -2.8 -2.5 -2.9 -2.8 -2.6 -2.3 -2.2 -2.4 -2.7

CPI (q/q) 0.4 0.3 0.4 1.0 0.0 0.5 0.6 0.5 0.1 0.6

Employment 2.5 1.2 0.8 1.2 -0.1 2.2 0.4 0.6 0.5 0.5

Unemployment rate % 5.0 4.9 5.3 4.9 4.8 4.6 4.5 4.4 4.4 4.3

Avg hourly earnings (ann %) 2.1 1.6 1.1 1.1 1.2 2.0 2.7 2.8 2.6 2.4

Trading partner GDP (ann %) 3.4 3.2 3.5 3.5 3.6 4.0 3.7 3.7 3.6 3.6

CPI (y/y) 0.4 0.4 1.3 2.2 1.7 1.9 2.1 1.5 1.6 1.8

GDP (production s.a., y/y)) 3.5 3.3 2.6 2.5 2.5 2.5 2.6 2.5 2.5 3.0

Interest Rates

Historical data - qtr average Government Stock Swaps US Rates Spread

Forecast data - end quarter Cash 90 Day 5 Year 10 Year 2 Year 5 Year 10 Year Libor US 10 yr NZ-US

Bank Bills 3 month Ten year

2016 Sep 2.10 2.30 1.95 2.25 2.05 2.15 2.50 0.80 1.55 0.70

Dec 1.85 2.10 2.45 2.95 2.25 2.65 3.10 0.90 2.10 0.80

2017 Mar 1.75 2.00 2.70 3.25 2.35 3.00 3.50 1.15 2.50 0.80

Jun 1.75 1.95 2.45 2.95 2.25 2.80 3.25 1.25 2.20 0.75

Sep 1.75 1.95 2.45 2.95 2.20 2.70 3.20 1.30 2.20 0.75

Forecasts

Dec 1.75 1.95 2.75 3.20 2.20 3.00 3.50 1.45 2.60 0.60

2018 Mar 1.75 1.95 2.80 3.25 2.30 3.05 3.55 1.55 2.75 0.50

Jun 1.75 2.05 2.80 3.25 2.40 3.05 3.55 1.70 2.75 0.50

Sep 2.00 2.30 3.15 3.60 2.60 3.40 3.90 1.95 3.00 0.60

Dec 2.25 2.55 3.25 3.70 2.85 3.50 4.00 2.20 3.00 0.70

2019 Mar 2.50 2.80 3.25 3.70 3.10 3.50 4.00 2.30 3.00 0.70

Jun 2.75 3.05 3.30 3.75 3.20 3.50 4.00 2.30 3.00 0.75

Sep 3.00 3.20 3.35 3.80 3.30 3.50 4.00 2.30 3.00 0.80

Dec 3.00 3.20 3.40 3.85 3.30 3.55 4.05 2.30 3.00 0.85

Exchange Rates (End Period)

