ANALYSIS: In last week’s column I wrote that “… the next monetary policy review coming up on August 16 is unlikely to contain anything immediately positive for borrowers.” Such has turned out to be the case.
The Reserve Bank of New Zealand has left the official cash rate at the 5.5% it was taken to late in May but slightly lifted its projections for where it might sit from the start of next year. That is, it has factored in a chance that the OCR might need to go up again. This is driven by concerns that inflation might not ease off as quickly as the RBNZ had thought.
However, the forecasts have probably not sufficiently allowed for the worsening situation in China. One-third of our export receipts come from the Chinese market and as economic data there continues to deteriorate, prospects for demand for our largely commodity-based products continue to worsen.
In fact, things are so worrying in China now that publication of the youth unemployment rate has been stopped and the authorities have asked economic analysts not to write negative reports on the Chinese economy.
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Recently Fonterra cut its projected pay-out for this season by one dollar. The chances are strong that it will have to cut a bit further and with dairy farmers already under the pump from soaring costs, it is looking like the regions will go through a challenging period over the next 12-18 months.
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But what about the cities? Rural weakness always reaches us, but it can take a long time. This time around the cities, and Auckland in particular, are being insulated by a boom in net immigration, which now totals 87,000 people in the year to June. That is a 1.8% boost to our population and history shows that most immigrants go to Auckland then either Wellington or Christchurch.
Add in the fact that the number of Kiwis leaving is now at a ten year high of 61,000 and we leave from everywhere in the country, not just the cities, and we get reinforcement of a point I have made here before. The housing upturn this cycle will be led by Auckland. The regions will follow, but with a lag.
Can we see evidence of this in the data released by REINZ this week? Personally, I would not read all that much into the numbers as yet because the upturn in activity is still quite fresh and data in our small country can be quite volatile on a month to month and even quarter to quarter basis.
But, for what it is worth, sales of real estate in Auckland were ahead by about 25% in seasonally adjusted terms in the three months to July compared with 15% growth elsewhere in the country. With regard to prices, in July average sales prices as measured by REINZ’s House Price Index were ahead 1.8% from April versus no growth for the rest of the country.
Independent economics speaker Tony Alexander: "The housing upturn this cycle will be led by Auckland. The regions will follow, but with a lag." Photo / Fiona Goodall
On another matter, it is interesting to note that the Reserve Bank has downgraded their forecasts for the government’s accounts over the next three years. Whereas just three months ago it anticipated a deficit only equal to 0.8% of the size of our economy this fiscal year, now it sees it near three times that at 2.3%.
For the 2024/25 fiscal year the RBNZ now sees a deficit of 1.3% of GDP and not 0.5%, and the previous pick of a 0.5% surplus for 2025/26 has disappeared. Whichever party wins come October 14 there will need to be some fiscal “adjustments”.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
