New Zealand is enjoying 3.2 per cent economic growth and 0.1 per cent inflation, the statisticians tell us, but Bank of New Zealand economists warn we could see those numbers switch.
In the wake of a further lurch lower in export dairy prices and weak readings for consumer and business confidence, over the past two days market economists have revised down their outlook for interest rates.
Westpac yesterday joined ANZ and ASB in forecasting that Reserve Bank Governor Graeme Wheeler will have to reverse all four of the official cash rate hikes he dispensed last year, returning the OCR to its all-time low of 2.5 per cent.
BNZ head of research Stephen Toplis also takes a downbeat view of the economic outlook. His central forecast is that annual average gross domestic product growth will slow to 2.4 per cent for calendar 2015 and 2.1 per cent for the following two years.
But it's not hard to envisage a scenario where a recession becomes imminent, Toplis says, if dairy prices fail to recover, an El Nino drought hits agricultural products, Christchurch house prices fall leading to more generalised uncertainty in the housing market, business uncertainty inhibits investment and net migration ebbs.
Add to that the ever-present risk of an international shock.
With those downside risks to an already weakening growth outlook, Toplis might be expected to be in the three-more-rate-cuts camp.
But while he expects another cut, to 3 per cent on July 23, beyond that he's not so sure.
The main reason is that the Kiwi dollar has already fallen much more than the Reserve Bank expected. On a trade-weighted basis it is almost 6 per cent below where the bank assumed it would be in the September quarter, which has just begun.
All else being equal, the drop in the New Zealand dollar, if sustained, would add between 0.6 and 1.2 percentage points to the Reserve Bank's forecast inflation peak of 2.1 per cent, Toplis said.
"We can't caution enough that the decision-making process as to where interest rates eventually go must revolve around the Reserve Bank's forecasts for inflation."
In last month's monetary policy statement, inflation was already forecast to rise to the mid-point of the bank's 1 to 3 per cent target band by the end of next year.
"The recent slump in the exchange rate must surely push that forecast higher. As the risks around growth falling to zero coincide with the possibility that CPI inflation heads to 3 [per cent], the Reserve Bank will most surely have a fun time ahead of it," Toplis said, tongue in cheek.
Meanwhile, Westpac chief economist Dominick Stephens has shifted his view of a fourth OCR cut, to 2.5 per cent by October, from a risk to a likelihood. Westpac is also forecasting the Kiwi dollar will average US62c in the December quarter this year.
As well as the plunge in dairy prices, an indicator the Reserve Bank is acutely focused on, Stephens cites deteriorating consumer sentiment recorded in the Westpac McDermott Miller survey. "We've also detected a distinct souring of business confidence in our visits to businesses and regions around the country."
Some recent developments count against OCR cuts, Stephens said, notably the plunging exchange rate and an Auckland housing market which continues to power ahead.
"All these developments must be considered in the context of a central bank that's under pressure to lift inflation towards 2 per cent, is wary of further downside surprises to inflation, and is rather dismissive of inflation risks posed by rising house prices."