Economic activity is on the up as shoppers carry bags in Queen St.
New Zealand’s economic outlook has improved, with high net migration expected to drive stronger GDP growth this year, says Infometrics.
Inflation was also likely to be back within the Reserve Bank’s target band of 1-3 per cent by the second half of this year, the economics consultancy said.
Infometrics has upgraded its GDP forecast. It now expects GDP growth to average 2 per cent per annum across 2024 and 2025 - a substantial upward revision from the 1.2 per cent per annum growth it was forecasting in October last year.
The more positive outlook was underpinned by continued high net migration that was set to take longer to retreat from its current record level, said Infometrics chief forecaster Gareth Kiernan.
“Aggregate household spending will be boosted by having a larger population,” he said.
“Although net migration is set to ease from its late-2023 peak of 132,300 per annum, we are still forecasting an inflow of almost 80,000 per annum at the end of this year. 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.”
Improving business confidence would also lead to more positive outcomes for business investment spending, he said.
The latest ANZ Business Outlook survey showed top-line confidence rising to the highest level in almost a decade, despite ongoing concerns about costs and less rosy expectation for firms’ own activity.
High net migration had 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, Kiernan said.
“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 per cent target band in the second half of this year,” he said.
“We now expect the Reserve Bank to cut the official cash rate from August this year, three months earlier than we were previously forecasting.”
Interest rate cuts would be gradual, taking the OCR to 4 per cent by the end of 2025, but the easing would help foster more positive trends in spending and investment activity, he said.
Several upside inflationary risks remained, 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 now forecasts that house price inflation will remain below 5 per cent per annum this year. Relatively high mortgage rates and the expected introduction of debt-to-income restrictions would limit the scope for house prices to be bid up significantly.
The soft Chinese economy also posed ongoing concerns for agriculturally focused regions throughout the next 18 months, Kiernan said.
“Weak export prices will weigh on revenue, creating a divergence in economic activity in the urban areas benefiting from high net migration and the provincial areas exposed to China’s slower economy,” he said.
“The soft landing currently being experienced by the economy will not be evenly spread across New Zealand.”