GDP: Economic outlook downgraded by international group - ‘more challenges than anticipated’

International research group BMI has lowered its real GDP growth forecast for New Zealand for 2024, saying “weak growth in the first quarter indicates that the domestic macroeconomic environment may be facing more challenges than anticipated”.

BMI is a division of Fitch Solutions which includes the Fitch Ratings agency. However, BMI says this report is not a comment on Fitch Ratings’ Credit Ratings. Fitch Ratings analysts do not share data or information with BMI.

Regardless, it is a tough assessment of the New Zealand economic outlook, which is facing scrutiny from ratings agencies.

“Our current real GDP projection is 1%, which is an improvement from the 0.6% expansion in 2023 but represents a reduction from our previous estimate of 1.2%,” BMI said.

“In May, New Zealand’s private sector activity contracted further, and at marginally faster rate than in April, which contributed to our more cautious economic forecast.”

The lower forecast for headline growth primarily reflected lower anticipated growth contribution from households, BMI said.

“We currently forecast household consumption to add 0.2 percentage points to headline growth, a decrease from the previously projected.”

BMI also noted that the GDP-Weighted Combined Index, a gauge of the Performance of Composite Index, dropped to 43.4 in May, down from 45.7 in April.

Activity in both the services and manufacturing sectors also shrank in May as recorded by the services and manufacturing Purchasing Managers’ Index (PMI) figures, it said.

“With weakening domestic demand and tight monetary policy, we expect the private sector to encounter ongoing challenges for the rest of the year. These difficulties are likely to pose additional obstacles to the broader economic growth of the country.”

The impact of high interest rates on consumer spending was likely to be exacerbated by rising unemployment, BMI said.

“The unemployment rate climbed to 4.3% in [the first quarter of] 2024, the highest it has been since [the first quarter] of 2021.”

This was an uptick from the 4% from late 2023, and it exceeded market expectations, which had anticipated a rise to 4.2%.

Additionally, the underutilisation rate rose to 11.2%, up from 10.7% in the preceding quarter, BMI noted.

“Concurrently, the number of job vacancies has been declining. Collectively, these data points suggest a weakening in labour market conditions. We expect a slight rise in unemployment in the upcoming months. Our projections indicate that unemployment will average around 4.5% in 2024.”

If there was any bright spot in the report it was that BMI sees interest rate cuts coming later this year as the economic conditions continue to darken. But even that came with an ominous warning.

“We anticipate a shift to more accommodative monetary policy to occur in the fourth quarter of 2024,” it said.

“We currently forecast that the Reserve Bank of New Zealand will reduce the OCR by a total of 50bps in 2024. Nonetheless, if inflation remains persistently high, the RBNZ may choose to enact smaller rate cuts than anticipated, or it could delay rate cuts until 2025.”

Such a scenario would likely have a negative impact on both consumer spending and business investment, BMI said.

“Furthermore, if economic growth in Mainland China turns out to be weaker than expected, the repercussions for the domestic economy could be more significant than we currently project, mainly through a decline in trade. This potential deceleration in one of New Zealand’s major trading partners could exert additional pressure on New Zealand’s economic performance.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.