Westpac Economic Overview, August 2023 – The Great Rebalancing?

Westpac has just released its latest Economic Overview.

“Several imbalances are clearly evident in the New Zealand economy,” noted Chief Economist Kelly Eckhold. “Most fundamentally, while growth is slowing, the economy is running above its sustainable capacity, and inflation is still very high.”

Given the marked tightening of monetary policy over the past couple of years, we are now in the period where we should be starting to see tangible progress on the ‘great rebalancing’. The key question is how fast will the necessary adjustments in economic conditions occur?

“There are some encouraging early signs,” noted Mr Eckhold. “Inflation is now off its highs. In addition, consumer spending has been weakening as households have tightened their belts as interest rates and other cost of living pressures bite.”

But there are also areas of concern. Notably, domestic inflation hasn’t fallen as fast as expected. In addition, while the current account deficit has begun to narrow, it will likely remain elevated compared to pre-pandemic levels.

“Our sense is that further monetary policy action is required to ensure that inflation will fall in a timely manner. That’s why we expect a further increase in the Official Cash Rate later this year, and only gradual rate reductions down the line.”

“We’re forecasting a protracted period of sub-trend economic growth,” noted Mr Eckhold. “For inflation to fall as quickly as the RBNZ has forecast, a softening in the labour market is needed and wage growth needs to slow. If that doesn’t happen, there’s a risk that the Official Cash Rate will need to rise even further than we’re projecting.”

One of the major headwinds for the economy has been weaker than expected activity in some of our key trading partner economies, most notably China. The related softness in demand is weighing on the prices of some of our key exports. As a result, Westpac have revised down their 2023/24 milk price forecast to $7.50/kg.

One area where conditions have been firmer is the housing market. The sharp fall in house prices that began in late-2021 has now been arrested. We’ve also seen sales rising from their post-pandemic lows and population growth remains strong. We’ve revised up our forecasts for house price growth and now expect prices across the country to rise by almost 8% over 2024 (up from our previous forecast for a rise of 2.5%).

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