Economic Weekly: GDP sidelined as global rates battle royale rages

Last week’s GDP figures came and went with little fanfare. Barely a zephyr rippled through financial markets as Stats NZ reported the NZ economy went backwards to the tune of 1% in the fourth quarter of 2020. The currency held all of its recent gains and interest rate markets went on pricing a >50% chance of an RBNZ rate hike in February. Admittedly, there were probably a few on a Thursday go-slow in the wake of Te Rehutai’s Wednesday exploits. But still.

It’s a sign of the times that such a weak set of data, indeed much weaker than expected, were largely ignored. And yet, it was the correct reaction in our view. There was always going to be some chop as the economy re-set itself following the 14% post-lockdown surge of Q3. And there’s every chance we see another negative quarter in Q1 as the closed borders continue to weigh heavily on some sectors. While this would mark another ‘technical recession’ (awful language we know, particularly for those feeling its effects most acutely), our broader economic and interest rate view hasn’t changed. 2021 still looks like a year of flattish consolidation for the economy, with 2022 being “our year”.

The more influential news last week was actually offshore. The arm wrestle between markets keen to price higher and steeper yield curves, and central bankers trying to hold them back, stepped up a notch. The global reflation story has been the big theme of 2021 and, as the chart shows, is a key driver of the uplift we’ve seen in NZ wholesale interest rates. Indicative of such, 10-year swap yields closed last week around 10bps higher, despite the weaker NZ economic data.

We saw central banks in Australia, the US, and the UK all trot out similar iterations of the tightly clung-to line that interest rates are going nowhere until they are totally convinced inflation and/or employment targets are being met, not just on a forecast basis, but in real-time. This is occurring even as central banks continue to put through chunky economic forecast upgrades, as both the BoE and Fed did last week. Only one side can ultimately win the arm wrestle of course, and our sense is that markets probably have the upper hand. This underpins our forecasts for NZ wholesale yields continuing to rise, on a trend basis.

It’s more famine than feast on the economic data front this week. However, we’ll be keeping our eyes peeled for government announcements on whether an April Trans-Tasman travel bubble will go ahead, as well as a package of measures designed to address rampant house price inflation. mike.jones@asb.co.nz