What 2025 has in store for your wallet

Tuesday, 31 December 2024

After an incredibly tough financial year for many can we expect 2025 to be any better for our wallets?

The economy was widely forecast to improve in 2025 after a challenging few years following the Covid-19 pandemic, high inflation and the cost of living crisis.

Moneysweetspot chief executive Sasha Lockley we experienced a “quick hit of dopamine” at the end of 2024 with inflation being back on track sitting a 2.2% and the OCR being reduced yet again in November to 4.25%.

“However, the reality remains that New Zealand is an expensive place to live, and we’re still seeing an increase in businesses that are hurting. That’ll play out two ways – redundancies and business closures, neither of which are good for people’s wallets or the economic recovery,” she said.

Despite New Zealand’s average wage increasing 3.4% in the third quarter of 2024 it was still slightly ahead of inflation, but prices for essential goods and services remain higher than average inflation. Likewise, despite rental prices being at an eight month low, they are still 1.6% higher than September 2023 at $630.

“More than just the costs of living, the costs of existing are higher than ever,” Lockley said.

“Balancing the family budget is always going to be a juggle for the stretched majority. Rental prices eat into around 50% of our average income, electricity prices are rising, and New Zealand childcare costs are amongst the highest globally.”

Infometrics chief economist Brad Olsen said although lower interest rates were starting to allow households to spend more already as mortgage repayments have dropped, it would still take some time for spending activity to increase.

A weaker labour market and rising unemployment will also be weighing heavily on households’ willingness to spend, at least in the short term, he said.

According to the Household Labour Force Survey employment fell 0.4% from a year ago, the first annual fall in employment on the survey measure in 12 years.

Compared to September 2023, unemployment increased by around 28,000 people, and the Reserve Bank expects at least another 12,000 people to become unemployed by the end of March 2025. Job ads also felt non-existent, with the Ministry of Business, Innovation and Employment’s Jobs Online index showing job ads had dropped 59% from their peak in 2021.

“These two conflicting trends are a challenge for households navigating their way into the new year,” Olsen said.

“Overall, we’re in a bit of a tough spot right here and now, but with better trends around the corner.

“Households will be looking forward to lower interest rates when they next refix, but in the meantime will also remain worried about job security. That worry will last until interest rate falls do actually hit people’s wallets, households spend more, and business sales improve. At that point, business should start hiring more, reducing the threat and worry of higher unemployment.”

So how much relief might borrowers see?

Westpac senior economist Satish Ranchhod said if you had fixed your mortgage for six months back in May and refixed for six months again in late November, the rate you would be paying would be nearly 110bps lower.

Similarly, if you had fixed in November 2023, the rate would be about150bps lower, and if you fixed two years ago your rate would now be about 80bps lower.

“However, if you fixed three or more years ago, when rates were at their post-pandemic lows, you’ll actually be rolling on to a rate that’s about 100bps higher. But even at those long terms, the rates currently on offer are down from the highs we saw last year,” he said.

But Olsen said there were still a lot of external factors to keep an eye on such as risks of escalation in conflicts in Eastern Europe and the Middle East, and the trade sector could go through tough times in 2025 as US President-elect Donald Trump talks up expectations of tariffs on day-one, which could effect the economy.

“A key part of 2025 is trying to find the new normal for the economy – we’ve been through low interest rates, high inflation, high interest rates, and now trying to figure out the Goldilocks zone.”