“The upgrade to activity reflects a stronger recovery in domestic demand, with the faster normalisation in policy settings driving a cyclical recovery in investment as firms make up for delayed investment activity, while consumption rises as debt-servicing costs fall and real incomes continue to recover from the erosion caused by high inflation.”
Partially offsetting stronger domestic demand is waning support from net exports as import demand firms in line with broader economic activity, while the post-Covid recovery in services exports (chiefly international tourism) tapers. Merchandise export performance is expected to improve in the near term as favourable weather conditions and rising export prices support growth in volumes. However, in the medium term, land-use constraints are expected to continue to restrict growth in primary production and lead to export volume growth flattening off.
ANZ is still forecasting the Official Cash Rate will fall to a neutral level of 3.5% by mid-2025, but notes that could change. “Should the economy and inflation pulse undershoot expectations, the RBNZ will not hesitate to take the OCR into stimulatory territory.”
Labour market lag
The unemployment rate is expected to peak at 5.5% in the middle of 2025 before a recovery in labour demand spurs a return to a better balance.
“While economic activity is expected to gradually recover, labour market conditions are expected to continue to weaken into 2025 as the impacts of past monetary tightening continue to flow through,” ANZ says.
“The adjustment in employment levels to past weakness in economic activity is expected to continue through the first half of 2025. While private sector employment is already firmly in contraction, growth in industries more closely tied to fiscal policy settings is providing a partial offset.”
However, as the Government’s fiscal consolidation continued, support for employment growth from the public sector was likely to fade.
“On the supply side, fewer job opportunities are resulting in weaker labour force participation as discouraged worker effects play out, while labour supply growth is also slowing on the back of rapidly cooling net migration inflows as fewer migrants arrive and more Kiwis look to opportunities offshore.”
ANZ sees unemployment dropping back to 4.6% in 2026.
Trump effect
Donald Trump’s win will have implications for the global economy, particularly for economies that tend to run a trade surplus with the US (for example, China, Europe, Mexico), ANZ says.
But with details of his policy agenda lacking at this stage, it was difficult to quantify and incorporate into the outlook.
“Broadly speaking, it’s likely that the indirect impacts of increased protectionism in the US (such as weaker demand outside of the US) will have a larger impact on NZ than the direct impacts,” the report says.
“But that would also depend on how the Kiwi dollar reacted and what policymakers among our largest trading partners (for example, China) do to stabilise demand. There could be significant offsets for our exporters.”
Despite downward pressure on the New Zealand dollar in the past few weeks, ANZ forecasts have not changed since the last quarter and predict a gradual NZD/USD appreciation to US62¢ by the end of the year and to US63¢ by the end of 2025.
“These moves are expected to be supported by stronger commodity prices (particularly dairy) and gravitational pull back to fair value, which we see at US62¢.”
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.