USD Forecasts NZD Forecasts

NZD/USD AUD/USD EUR/USD GBP/USD USD/JPY NZD/USD NZD/AUD NZD/EUR NZD/GBP NZD/JPY TWI-17

Current 0.68 0.76 1.19 1.35 112 0.68 0.90 0.58 0.51 76.6 72.4

Dec-17 0.70 0.75 1.17 1.33 116 0.70 0.93 0.60 0.53 81.2 75.3

Mar-18 0.69 0.74 1.18 1.30 118 0.69 0.93 0.59 0.53 81.4 74.5

Jun-18 0.69 0.73 1.20 1.31 118 0.69 0.95 0.58 0.53 81.4 74.5

Sep-18 0.70 0.73 1.22 1.28 118 0.70 0.95 0.57 0.54 82.0 74.9

Dec-18 0.70 0.73 1.20 1.26 120 0.70 0.96 0.58 0.56 84.0 75.7

Mar-19 0.71 0.74 1.20 1.25 120 0.71 0.96 0.59 0.57 85.2 76.5

Jun-19 0.72 0.75 1.18 1.24 120 0.72 0.96 0.61 0.58 86.4 77.5

Sep-19 0.73 0.76 1.18 1.25 118 0.73 0.95 0.61 0.58 85.6 77.4

Dec-19 0.73 0.76 1.17 1.24 117 0.73 0.95 0.62 0.59 84.8 77.4

Mar-20 0.73 0.76 1.19 1.26 116 0.73 0.96 0.61 0.58 84.7 77.5

TWI Weights

14.0% 20.7% 11.3% 4.6% 6.4%

Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ

bnz.co.nz/research


Annual Forecasts

As at 30 November 2017

Forecasts December Years

as at 30 November 20172016 2017 2018 2019 2020 2015 2016 2017 2018 2019

GDP - annual average % change

Private Consumption 2.8 4.8 3.4 3.3 2.3 2.9 4.3 4.0 3.1 2.7

Government Consumption 2.6 2.4 3.2 2.6 2.2 2.6 2.2 3.5 2.4 2.5

Total Investment 2.5 5.6 1.9 3.9 3.0 2.1 5.5 2.7 3.3 3.5

Stocks - ppts cont'n to growth -0.2 -0.3 0.0 0.2 0.0 -0.3 0.0 0.0 0.1 0.0

GNE 2.5 4.3 3.1 3.5 2.4 2.3 4.1 3.6 3.2 2.9

Exports 5.6 0.7 2.5 2.8 4.3 6.9 1.6 1.1 2.7 4.2

Imports 2.0 5.1 4.4 4.0 3.6 3.7 3.4 5.1 3.9 3.9

Real Expenditure GDP 3.5 3.0 2.5 3.1 2.6 3.2 3.5 2.4 2.8 2.9

GDP (production) 2.4 2.9 2.5 3.1 2.6 2.5 3.0 2.5 2.9 2.9

GDP - annual % change (q/q) 2.8 2.5 2.5 3.5 2.2 2.2 2.6 2.6 3.4 2.3

Output Gap (ann avg, % dev) 0.8 0.9 0.8 1.2 1.0 0.8 0.9 0.8 1.0 1.1

Household Savings (gross, % disp. income) 2.1 0.7 1.4 1.5 1.7

Nominal Expenditure GDP - $bn 250.7 264.7 277.1 288.6 301.1 247.6 260.7 274.7 285.4 298.0

Prices and Employment - annual % change

CPI 0.4 2.2 1.5 1.9 2.0 0.1 1.3 2.1 1.7 2.1

Employment 2.0 5.7 3.2 2.0 1.6 1.4 5.8 3.7 2.1 1.8

Unemployment Rate % 5.2 4.9 4.4 4.5 4.6 5.0 5.3 4.5 4.4 4.6

Wages - ahote 2.5 1.1 2.8 2.8 2.7 2.5 1.1 2.7 2.6 2.8

Productivity (ann av %) 0.3 -2.6 -1.3 0.6 0.8 0.1 -1.7 -1.8 -0.1 1.0

Unit Labour Costs (ann av %) 2.5 4.7 4.0 2.6 2.3 2.6 3.6 4.3 3.2 2.1

External Balance

Current Account - $bn -7.3 -7.7 -6.0 -8.3 -9.1 -8.0 -6.6 -6.4 -8.2 -8.9

Current Account - % of GDP -2.9 -2.9 -2.2 -2.9 -3.0 -3.2 -2.5 -2.3 -2.9 -3.0

Government Accounts - June Yr, % of GDP

OBEGAL (core operating balance) 0.7 1.5 1.0 0.9 1.6

Net Core Crown Debt (excl NZS Fund Assets) 24.5 22.2 22.7 22.9 22.2

Bond Programme - $bn 7.0 8.0 8.0 9.0 10.0

Bond Programme - % of GDP 2.8 3.0 2.9 3.1 3.3

Financial Variables (1)

