The New Zealand economy is on track for the much sought-after “soft landing”, according to Infometrics’ latest forecasts. Although economic activity is set to remain patchy in coming quarters, year-end growth is predicted to bottom out at 0.9% during 2024, which is an upward revision of more than a percentage point from the trough that had been expected earlier this year.
“Part of the economy’s resilience is due to the record high net migration inflows that are currently occurring,” says Infometrics Chief Forecaster Gareth Kiernan. “The addition of 110,000 people to the population over the last year has filled workforce vacancies and skill shortages, boosted demand even as household budgets are being squeezed, and created a moderate pick-up in the housing market.”
At the same time as demand has held up, the easing in inflation to 5.6%pa suggests that the Reserve Bank’s tighter monetary conditions are working as hoped. Much of the slowdown in inflation to date has been driven by weaker global price pressures and the normalisation of international supply chains, but inflation is still forecast to trend down towards 3% by early 2025. The Bank is now unlikely to lift the official cash rate above 5.5%, but lingering price pressures could also prevent any rate cuts until late next year. Domestic inflationary risks that could persist into 2024 are presented by higher oil prices and transport costs, continued wage pressures if the labour market remains tight, or flow-on effects from the housing market recovery into broader consumer spending trends.
“The Reserve Bank is balancing these inflationary risks against weakness in the global economy, particularly in China, which is weighing on export prices,” says Mr Kiernan. “Significant cost increases since 2020 mean that the profitability of farmers is under major pressure. As a result, provincial regions with agriculturally based economies will struggle more than other regions over the next 18 months.”
The incoming government’s likely relaxation of tax rules for property investors is set to boost buyer demand for housing. However, if interest rate cuts are delayed until late 2024, mortgage rates will hold above 6% next year and keep housing relatively unaffordable. Infometrics expects prohibitive debt-servicing costs to limit the extent of any house price rises during 2024.
“The economic outlook is not without its challenges, which reflect the severe stresses the economy has been under throughout the last three years,” says Mr Kiernan. “However, trends in current inflation and growth expectations are both relatively good, all things considered. There is a sense that the rebalancing of the New Zealand economy after the pandemic could have been a lot more harrowing than what we are currently experiencing.”