Looking Backwards Is Not Good. So We’re Looking Forward To The HYEFU, GDP Release, And 2025

• The difficult year that was 2024 is coming to an end. It’s a dash to the finish line. This week, we have the Government’s half-year update (HYEFU). And it’s not good news. The starting point is a little weaker and the outlook is a little softer.
• And to finish the year, the GDP report hits the headlines on Thursday. Again, it’s not good news. We’re likely to see another contraction of about -0.3%. That’s two years of recession (under the original numbers). But said numbers have been revised up… it’ll be an interesting day.
• This weekly is jampacked. In our ‘chart of the week’ we run through our spending data over the Black Friday sales, and talk about household spending into 2025. We’re spending a little less per item, but we’re getting more bang for buck with every hard-earned dollar. Our ‘special topic’ is on the Kiwi dollar, with forecasts and a snapshot of what it means for importers and exporters.

Here’s our take on current events

With the end of 2024 approaching, there’s no better time to talk about what’s in store for 2025. We’ve updated our outlook for the year ahead. And we’re confident that it will be a better year. Especially the second half of the year.

It’s all about cuts to the cash rate. We’ve seen 125bps of easing thus far, and we forecast another 125bps to come. A cash rate of 3% is our forecast terminal rate, where policy settings are neither stimulating nor restraining growth. Continued cutting of the cash rate is justified by low and stable inflation around 2%. Although we see greater risks to the downside, that necessitates further policy easing.

As interest rates fall, growth will gain momentum. Business and consumer confidence improves with every rate cut delivered and expected. Activity should lift from here. We forecast economic growth of 2.2% over 2025, up from no growth in 2024. The labour market, however, is expected to deteriorate further. Labour demand lags the broader economic cycle. The unemployment rate is expected to continue climbing to a peak of 5.3% in the middle of 2025. From there, it is a slow descent as the economy recovers.

2025 will be a year of two halves. The first half will be a bumpy ride with glimpses of growth. And the second half will see an uplift in activity that will spring to life in 2026.

Check out "Pick a path: ‘Alive in 25’ or ‘Thrive in 25" for more on our outlook – it’s loaded with pretty charts.

Now, as excited as we are to leave 2024 behind, there’s still a couple of major data releases to get through first…

First up, Treasury’s Half Year Economic and Fiscal Update (HYEFU). Tomorrow, the Government will open its books for all to see. And we’ll get a refresh of Treasury’s economic and fiscal forecasts. Despite an earlier delivery of chunkier than expected rate cuts back at the May budget, recent comments from Treasury’s Chief Economic Advisor forewarn a downgrade to their economic projections. In part, the signalled softer outlook stems from the Kiwi economy proving weaker than Treasury’s forecasts back in May. However, further comments from Treasury’s Chief Economic Advisor also suggest a downwards revision in trend productivity growth. Ultimately, the weaker starting point will mean a weaker fiscal outlook with shortfalls in tax revenue. And as such, the forecast return to surplus will likely be pushed back another year into 2028/29.

And come Thursday, we’ll see how the Kiwi economy performed over the September quarter. By our calculations we expect the economy contracted a further -0.3% over Q3 – a marginally larger contraction than the RBNZ’s -0.2% forecast. However, there’s more uncertainty than usual around our pick given StatsNZ’s has tweaked its methodology in calculating GDP. The changes have resulted in some chunky upwards revisions to historical prints. The revisions have shown that in the two years to March 2024, the Kiwi economy is nearly 2%pts larger than previously estimated. So, we’re likely to see some of the depth of the recession we’ve had revised away. That’s not to say there isn’t some serious weakness and pain out there. Because regardless of the changes and revisions, the Kiwi economy remains in a recessionary environment. And the September quarter likely recorded another contraction.

Weakness is likely to be spread across the board with our estimates showing around half of the industries in decline over the quarter. But it's the goods producing industries - manufacturing, construction, and the utility services (electricity, gas, water, & waste services) that are looking to be the largest drivers in the contraction. Monthly PMIs remained in contraction. While building activity, as we flagged last week, contracted for the fifth quarter in a row. And topping it all off, the surge in wholesale electricity prices is likely to weigh heavily on the utility services.

There will likely be some relief in the primary industries, with some strength across agri. Dairy production was up over the quarter with higher payouts. And a recovery in export log prices will likely see a rebound in forestry, compared to last quarter’s chunky decline. But the services industry will likely show little growth. Retail sales, though slightly higher in Q3, were still in decline. And we’re expecting to see further declines across wholesale trade. Professional services are soft, particularly with ongoing job losses.

So, it’s still pretty ugly out there. But bear in mind that the cash rate had only been cut 25bps over the September quarter. So, there is good news coming. The September quarter should mark the final decline in economic output in this cycle. And with an extra 100bps of cuts over the December quarter, Q4 should be a better quarter. Though with rates still well above neutral we’re not expecting anything that will shoot the lights out. We still have a bit of time (and more rate cuts to come) before the Kiwi economy regains momentum.