NZD/USD 0.67 0.70 0.69 0.71 0.73 0.68 0.70 0.70 0.70 0.73

USD/JPY 113 113 118 120 116 122 116 116 120 117

EUR/USD 1.11 1.07 1.18 1.20 1.19 1.09 1.05 1.17 1.20 1.17

NZD/AUD 0.90 0.92 0.93 0.96 0.96 0.93 0.96 0.93 0.96 0.95

NZD/GBP 0.47 0.57 0.53 0.57 0.58 0.45 0.56 0.53 0.56 0.59

NZD/EUR 0.61 0.66 0.59 0.59 0.61 0.62 0.67 0.60 0.58 0.62

NZD/YEN 76.2 79.1 81.4 85.2 84.7 82.1 81.6 81.2 84.0 84.8

TWI 72.2 76.5 74.5 76.5 77.5 73.4 78.1 75.3 75.7 77.4

Overnight Cash Rate (end qtr) 2.25 1.75 1.75 2.50 3.00 2.50 1.75 1.75 2.25 3.00

90-day Bank Bill Rate 2.41 1.98 1.95 2.78 3.12 2.78 2.02 1.95 2.53 3.20

5-year Govt Bond 2.40 2.70 2.80 3.25 3.45 2.95 2.75 2.75 3.25 3.40

10-year Govt Bond 2.90 3.25 3.25 3.70 3.90 3.45 3.30 3.20 3.70 3.85

2-year Swap 2.30 2.30 2.30 3.10 3.20 2.80 2.40 2.20 2.85 3.30

5-year Swap 2.60 3.00 3.05 3.50 3.70 3.15 3.00 3.00 3.50 3.65

US 10-year Bonds 1.90 2.50 2.75 3.00 3.00 2.25 2.50 2.60 3.00 3.00

NZ-US 10-year Spread 1.00 0.75 0.50 0.70 0.90 1.20 0.80 0.60 0.70 0.85

(1) Average for the last month in the quarter

Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ

ForecastsActualsForecasts

March Years

Actuals

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Forecast Median Last

Friday 1 December

NZ, Terms of Trade, Q3 +1.3% +1.3% +1.5%

China, PMI (Caixin), November 50.9 51.0

Jpn, CPI, October y/y +0.2% +0.7%

Jpn, Capital Spending, Q3 y/y +3.2% +1.5%

UK, Markit/CIPS Manuf Survey, November 56.5 56.3

US, ISM Manufacturing, November 58.3 58.7

US, Construction Spending, October +0.5% +0.3%

US, Fed's Kaplan/Harker Speak

Monday 4 December

Aus, Company Profits, Q3 -4.5%

US, Factory Orders, October +0.3% +1.4%

Tuesday 5 December

NZ, Crown Financial Statements, 4m-to-Oct 2017

NZ, Building Work Put In Place, Q3 vol s.a.+1.0% -0.5%

NZ, ANZ Commodity Prices (world), November -0.3%

Aus, Retail Trade, October flat

Aus, RBA Policy Announcement 1.50% 1.50% 1.50%

Aus, BOP Goods and Services, Q3 prelim +0.3ppts

China, Services PMI (Caixin), November 51.2

Euro, Retail Sales, October +0.7%

Euro, GDP, Q3 3rd estimate +0.6%

UK, Markit/CIPS Services, November 55.6

US, ISM Non-Manuf, November 59.0 60.1

US, International Trade, October -$44.8b -$43.5b

Wednesday 6 December

NZ, ANZ Job Ads, November +0.9%

NZ, Dairy Auction, GDT Price Index -3.4%

Aus, GDP, Q3 +0.8%

Germ, Factory Orders, October +1.0%

US, ADP Employment, November +175k +235k

Can, BOC Policy Announcement 1.00%

Thursday 7 December

NZ, QVNZ House Prices, November y/y +3.9%

NZ, Wholesale Trade, Q3 ($) s.a. +1.7%

Aus, International Trade, October +$1.7b

Germ, Industrial Production, October -1.6%

Friday 8 December

NZ, Manufacturing Sales, Q3 vol s.a. +1.0%

Aus, Housing Finance, October -2.3%

China, Trade Balance, November +CNY254b

Jpn, GDP, Q3 2nd est +0.3%P

UK, Industrial Production, October +0.7%

US, Non-Farm Payrolls, November +198k +261k

US, Mich Cons Confidence, December 1st est 97.8 98.5

Saturday 9 December

China, CPI, November y/y +1.8% +1.9%

Monday 11 December

NZ, Electronic Card Transactions, November +0.4%

Jpn, BSI Business Survey, Q4 +5.1

US, JOLTS Job Openings, October 6,093

Forecast Median Last

Tuesday 12 December

Aus, House Prices, Q3 y/y +10.2%

Aus, NAB Business Survey, November +8

Germ, ZEW Sentiment, December +18.7

US, PPI ex-food/energy, November y/y +2.4%


Aus, Consumer Sentiment - Wpac, December 99.7

Jpn, Machinery Orders, October -8.1%

Euro, Industrial Production, October -0.6%

UK, Unemployment Rate (ILO), October 4.3% 4.3%

US, CPI ex food/energy, November y/y +1.8%

US, FOMC Policy Announcement 1.50% 1.50% 1.25%

Thursday 14 December

NZ, (circa) Government's HYEFU

NZ, ANZ-RM Consumer Confidence, December 123.7

Aus, Employment, November +4k

China, Industrial Production, Nov y/y +6.2%

China, Retail Sales, Nov y/y +10.0%

Euro, ECB Policy Announcement, Refi 0.00% 0.00% 0.00%

UK, CPI, November y/y +3.0%

UK, BOE Policy Announcement 0.50% 0.50%

UK, Retail Sales vol., November +0.3%

US, Retail Sales, November +0.2%

Friday 15 December

NZ, BNZ PMI (Manufacturing), November 57.2

Jpn, Tankan (lge manuf), Q4 +22

US, Empire Manufacturing, December +19.4

US, Industrial Production, November +0.9%

Monday 18 December

NZ, BNZ PSI (Services), November 55.6

China, Property Prices, November

Jpn, Merchandise Trade Balance, November +Y285b

Tuesday 19 December

NZ, WMM Consumer Confidence, Q4 112.4

Aus, RBA Minutes, 5 December Meeting

Euro, Labour Costs, Q3 y/y +1.8%

Germ, IFO Index, December 117.5

US, Housing Starts, November 1,290k


NZ, Merchandise Trade, November -$549m -$871m

NZ, Balance of Payments, Q3 -2.6% -2.8%

US, Existing Home Sales, November 5.48m

Thursday 21 December

NZ, GDP, Q3 +0.7% +0.8%

NZ, External Migration, November s.a. +5,580

Jpn, BOJ Policy Announcement, Policy Rate -0.1% -0.1%

US, Philly Fed Index, December +22.7

US, Leading Indicator, November +1.2%

US, GDP, Q3 3rd est +3.3%P

Friday 22 December

US, New Home Sales, November 685k

Calendar

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