May New Zealand’s 2025 Be Merry And Bright

Friday, 13 December 2024, 9:49 am
Press Release: ASB Bank

ASB is looking ahead to 2025 with its Economics team considering what factors are likely to have the biggest impact on New Zealand’s economy. While much of the uncertainty seen throughout 2024 will likely remain, there is more reason to be optimistic for the new year.

“It’s amazing what a difference a year makes. The general feeling was pessimistic at the start of this year and while we’re not out of the woods and challenges still lay ahead, there is a sense of guarded optimism about what’s around the corner,” says ASB Senior Economist Mark Smith.

ASB’s Economics team will be watching the following through 2025:

New Zealand interest rate outlook

While interest rates in New Zealand and offshore markets have seen a period of pronounced volatility in recent years, they are now trending downwards as inflationary pressures subside and with the Reserve Bank of New Zealand (RBNZ) having cut the Official Cash Rate (OCR) by 125bps throughout 2024.

“The question is whether future falls will be modest or more substantial,” says Smith. “We’re forecasting further OCR cuts of 100bps next year, including a 50bps cut in February, taking the OCR to 3.25% by the end of next year. This should mean borrowing interest rates for households are likely to be in the 5% to 6% range by the end of 2025. The average interest rate on mortgage borrowing is assumed to end 2025 about 100bps lower than its 6.4% Q3 2024 peak”.

The return of low and stable inflation

Brighter signs have also emerged over 2024 as inflation has dropped around the world following the COVID-19 period which saw high and variable inflation impede economic efficiency. In New Zealand tradeable CPI prices fell about 1.5% over the year with ASB estimating CPI inflation will end the 2024 calendar year virtually at the midpoint of the RBNZ’s 1-3% target. Looking ahead, ASB anticipates annual CPI inflation to modestly tick up to 2.6% by the end of 2025.

“The return to low and stable inflation will make it easier for firms, household and government to plan and invest, helping to grow the economy.”

Lower inflation combined with falling interest rates is also taking pressure off household budgets.

“To put it in context, during the peak of the COVID-19 pandemic, households were facing annual increases of more than $100 per week in living costs. In 2024 this slowed to an extra $30 per week and in 2025 we believe it will shrink to less than an extra $10 per week,” says Smith.

Consumer spending and the housing market

A question that remains is whether falling interest rates and inflation and an easing in cost-of-living pressures will be enough to drive a consumer spending and housing market rebound at a time of rising unemployment.

While household spending volumes are expected to end 2024 about 6% below early 2022 peaks on a per-capita basis, and household net worth and house prices are likely to end 2024 about 20% below late 2021 peaks in inflation adjusted terms, there is reason to be hopeful for 2025.

“The moderation of inflation will ease pressure on household and business budgets while lower interest rates should help to kick-start greater spending in the retail, wider services and construction sectors which should in turn support labour incomes and cap the 2025 lift in the unemployment rate.

“Lower interest rates should also provide a welcome boost to the housing market and we expect house prices to rise by 5-10% over 2025, although we don’t expect these to surpass the record peaks we saw in 2021 until 2026,” says Smith.

New Zealand economic rebalancing

One of the bright lights for 2024 has been the commodity export sector with New Zealand export prices up about 25% over August 2023 lulls in USD terms. These results have been bolstered by the combination of strengthening offshore demand, production constraints for overseas competitors and favourable domestic climatic conditions, particularly in the primary sector.

“While we’ve seen some good gains, we remain wary of the global outlook and the fact our export intensity and overall productivity performance is low in relation to our OECD peers.

“As a country we need to be thinking longer-term and have a more outward and export focus if we’re going to improve New Zealand’s low productivity performance and domestic incomes. Taking a different approach will require involvement from everyone from Government and regulators to businesses and households. How we become more future focused is something our team will be looking more closely at in 2025,” says Smith.

Trump 2.0

While financial market sentiment has so far remained constructive since former US President Donald Trump was elected in early November, it remains to be seen what the impact of a second Trump presidency will have on New Zealand.

“The US is New Zealand’s third largest trading partner so its trade policies under Trump will be of the greatest concern to Kiwi exporters. If tariffs are announced, the impact will depend on their size, how long they are imposed for, and how targeted they are. The response of other countries, particularly China, will also be key and could impact global growth if they are retaliatory. That said, if we learnt anything the first time around, it’s to expect the unexpected and with Trump already having changed his view on tariffs, these could simply be a negotiating tactic – time will tell.

“While overall there’s cause to feel more positive about the year ahead, there will also need to be an element of wait and see. As we’ve seen in 2024, a lot can change in a year,” concludes Smith.

The full 2025 Outlook Report, along with other recent ASB reports covering a range of commentary, can be accessed at the ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html

© Scoop Media

ASB Bank

Helping you get one step ahead.

In 1847, ASB opened as the Auckland Savings Bank with the pledge: 'to serve the community; to grow and to help Kiwis grow'. And that is very much what ASB is about today.

ASB is a leading provider of integrated financial services in New Zealand including retail, business and rural banking, funds management and insurance.

ASB strives to consistently provide its customers with outstanding service and innovative financial solutions. They're dedicated to providing simple financial products that allow their customers to bank with them how and when they want.

We all have our own ways to measure progress, and our own stories about the things that matter to us. Whatever way you choose to measure progress, and whatever your goals, ASB is there to help you get one step ahead.

Contact ASB Bank

• Info on - Bank Accounts
• Info on - ASB Home Loans
• Info on - ASB Credit Cards
• Link to - Mortgage Calculator
• Info on - Business Banking
• Info on - ASB Kiwisaver
• Link to - ASB Blog
• Info on - Personal Loans