Brendan Larsen: Milford Asset Management expert on whether the economy's improved following recent OCR update

The Reserve Bank is set to reveal their latest OCR update next week, but experts aren't feeling too hopeful about the economy.

GDP is down and the labour market remains weak, and many are feeling less optimistic.

Milford Asset Management's Brendan Larsen explained further.

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Episode Transcript

Speaker 1 (00:00):
Right.

Speaker 2 (00:00):
Brendan Larseners with molvered acidt management high.

Speaker 1 (00:02):
Brandon Good Evening, Brendan Listener, just.

Speaker 2 (00:04):
Tell us how you think the economy has been unfolding
of late?

Speaker 1 (00:09):
Yes, sure, so I guess clearly. Up until the October
ibien Z meeting, the flow of data really was quite poor.
So GDP posted a very week second quarter, and although
the detail around private consumption perhaps wasn't as bad as feared,
the report overall did spook the ibn Z. The week
GDP also came alongside a further slowing in the labor market,

(00:30):
which meant that there was more spec capacity in the
economy than the ivn Z had expected. Alongside this, we've
also seen a trend in mortgage holders keeping their refixing
very short between six months in one year, and so
that means that the easing that the ovan Z has
done to date hasn't really been flowing through via the
mortgage channel like it usually does, given those shorter rates

(00:50):
are often much higher than the two and three year
rates where people usually fix, and so this speck capacity
in the economy as well as a desire to keep
wholesale and therefore mortgage rates lower to get the intended
easing and debt costs was really the reason the IBNZ
delivered that fifty base point rate cut in October.

Speaker 2 (01:07):
Okay, So I mean, obviously some weak conditions, but the
Reserve Bank has a single inflation mandates. What's the latest there.

Speaker 1 (01:13):
Yeah, Look, it's a good point, and I think it
really comes back to the spare capacity argument I made
just a moment ago. So consumer prices rose three percent
in the third quarter, and so that's the top of
the ibnz's one to three percent band and an acceleration
on the second quarter. So at face value, people may
wonder how a central bank focus solely on inflation could
justify cutting by fifty basis points, and as I say,

(01:35):
really it comes down to their view that there is
a lot of spare capacity and that should put downward
pressure on inflation over the medium term. Within that Q
three CPR report, we also can see that a lot
of the upside came from food and more volatile items,
whereas cyclical categories like housing were actually weaker. And so
that does show that domestic conditions are still really tough.

Speaker 2 (01:56):
Okay, So since we had that fifty basis point cut
in October, have we seen any notable changes in the economy.

Speaker 1 (02:02):
Look, I think there are tentative signs of improvement, but
we want to see more conclusive data before we're really
shouting from the rooftops. We need to remember that we've
had three hundred basis points of rate cuts with a
high chance of another twenty five basis points next week,
and so that is a substantial amount of easing that
should start showing up more clearly. So, as I mentioned earlier,
one of the reasons we think that the reaction in

(02:24):
the economy to rate cuts this time is slower is
due to almost all of the mortgage that we're rolling
over this year being refixed at very short tenors, and
so once people start turning out their debt there is
still easy to flow through. On the data front. To
your point, I think since October we have seen a
few things that show some signs of improvement. One of

(02:44):
them is the Manufacturing PMI showing four of five categories
and expansion during the month, led by new orders, which
is a really positive signal for future growth. We've also
had the Services index show a second consecutive month of improvement,
and so that remains in contraction, but directionally that's better.
We've also had two months of improving job add data,

(03:05):
and the housing market is finally showing some signs of life,
with sales up fifteen percent in October and prices up
one point seven percent over the last three months, and
so we're optimistic that the bottom is in.

Speaker 2 (03:15):
Oh how good, Brendan, I'm so pleased with that news.
Thank you, Bring the Last and Milfit Asset Management.

Speaker 1 (03:20):
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