Despite that, the bank said there was a strong chance of inflation failing to sufficiently cool, and that could delay any cuts to the Reserve Bank official cash rate.
Fiscal policy
“Fiscal policy also needs to do its bit to help lower inflation. But the Government will need to tread carefully,” the new ASB Economic Note added.
“Creaky infrastructure needs to be rebuilt and critical services maintained.”
A return to fiscal surplus was crucial to narrow New Zealand’s huge current account deficit.
The country spent $30.6 billion more on imports than it earned from its exports in the year to September.
Population growth
Strong net immigration should boost both the demand and supply sides of the economy, ASB said.
“Sizeable net inflows of migrants have also increased labour market capacity and helped to alleviate capacity bottlenecks.”
But that had not added sufficient oomph to get the economy out of its poor GDP performance.
“Net immigration flows are volatile and unpredictable, and it is unclear how net immigration inflows will pan out over 2024,” ASB added.
The bank expected population growth to slow at the end of the year.
House prices
The housing market appeared to have consolidated in 2023 after a volatile spell, ASB added.
Strong population growth and record net immigration would probably exacerbate housing shortfalls.
Prices were now more than one quarter below late 2021 peaks in inflation-adjusted terms, the bank said.
“Affordability remains stretched, with rental yields below the cost of funding.”
ASB also said high debt servicing costs and rising unemployment were likely to have an impact.
The bank expected New Zealand house prices to rise 7-10 per cent this year.
“We are closely watching borrowing costs, the labour market outlook, migration, dwelling rents, government policy, construction sector activity and inflation, and residential section prices.”
Donald Trump
Geopolitical risks and a huge number of elections abroad would have to be closely observed, ASB added.
Turmoil in Gaza and Ukraine could trigger pronounced volatility.
“Social cohesion looks to be fraying and there seems to be growing disillusionment and distrust globally. Misinformation and AI is not helping.”
A sluggish Chinese economy could also be consequential, the bank said.
“The Chinese global growth locomotive is struggling to regain pre-Covid-19 momentum, with increasing policy support expected in 2024.”
The bank said United States presidential elections in November were likely to have a massive influence on the economic, political and market narrative.
“We only need to think back to 2016 that bought us Brexit and the election of Donald Trump as the 45th US President. Brace for a similar dynamic, although there are signs of buyers’ remorse given the lacklustre post-Brexit performance of the UK economy.”
A Trump victory and Republican-controlled Congress could mean the US scaling back its economic and military help to other countries, and trade liberalisation slowing down.
“An increasingly volatile and more protectionist global backdrop could create significant headaches for New Zealand,” ASB added.
A possible Trump administration’s likely preference for a weaker US dollar could make the Kiwi dollar stronger and so help efforts to lower New Zealand inflation.
