Economic forecast for New Zealand

05.12.2024

Economic momentum remained weak in the second half of 2024 and the economy is expected to expand by only 0.6% this year. Growth is projected to pick up to 1.4% in 2025 and 2.1% in 2026 as lower interest rates boost investment and real household income growth lifts private consumption. The difficulty of finding labour has declined, reducing wage pressures. Low and medium skilled labour shortages are not expected to return over the next two years. Feeble economic growth and easing labour market tensions are helping to lower headline inflation, which is expected to remain around 2%. Declining net inward migration, elevated electricity prices and low productivity growth are expected to temper the pace of the recovery.

The government should continue its gradual fiscal consolidation to strengthen buffers to cope with future negative shocks. Provided inflation stabilises around 2%, the official cash rate should continue to be gradually reduced in 2025. With migration-fuelled population growth assumed to diminish markedly, a stronger and more sustained recovery requires reforms to improve the functioning of energy markets and lift productivity growth including reinvigorating competition, fostering greater innovation and digitalisation, improving the school achievements of all children, facilitating infrastructure investment, and increasing the local supply of health, teaching, engineering and IT specialists.

Economic growth remains feeble.

The 525 basis points increase in the monetary policy interest rate through to mid-2023 continues to be felt across the economy. Excluding the effect of strong population growth, which peaked close to 3% per annum due to net inward migration, underlying momentum in the economy is weak. Activity in interest rate sensitive sectors, notably construction, continued to slow and business investment is shrinking. Private consumption would be falling without high population growth. Higher-frequency indicators, including job vacancies, purchasing manager indices and business activity surveys suggest GDP growth remained weak in the second half of 2024. Net inward migration has started to fall, driven by a large exodus of New Zealand citizens. GDP per capita continues to decline and in mid-2024 was 2.5% lower than a year earlier. A sustained upward trend in the futures electricity price is causing firm closures and exerts an additional drag on investment.

Looser monetary policy and fiscal consolidation are required.

With inflationary pressures waning, the Reserve Bank of New Zealand has appropriately begun to reduce the policy interest rate in August 2024, and monetary policy should ease towards the neutral rate of around 3%. To put public debt on a downwards path, the government should fully implement the fiscal consolidation announced in the 2024 Budget, which is estimated to reduce the structural fiscal deficit by around 1.2 percentage point of GDP between 2024 and 2026. This deficit projection assumes revenue moves broadly in line with the OECD’s nominal GDP growth projection of around 4% per annum, while aggregate spending will fall as a share of GDP following the path set out in the 2024 Budget.

Monetary policy easing and tax cuts will underpin a modest recovery.

The easing of monetary policy, along with income and other tax cuts (0.5% of GDP) implemented in July 2024, will help underpin a turnaround in the economy, with growth of 1.4% in 2025, rising to 2.1% in 2026. Insufficient supply of high-skilled labour, tapering of the post-pandemic rebound in international tourist arrivals and low productivity growth will temper the recovery. With weak growth, vacancies have declined and generalised labour shortages have faded. Subdued employment growth is expected, resulting in an unemployment rate above 5% in 2025. Rising unemployment may sap consumer confidence, slowing the recovery in private consumption. If electricity futures prices remain high, or rise further, this would cause more firm closures and undermine business investment. However, a high share of mortgages carries a variable rate so lower interest rates, along with planning law reforms may spark a stronger housing market and infrastructure construction recovery than expected.

Source: European Commission. European economic forecast, december 2024.