Altogether, it’s a busy last week. And we’ve only covered the events happening here at home! In the US, the Fed is likely to deliver another 25bp cut on Thursday. Meanwhile over in the UK, the BoE is expected to remain on hold at 4.75% before returning for more gradual rate cuts in 2025.

Charts of the Week: From material to memorable, Kiwi spending shifts.

We trawled through Kiwibank electronic card transactions over the Black Friday period and uncovered an encouraging improvement in consumer spending. Last year, households had little appetite to spend. The number of core retail (excluding hospitality and food) transactions declined almost 5%. However, 12 months and a couple of interest rate cuts later, the appetite and ability to spend is recovering – slowly. The volume of core retail spend rose 4% on last year’s levels. Black Friday discounting and a slowdown in consumer price inflation resulted in a 2.5% decline in the nominal value of spend. Better put, the value per transaction is 6.2% cheaper than last year.

Our data suggests that Kiwi are now spending less and getting more. It follows a period where the rise in inflation eroded the purchasing power of our hard-earned dollar – we were spending more and getting less. But we’ve returned to more stable price growth, and even deflation in parts. Indeed, the evolving trend may also be a function of changing consumer patterns. In recent times, our household imports of low-value goods have skyrocketed, up 40% in the last year. The retail landscape is shifting, with the likes of Temu – the Chinese online shopping behemoth – entering the market.

Beyond the usual ups and downs in spending in any given year, our data signals this shift in underlying consumer behaviour. As witnessed globally, Kiwi are prioritising experiences with a rise in spending among categories like hospitality. Think restaurants, bars and café’s, movies, concerts, festivals, sport events etc. In the year to November 2024, the number of transactions relating to so-called ‘experiences’ has increased 7% since 2022. The demand for physical goods is correcting lower following covid, with the volume of spend in fact declining in 2023.

A special mention to movies and events which has struggled not only during the pandemic but also with the rise in streaming services. Nonetheless, the volume of spend rose 9% in the final week of November as Gladiator and Wicked battled it out for the Box Office crown. But ‘Glicked’ simply cannot compete with the success of Barbenheimer in July 2023 – the number of transactions rose an atomic 45% in the premiere week.

The outlook for household spending is slowly improving. Next year should be a better year. But we’re unlikely to see the same splurge as in previous years. Because repairing balance sheets is the near-term focus for many households. We’ve been in a per capita recession since December 2022. And household savings has fallen in five of the last seven quarters. Net disposable income fell in the June quarter, with the household sector funding the increase in spending through borrowing and drawing on existing funds. The change in interest rates and expected rise in house prices should improve the financial position of the household sector. But first, it’s about bringing balance sheets back to baseline.

Check out the full report for a breakdown of consumer trolley carts, and the tailwinds and headwinds for household spending in 2025.

We’ve taken a look at currency markets and refreshed our outlook. See our full report here: Keep calm and carry Kiwi. We hit 58c, on track for 57c... Will we hit 55c?.

Here are some of the key points;

• The carry on the Kiwi has collapsed, with Kiwi cash cut below US cash, and creeping below Aussie cash, causing a calculated claw back in conspicuous longs. Interest rate differentials are working against the Kiwi, and will continue to do so well into 2025.
• If we put our previous forecasts under the microscope, the RBNZ has cut in line with our thinking … and we’ve been the most vocal in support of aggressive easing to reflate us out of recession. On the other side, the Fed has cut by less than we expected, and the RBA hasn’t even started yet. Both the Fed and RBA have surprised us on the slower to move, die from boredom, side of the ledger.
• RBNZ will cut another 50bp cut in February, and another 25bp in either April or May. That’s fine. That’s priced. But it’s the inevitable move to 3% that’s not priced. And if we’re right, we’ll see the Kiwi currency crumble towards 55 cents. And it may be a year of two halves, with the Kiwi climbing in the second half. Stronger global growth means a stronger Kiwi.

Interest rate differentials can tell you everything you need to know in life… and even the meaning of it (if you love markets). And it is the differential that can drive investor flow. Until recently, Kiwi offered higher interest rates than the US and Australia. That rate differential has reversed, reducing the attractiveness of the Kiwi dollar. And we expect that to continue as the RBNZ cuts to 3% next year, more so than the RBA and Fed.

As we think about the Kiwi headed into 2025, we see further downside risk. The bird is likely to trade towards 57c, and possibly 55c. Our traders are ‘odds on’ in favour of such a depreciation. And our economists agree, it would certainly help our exporters and tourism operators.

It’s a bit early to be talking about the next move in the Kiwi… but if we’re right, and the Kiwi economy recovers next year… then yeah, we will see the Kiwi dollar rise. But that’s a story for the second half of 2025.

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