New Zealand’s economic prospects are brightening, according to Infometrics’ latest forecasts. GDP growth is predicted to average 2.0%pa during 2024 and 2025, which represents a substantial upward revision from the 1.2%pa growth that was being forecast by Infometrics in October last year. This more positive outlook is underpinned by continued high net migration that is set to take longer to retreat from its current record level. Improving business confidence will also lead to more positive outcomes for business investment spending.
“Aggregate household spending will be boosted by having a larger population. Although net migration is set to ease from its late-2023 peak of 132,300pa, we are still forecasting an inflow of almost 80,000pa at the end of this year,” says Infometrics Chief Forecaster Gareth Kiernan. “Additional people mean additional spending, and these more buoyant demand conditions for businesses will encourage more investment later this year and into 2025, while the downturn in construction activity will be less marked because the larger population also needs to be housed.”
High net migration has been a crucial factor behind easing pressures in the labour market, and it has enabled improvements from earlier worker shortages that were so critical during 2021 and 2022 when the borders were shut. With the unemployment rate trending upwards, growth in labour costs will slow during 2024, reducing a key driver of persistent domestic inflation. In tandem with clear signs of weaker global price pressures, this trend will bring headline inflation back within the Reserve Bank’s 1-3%pa target band in the second half of this year.
“We now expect the Reserve Bank to cut the official cash rate from August this year, three months earlier than we were previous forecasting” says Mr Kiernan. “Interest rate cuts will be gradual, taking the OCR to 4% by the end of 2025, but the easing will help foster more positive trends in spending and investment activity.”
Several upside inflationary risks remain, including rising international shipping costs due to the Red Sea conflict, as well as the demand effects of high net migration on the housing market and infrastructure networks. However, Infometrics forecasts that house price inflation will remain below 5%pa this year. Relatively high mortgage rates and the expected introduction of debt-to-income restrictions are set to limit the scope for house prices to be bid up significantly.
“The soft Chinese economy also poses ongoing concerns for agriculturally focused regions throughout the next 18 months,” says Mr Kiernan. “Weak export prices will weigh on revenue, creating a divergence in economic activity in the urban areas benefitting from high net migration and the provincial areas exposed to China’s slower economy. The soft landing currently being experienced by the economy will not be evenly spread across New Zealand.