Interest rate cuts drive economic recovery from mid-2025, latest forecast says

Friday, 18 October 2024

New Zealand's inflation rate has dropped to 2.2%, the lowest in more than three years. Although prices are still rising, the pace has slowed. Lower prices for air travel, petrol, and vegetables helped, but rent and insurance costs have increased.

The economy is expected to recover by mid-2025, but it will not be all that plain sailing, Kiwi economists say.

Infometrics’ latest forecasts out Friday show the economy was likely to remain weaker through the first half of next year, but expected GDP growth by the end of 2025 had been revised up from 1.5% to 1.9% per annum, and was predicted to continue into the following year, with growth reaching 2.7%pa by mid-2026.

But for the next nine or so months, households would likely remain cautious on spending thanks to continued increases in the unemployment rate.

Infometrics chief forecaster Gareth Kiernan said job vacancies had dried up this year, and by June 2025 employment growth would still be languishing at just 0.3% per annum as businesses consolidate their staffing requirements in the face of higher cost structures and weak demand conditions.

And despite the Reserve Bank dropping the OCR to 4.75% and another 50 basis point cut expected in November, the high proportion of mortgage lending was on fixed rates which meant the monetary conditions would not have an immediate effect on household budgets.

“A further rise in the unemployment rate, to a peak of 5.4% in mid-2025, will weigh on people’s job security and willingness to spend. But as people re-fix onto lower mortgage rates and more money is freed up for discretionary spending, we expect the economy to regain more momentum during the second half of next year.”

Infometrics chief forecaster Gareth Kiernan.

When it comes to the economic recovery, parts of the agricultural sector would contribute as lower costs and better export prices would improve profitability for dairy and beef farmers.

A modest pick-up in the housing market was also likely during 2025 as debt-servicing costs reduce, with an increased number of buyers in the market pushing house price inflation back up to over 5%pa.

But it will not all be plain sailing as government spending would remain constrained for the foreseeable future, with fiscal outcomes still worse than expected, the economists’ report said.

More broadly, the current lack of job vacancies was causing a sharp reversal in net migration, with fewer arrivals being compounded by more people seeking opportunities in Australia, Kiernan said.

Infometrics forecasts that annual net migration would drop to about 16,000 by the end of 2025, and turn negative during 2026/27 as Australia’s unemployment rate remains below New Zealand’s.

“Given the challenges currently faced by the New Zealand economy, the Reserve Bank’s interest rate cuts are not before time,” Kiernan said.

“With inflation already just shy of the bank’s target midpoint, there is scope for further easing, with another cut of at least 50 basis points before Christmas. But there is also a risk that larger and faster cuts going forward amplify next year’s economic upturn, as the bank tries to make up for being behind the curve.

“The bank has already exacerbated the economy’s ups and downs over the last four years, ultimately creating more hardship for businesses and households than might otherwise have been necessary.”