Source: Kiwibank – Analysis by Jarrod Kerr
My odds are stacked, I’ll go back to black – Amy Winehouse
Red, black, red, and now back in black. We are crawling out of recession.
- After some painful falls in activity over the second half of last year, the Kiwi economy ended 2024 on a better note. Economic activity lifted 0.7% over the December nicely above our forecast 0.3% and the Reserve Banks 0.3%. A slightly positive surprise following a downwardly revised 1.1% contraction last quarter, with a cumulative 2.2% contraction over the last 2 quarters.
- For the first time in two years, activity on a per capita (per person) basis lifted. Over the quarter, output per person was up 0.4%. It has been a very long time coming.
- Over the year, it’s still sombre reading. Compared to December 2023, the economy is still 1.1% smaller. And annually, output on a per person basis remains in decline having fallen a 2.2% over the year, last quarter it was down 3% over the year.
- Looking out to 2026, we’re optimistic. And we believe in the process. The process of cutting interest rates until asset markets respond is happening. The light at the end of the tunnel is coming out of the RBNZ. Policy settings are restrictive, but more interest rate cuts are coming. High interest rates have hurt, and the economy demands more easing.
We’re acknowledging this as the first step in the economy’s recovery. 11 of the 16 measured industries posted lifts in activity over the December quarter.
And Green shoots have emerged across the services and primary industries. December’s lift in activity was driven by an uptick in rental hiring and real estate, along with an expected uptick in retail trade and accommodation.
According to Stats NZ, the summer tourism season saw higher spending from international visitors which flowed through to an increase activity across accommodation, hospitality and transport.
An increase in activity across healthcare off the back of higher central government healthcare and social assistance also helped add a bit of extra oomph over the quarter.
Still it must be noted that there were still pockets of significant weakness in today’s scorecard. Construction alone took away 0.2%pts points of growth over the quarter having posted a sizeable, but not unexpected, 3.1% decline in activity.
Meanwhile across the professional landscape, everything from business services to public admin and media continues to suffer under the weight of a still deteriorating labour market…
We’ve had 175 bps of rate cuts since August last year. And more rate relief is on its way. With each cut the restrictiveness of the current environment eases. And over time, we expect this to translate into stronger economic activity.
For now, with the cash rate still above neutral (3%), demand and economic activity will remain slightly constrained in the short term. But looking ahead, as we move closer to a neutral rate environment, we anticipate momentum to grow. It’s still not until the second half of this year that we expect a material lift in activity.
That said, growing downside risks to the global outlook could pose a potential headwind for the Kiwi economy’s recovery.
And should the downside risks persist, then a move to a cash rate below 3% may be needed to get us back on track. For now though, today’s report changes little to our outlook. We continue to expect the Reserve Bank to deliver two 25bps cut over their next two meetings. Followed by at least one more 25bps cut to 3% in the third quarter of this year.
