The Governor of the Reserve Bank of New Zealand explains how the expansion of money supply and higher consumer prices have eroded people’s purchasing power. Video / Carson Bluck / Mark Mitchell
“Tough as it may be right now, small glimmers of the light at the end of the tunnel are showing through,” says ASB chief economist Nick Tuffley.
In ASB’s latest Economic Forecast Update, Tuffley looks ahead at the coming months, warning of a “slow grind” as the economystays flat across 2024.
But the outlook is softened by early signs of improvement and the longer-term prospect of a turnaround.
“Inflation has shown further signs that it is coming down. By the end of this year, it will be back within the target band [below 3 per cent],” he said.
“We expect the [Reserve Bank] will be confident enough to cut interest rates before year-end, or if not in early 2025.”
The housing market had also turned a corner, he said.
“The recovery is unspectacular so far, though as expected given some of the headwinds. Lower interest rates, favourable tax changes, and still-booming migration will increasingly boost the market over time.”
Dairy prices had also recovered to the degree an $8/kg milk price for this season and the next looked achievable, and tourism recovery continued - though more gradually now.
“We don’t rule out further contractions in GDP, though by year-end we expect to see the foundations for recovery being put into place,” Tuffley said.
The pressure of high interest rates continued to dominate. Consumer and Government spending, and capital expenditure, were contracting.
However, soft domestic spending was containing imports, leading to a positive contribution from net exports and a narrowing of New Zealand’s still large current account deficit.
Migration flows continued to provide a floor under overall activity, with population growth nudging a 3 per cent annual rate, the strongest since the early 1990s.
“Despite the flat activity and evident pressure on businesses (and Government departments) to contain costs, we expect that the level of employment will remain pretty flat,” Tuffley said.
“Most of the continued increase in unemployment that we expect is from the sheer lift in population.”
Pressure would remain on households. Consumer spending volumes had started contracting – despite record population growth.
“Retail trade data, with a richer breakdown of spending, show that spending volumes are down (slightly), even for ‘essential’ supermarket purchases,” Tuffley said.
“There has been a clear switch away from some discretionary spending, such as recreation and liquor, and from durables. In contrast, spending on experiences such as travel/accommodation has continued to lift.”
ASB expects spending volumes will start to pick up over the second half of the year, with inflation substantially lower at that point and interest rates on the cusp of falling.
Meanwhile, the housing market’s recovery remained very gradual.
Fixed-term mortgage rates passed their peak last year, though remained fairly high, Tuffley said.
And in the short term, the turn in the market is contributing to more stock coming on to the market. The impending slashing of the bright-line tax period was likely to do the same temporarily.
“We still expect price growth of around 7 per cent this year and a stronger 2025, as interest rates keep falling and population pressures boost demand.”
Nick Tuffley, ASB chief economist.
Inflation had continued to reduce, although some parts were coming down faster than others, he said.
“Tradable inflation (largely goods exposed to overseas markets and the NZD) has come down faster than generally expected. However, some pockets of non-tradable inflation (largely housing and services) have been more stubborn in falling.”
Rental inflation (10 per cent of the Consumer Price Index basket) was reaccelerating, impacted by the strength of migration.
Council rates and insurance costs were also going up at a strong pace. Wage growth has been falling only gradually, but should continue to ease as expanding labour supply and muted hiring take further pressure off wages.
“Nevertheless, headline inflation remains on track to fall below 3 per cent over the second half of this year and settle close to 2 per cent over 2025,” Tuffley said.
“It is still some time yet until the RBNZ will see clear evidence inflation is under control.”
That meant OCR cuts were not imminent.
“We expect the RBNZ will be comfortable to start cutting the OCR in November, provided that headline inflation is comfortably in the target band and other ‘core’ measures of inflation are looking well-behaved.”
