Real GDP growth anticipated to ease then pick up by 2025
The latest projections from the Organisation for Economic Co-operation and Development (OECD) indicated an easing of real GDP growth in New Zealand to 1.3% in 2024, followed by a modest uptick to 1.9% in 2025.
The landscape is shaped by a confluence of factors, with higher interest rates casting a shadow on consumption and housing investment, while the slowdown in global growth puts constraints on inbound tourism and exerts downward pressure on commodity export prices.
Despite these headwinds, a notable stabilising force emerged in the form of strong net inward migration, particularly among individuals of working age. The influx, reaching more than 118,000 individuals (2.3% of the population), provides a crucial support pillar for consumption.
OECD noted, however, that the surge is likely a temporary release of pent-up migration demand post the easing of COVID-19 border controls, but also reflects a more permanent liberalisation of work visa schemes in late last year.
However, recent data revealed a concerning trend as employment growth has turned negative, leading to a rise in the unemployment rate.
OECD on monetary and fiscal policy
The OECD report emphasised the need to uphold a tight monetary policy throughout next year to curb inflation, particularly considering the sticky core inflation, gradual fiscal consolidation, and migration-driven population growth that will likely reignite pressures in the housing market.
The OCR is forecasted to hold steady at 5.5% until the end of 2024, followed by a gradual reduction to 4.25% by the close of 2025, as inflation approaches the midpoint of the Reserve Bank’s target range of 1-3%.
On the fiscal front, a mildly contractionary stance is expected as the economic slack widens, with a projected headline deficit hovering around 3% of GDP between 2023 and 2025.
Modest growth anticipated in 2025
Amid these dynamics, economic growth is expected to hover at 1.3% in 2024, gaining traction to reach 1.9% in 2025.
A housing shortage and rising prices are expected to drive increased housing construction, while higher growth in China and key trading partners will boost exports. Projected inflation is expected to ease gradually, reflecting the resolution of supply chain tensions, reduced demand, higher unemployment, and more modest nominal wage increases.
Risks to this projection are balanced, including El Niño conditions posing a drought threat, while stronger tourism could spur a robust export-led recovery.
More coordinated approach required
Despite some improvement, New Zealand's current account deficit is still high at 7.5% as of June, signalling excess demand.
OECD pointed out that overreliance on monetary policy has led to higher interest rates and a stronger exchange rate, slowing exports and economic rebalancing. Worsening the imbalance is the fiscal deficit, facing challenges like storm costs and delays in surplus targets. Previous delays in achieving a budget surplus two times, despite anticipated health and pension expenses by 2040, contributed to the issue. Also, dependence on migrants for jobs hampered benefits from labour market easing.
To address economic imbalances and foster sustainable growth, OECD proposed comprehensive reforms, including measures to enhance competition, bolster labour and skills, and improve housing supply.
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