New Zealand’s run of poor macroeconomic data continues

Recent data from Statistics New Zealand, showed the New Zealand Unemployment Rate rising to 4.3% in Q1, its highest level for three years. New Zealand is in a technical recession after two quarters of negative growth. Furthermore, headline inflation fell to 4.0% (Core 3.7%)  in Q1 from 4.7% previously. Even though inflation remains well above the Reserve Bank of New Zealand’s (RBNZ) target of 1.0% - 3.0%, the pressure is increasing for it to lower interest rates to help boost the stuttering economy. 

More negative data out on Wednesday showed Building Permits fell 0.2% in March on a monthly basis –  worse still, on an annual basis, the number of homes consented to is down 25.0% suggesting residential investment will remain a drag on New Zealand growth, according to analysts at Brown Brothers Harriman (BBH). 

Business Confidence also fell to 14.9 in April, from 22.9 a month earlier, pointing to the third straight month of drop and marking the lowest reading since last September, according to data out on Tuesday. 

The RBNZ appears to remain split between doves who want to cut rates and hawks who want to raise them, according to Westpac Chief Economist Kelly Eckhold. Whilst weak growth and high unemployment would be aided by lower interest rates, inflation is not seen as falling fast enough in key areas to warrant lower interest rates.

“Stickiness in core inflation is consistent with embedded inflation expectations..with the implication that inflation may bottom out above 2% without further tightening. The balance of risks does not favor relying on a 5.5% OCR,” says the Chief Economist in her note “Hawks, Doves and Kiwis,” published on Wednesday. 

For NZD/USD the key question is which central bank – the Fed or the RBNZ – will move to cut interest rates first. Given the worsening economic situation in New Zealand and the Fed’s increasingly neutral position, the RBNZ seems more likely to be the first to make the move.