Bumps may lie in wait on road to economic recovery

ANZ’s latest Business Outlook and Consumer Confidence surveys for November reveal economic sentiment continues to steadily improve; albeit slowly.
In the wake of the Reserve Bank’s latest decision to cut the OCR by a further 50 points for a second time last week and growing expectation it will do so for a third time in February, both businesses and consumers are beginning to feel things may be starting to bottom out and better times lie ahead.
That’s not to say the pain currently being experienced across the board – as both government departments and businesses continue to cut costs, and consumers reign in their spending worried about an uncertain employment outlook – will suddenly reverse course in 2025. There is still a high degree of caution out there.
The liquidation of green energy provider SolarZero in recent days, a business that had been operating for more than 50 years and was backed by one of the world’s leading investment managers, is a reminder of the stark challenges businesses continue to face navigating an economy that remains skittish at best.
But despite the current economic backdrop, what is surprising is the high degree of business confidence that does exist at present. After hitting a low of -77 at the beginning of 2023, a reading even below the depths of the 2008/09 global financial crisis, the ANZ survey’s latest result for November at +65 (down just a point from October) highlights the extent to which business sentiment continues to be inextricably linked to the outlook for interest rates.
The irony of course, is that the very fact the Reserve Bank is having to cut rates so aggressively to stimulate the economy is indicative of the economic jam NZ is currently experiencing.
In its latest Monetary Policy Statement, Reserve Bank governor Adrian Orr was quick to point out to both businesses and consumers they shouldn’t assume that the outlook from here is predetermined.
“While lower interest rates are expected to underpin a recovery in the domestic economy, the exact speed and timing of the recovery is subject to uncertainty”, the Monetary Policy Committee said, noting there were still plenty of potential bumps in the road ahead.
“Geopolitical risks and climate-related energy and food risks pose uncertainty over the medium term. There may be higher relative price volatility and more unpredictability in aggregate inflation.”
ANZ’s latest surveys highlighted a degree of disparity between businesses and consumers on this point.
Inflation expectations saw a decent fall, and at 2.5 percent are getting steadily closer to the magic 2 percent mark. However, business inflation expectations have fallen much more quickly than those of consumers, which are still hovering at around 4 percent, though consumer confidence itself jumped nine points in November to 99.8.
ANZ chief economist Sharon Zollner said that overall the survey results continued to highlight an economy attempting to regain its footing. “The continued lift in experienced activity suggests that interest rate cuts are changing actual behaviour, not just expectations. While the economy is clearly still very weak, things are starting to turn higher.”
Zollner also made the point that given where the economy has been, and the lag from activity to inflation pressures, the RBNZ would be confident there is sufficient domestic disinflation pressure in the pipeline, even if growth were to rebound faster than they are anticipating.
“This latest result does pour cold water on the idea of large emergency cuts being necessary to scrape the economy off the floor. There is real pain out there for sure – and both unemployment and business failures are likely to continue to increase for some time. But those two measures tell you where the economy has been, not where it’s going. Firms are saying that things are looking brighter.”
Investors will be hoping that optimism isn’t getting ahead of itself.
The New Zealand sharemarket pulled back from a three-year high on Friday with the NZX50 closing up 0.2 percent for the week at 13,067 after earlier pushing above 13,200 for the first time since October 2021.
November earnings results wrapped up and while they were generally positive with no significant downgrades being announced, it appears companies are increasingly finding ways to trim their costs in order to maintain their forecasts.
Gentrack was last week’s standout performer on the local market after once again overdelivering on its full-year result with a 25 percent lift in annual earnings.
The ports and utilities software developer saw its shares surge 30 percent for the week to close at a new all-time high of $14.05 following the better than expected result.
“Both the utilities and airports industries are transforming at pace. They are dynamic markets in a state of change, and we are confident in our ability to lead these markets globally over time” Gentrack chief executive Gary Miles said.
Market leader F&P Healthcare also delivered its half-year result that largely met expectations, though its share price was little changed by the end of the week.
The company reported a record $951.2 million in revenue, an increase of 18 percent from the prior corresponding period, while net profit after tax for the first half increased by 43 percent to $153.2m.
Ryman Healthcare shares ended the week down 7.4 percent at $4.65 after the country’s largest retirement village operator reported a rise in its vacancy rate from 10 percent to 12.1 percent. The company says that is due to the recent opening of three new hospital blocks with beds, which they remain confident will soon be occupied.
