But, as
always, we need to keep the optimism in perspective.
ANZ’s October Consumer Confidence survey on Friday showed the reality of the recessionary economy has somewhat dampened any jubilance about the inflation victory and lower interest rates.
Topline Consumer Confidence fell sharply after three months of improvement.
Like a marathon runner collapsing after crossing the finish line, there’s some elation. But getting the inflation win has taken a toll. Despite the Reserve Bank offering a rate-cut energy drink, the economy will have wobbly legs for a while yet.
Expectations are that we’re heading into a year of low economic growth and higher levels of unemployment.
Last week I wrote a list of seven post-inflation issues we should remain wary of.
But let’s not dwell on the risks over what should be a relaxing long weekend.
Let’s – with a bit of help from Westpac chief economist Kelly Eckhold – take a look at what the next year might look like if things go okay.
Eckhold and his team published an economic overview offering a pretty encouraging outlook.
“It looks like the worst is behind us,” read a headline in the report’s summary.
The report’s tone – optimism punctuated with numerous risks and caveats – feels about right to me as we head into the silly season and summer break.
Of course, things could always get worse. There could be a major Wall St crash, an oil shock or a natural disaster. If Donald Trump wins the US presidency and imposes the tariffs he says he will, we could see a global trade war that benefits no one.
There I go dwelling on the negative again ...
We can’t predict those things. What we can do is look at the direction current trends are pointing and see where they might take us.
So, where does Westpac think we’re headed?
Economic growth is expected to remain subdued for a while but with a gradual recovery across 2025.
Westpac’s forecast for 2025 is for 2.3% growth. That’s not great but, after two years of no growth at all, it might feel pretty good.
Everything is relative. That’s why unemployment rising to 5.6% (Westpac’s current forecast) from a record low of 3.2% is going to feel a lot worse than unemployment falling to 5.6% as it did in 2014 (from a post-GFC peak of 6.7%). In 2014, we were allegedly a “rock star economy”.
While companies and government departments are cutting jobs, both the reality and the threat of unemployment will hang over consumers and curb enthusiasm for splashing out.
But unemployment should peak relatively quickly – by the middle of next year if Westpac is right. A falling net migration rate and the exodus of skilled Kiwi workers will limit some tightness in the labour market.
We should see a pickup in some hard-hit sectors such as construction as new infrastructure projects get back underway (after an unfortunate pause for political regime change) and lower interest rates should give residential builders some breathing space.
“The easing in financial conditions [lower inflation and interest rates] is expected to support a gradual recovery in growth over 2025, with a pickup in household spending and a related firming in capital expenditure by businesses,” writes Eckhold.
”We also expect the housing market to recover with prices to rise by 8% over 2025. That will help to support an eventual recovery in construction activity.”
That’s a classic Kiwi economic recovery. It doesn’t solve our long-term issues with wealth creation and productivity.
We’re going to have to do better than that if we want to deal with our current account deficit and Crown debt and all the mounting spending demands we face.
But we’re not going to change the structure of the economy overnight. That being the case, for better or for worse, we need to see some growth back in the property and construction sectors just to get out of the recession.
The other traditional drivers for our economy are agricultural exports and tourism. There is some good news there, too.
“Export earnings are expected to firm over the coming year, underpinned by improved demand and supply conditions in the primary sector, along with a continued, albeit gradual, lift in international visitor numbers.”
The tourism recovery has been slow. Westpac economists don’t see a return to pre-Covid tourist numbers until 2027 but they do see a continued recovery.
Meanwhile, decent dairy, meat, wood and horticultural returns offer a potential shot in the arm for the recovery, particularly if the weather is kind and we see a season with good production volumes.
The combination of better export returns and depressed consumer demand for imports should even keep our current account improving for a while. Westpac expects it will dip to 4% (from 6.7% currently).
Westpac outlines some other scenarios – better and worse – but its base case has us headed for growth of about 2.7% in 2026.
So there we go. That’s about as upbeat an assessment of the New Zealand economic outlook as we can realistically expect without some major structural changes.
The classic Kiwi recovery. The kind we’d probably have seen (give or take some differences in timing) regardless of which political party was in power.
It is underpinned by looser monetary policy, a housing market recovery and improving global demand for our exports.
Is that good enough to build the kind of nation we aspire to be? No. It won’t solve inequality or significantly boost the nation’s underlying wealth. But after the turmoil of the past five years, I’ll take it.
And perhaps this time we can use the stability to make policy changes that will put us on a path to more dynamic growth.
Liam Dann is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.
