"Just a little patience," economist says
The summer economic data for New Zealand has not been as bright as hoped, but there's still a positive outlook on inflation and expectations for interest rate cuts in the near future, according to recent analyses by BNZ.
Here’s a summary of key insights Mike Jones (pictured above), BNZ chief economist, gained over the summer:
Current economic data still shows little sign of vitality
Recent data indicated a soft entry into 2024, with a notable 2% drop in December’s retail card spending, concluding the year lower than it began despite a 5% rise in prices and an additional 140,000 people in the country.
Meanwhile, the once-stable services sector has declined, with the Performance of Services Index (PSI) entering recessionary territory in December, following the Performance of Manufacturing Index (PMI)’s downturn since the previous February.
“The combination of the two plays to the grain of our view GDP will continue to contract in the short term,” Jones said.
Future pessimism diminishing
Despite current challenges, forward-looking indicators suggested an economic upturn in the second half of the year, with business confidence surveys showing improved growth expectations.
“The forward-looking growth gauges from the latest batch of business confidence surveys have now climbed to levels that can no longer be waved away as entirely election-related,” Jones said.
“Even if we don’t believe all the recent lifts – which at face value imply GDP growth of 2-3% – there’s plenty of fodder for the view the economy will grind back into gear over the second half of this year.”
Labour market faces oversupply
Recent labour market data showed jobs are still being created, with employment growing by 2-3% annually, and companies planning to continue this rate of hiring, which matches expected job growth trends. However, there's more job availability than demand, leading to a predicted rise in unemployment to 5.5% this year, up from 4% at the end of 2023, as reported by Stats NZ.
“At the root of all this is the migration-driven explosion in the supply of available workers,” Jones said. “The indications are that this wave of supply is increasingly overcoming firms’ demand for additional labour.”
Further reductions in inflation
Annual CPI inflation is on a downward trend, expected to return to the Reserve Bank’s target range by September, despite some concerns about persistent domestic inflation, the BNZ analysis showed.
“Our contention is that a rapidly easing labour market and the usual lags involved in higher interest rates will eventually put paid to lofty services inflation,” Jones said. “But the RBNZ is clearly not so sure and wants to see the hard evidence before changing its tune.”
Signs of imminent declines in offshore interest rates
Central banks globally are signaling likely interest rate cuts later this year, which has been positively received by markets, though the timing and extent remain under debate.
“Whatever the exact start date(s), the fact that inflation in the big, developed economies is back down around target levels, growth/employment indicators are looking wobbly, and yet interest rates remain up at deeply taxing levels means significant easing is very likely this year,” Jones said.
The implications, he said, include, firstly, potential downward pressure on wholesale and, consequently, retail interest rates, especially for longer-term rates where offshore factors have greater influence. Secondly, there could be upward pressure on the exchange rate unless the Reserve Bank begins to cut rates, which it is not expected to do initially.
Housing recovery encounters obstacle, forecast adjusted
The housing recovery has hit a slight bump, leading to a revised house price inflation forecast to 5% for 2024, down from an earlier 7% prediction.
“It’s become clear that the recovery has lost momentum. Having lifted 2½% from April to August, the REINZ House Price Index has essentially flat-lined over the subsequent four months,” Jones said.
“Properties are also taking a little longer to sell relative to mid-year and sales activity is still sub-par.
“It’s not that the recovery is over, more that it’s taking longer to get out of first gear. Some of this may reflect the late 2023 round of mortgage rate increases, but it also appears that the lift in supply we flagged last year is comfortably absorbing any extra demand.”
Reduced interest rates anticipated later this year
BNZ is expecting the Reserve Bank to cut the OCR in August, with mortgage rates anticipated to trend downwards in the second half of the year.
“We remain comfortable with our forecast for an August start,” Jones said. “If the wheels really fall off it could be sooner or, conversely, if the Reserve Bank wants to wait for hard evidence inflation is dead and buried it will come later.
“But holding the line on our third quarter rate cut view means we continue to believe mortgage rates have peaked and are likely to fall this year.”
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