Ryman reported a halving in its net profit after tax to $94.4m for the six months to the end of September, down from $187.1m in the previous corresponding period, despite total revenues lifting 10 percent from $333.6m to $366.3m.
In currency markets, the NZ dollar enjoyed its first positive week in almost two months after briefly falling below 58 US cents at one point last week. The Kiwi dollar gained 1.5 percent for the week to 59.23 US cents in response to a 1.6 percent fall in the US dollar index, its biggest weekly decline since mid-August.
Meanwhile, stocks in the US closed out November for the start of the traditional Thanksgiving holiday weekend after notching up their best month of the year. Investors continue to maintain a bullish outlook for the US economy following President-elect Donald Trump’s decisive election victory, with no letup in the continued rise of AI-related stocks which has underpinned this year’s strong rally.
The S&P500 advanced a further 5.7 percent in November as the index looks set to close out the year with a gain of almost 30 percent, due mainly to big gains by stocks such as Nvidia.
This upward trajectory appears to accentuate what Bank of America strategists call the “extreme disconnect” between investor bullishness on US assets and bearishness on the rest of the world.
Euro-area inflation climbed above the European Central Bank’s 2 percent target and the yen advanced more than 3 percent against the dollar last week as bets grow that the Bank of Japan will be forced to once again raise interest rates next month.
But after a year in which US unemployment remained near record lows and the Federal Reserve’s much heralded soft landing delivered on expectations, Wall Street seemingly remains more than content about what’s looming on the horizon.
“Earnings growth forecasts for 2025 in the US remain optimistic, at around 15 percent” William Davies, global chief investment officer at Columbia Threadneedle Investments told Bloomberg on Friday. “This continued resilience is to some extent a little surprising, because the global economy is not without risks as we move into 2025.”
In a telling sign and a warning for local exporters, given its significance as our largest trading partner, China’s long-term bond yields have fallen below Japan’s for the first time, as investors bet that the world’s second-biggest economy will become bogged down by a protracted deflationary spiral that has long afflicted its neighbour.
A rally in 30-year Chinese government bonds has pushed their yield down from 4 percent in late 2020 to 2.21 percent on Friday, as Beijing cuts interest rates to boost its flagging economy and Chinese investors pile into safe haven assets.
Japan’s long-term bond yields, which for years were stuck below 1 percent, have risen above China’s to 2.27 percent, as Tokyo normalises monetary policy after decades of painful deflation and stagnant growth. The crossover in yields comes as Chinese authorities battle to try to support yields, warning that a sudden reversal in the market could threaten wider financial stability.
But some investors believe that deflation has already become too entrenched in the Chinese economy to be easily fixed through conventional fiscal and monetary policy, meaning bond yields are likely to have further to fall.
Analysts are increasingly pointing to certain conditions in China’s economy that are beginning to echo those seen in Japan in the 1990s, when the bursting of a real estate bubble led to decades of stagnation, while US president-elect Donald Trump’s promise to significantly increase tariffs on Chinese exports is also seen as a serious threat to future growth prospects.
Beijing has long fought against the “Japan-ification” of its economy, and has made huge investments in its high-tech, green and electric vehicle sectors with the goal of boosting long-term growth.
Despite recently launching the biggest monetary stimulus since the Covid-19 pandemic and a RMB10 trillion ($1.4t) fiscal package, bond yields have continued to fall as domestic investors look for alternatives to China’s battered equity or property markets.
“It’s consistent with this new reality in global financial markets, due to US-China decoupling and China’s deflationary risk,” Ju Wang, chief China FX and rates strategist at BNP Paribas told the Financial Times over the weekend.“The rest of the world is seeing an inflationary risk  …  and in China there is not enough demand for excess capacity.”
It has been a dramatic reversal of fortune for the world’s second-largest economy, given that it wasn’t that long ago China’s growth prospects were the envy of the world.
Now China will simply be hoping it can avoid following Japan into a long-term deflationary cycle and given how dependent the NZ economy is on China’s long term economic growth prospects, we should all be hoping that outcome doesn’t come to pass either.
Monday
• Building Consents (Oct) – Stats NZ
Tuesday
• Balance of Payments and Overseas Trade (Sept Qtr) – Stats NZ
Wednesday
• Synlait Milk AGM• ANZ Commodity Price Index (Nov)
Thursday
• New Residential Mortgage Lending (Nov) – RBNZ• Provisional Agricultural Production Stats for Year to June – Stats NZ