- Falling inflation, and Reserve Bank’s decision to cut OCR, means economic pressure expected to soon ease off.
- GDP expected to remain flat-to-down over rest of 2024, while global growth outlook remains below average.
- Household spending remains under pressure; NZ dollar likely to strengthen against US dollar.
“The economy has been showing increasing signs of brittleness under the continued pressure from high interest rates. Painful as it is though, inflation is getting under control,” says ASB Chief Economist Nick Tuffley. “Recent encouraging signs suggest the Reserve Bank can be confident inflation will fall below 3% over the second half of this year and remain well contained beyond 2024.”
“Now that interest rates have started falling, and will continue to, confidence will start to lift and people will start making and acting on decisions,” said Tuffley. “Some people have been waiting for interest rate to fall before they act. Others have been in ‘survive until ‘25’ mode and will need to wait for cashflows to improve.”
Tuffley says he expects GDP will remain flat-to-down over the rest of 2024. “Falling interest rates will be a catalyst for renewed consumer and investment spending, spurring economic recovery over 2025.” GDP, which has contracted in two of the past six quarters through to March 2024, is down 0.5% from its 2022 peak, and over 4% down on a per-capita basis.
“The global growth outlook remains below average for 2024 and 2025, while the impact of getting on top of inflation lingers. The prospects for 2024 have been gradually revised up over the past six months as the battle to contain inflation has increasingly looked like it will be won soon and with some countries proving more resilient than expected.”
Tuffley says New Zealand household spending remains under some pressure, although it had a good start to 2024 compared with 2023. “Nevertheless, consumption volumes are nearly 3% down on a per-capita basis from early 2022 (when spending got a post-lockdown bump). We expect services spending will also see a paring back of growth in the short term while financial pressures remain.”
On New Zealand inflation outlook, Tuffley says after a long period of sticky inflation, there are growing signs it is slowing noticeably. “Some prices, though, will be relatively unaffected by interest rates, such as rents, council rates, and insurance premiums. We expect inflation will be back below 3% over the second half of this year, and back around the 2% target mid-point in the second half of next year.”
On the outlook for the NZ dollar, Tuffley says, “We expect the NZD/USD to gradually creep up over 2025, as global growth recovers and as the US Federal Reserve cuts interest rates. However, the NZD may come under pressure in the short term if the RBNZ cuts interest rates ahead of the US Fed. The NZ dollar has scope to fall slightly below 0.90 against the Australian dollar, although Australia’s relative economic outperformance has been increasingly reflected in the rate.”
The latest ASB Quarterly Economic Forecast, along with other recent ASB reports covering a range of commentary, will be available via the ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html
