Westpac Economic Overview, May 2024 – Doing The Hard Yards

Overall growth outlook

“Households and businesses will feel uncomfortable this year. Growth is not at disastrous levels but is weak, and the labour market will do a greater share of the required adjustment,” Westpac Chief Economist Kelly Eckhold commented on the release of Westpac’s May 2024 Economic Overview.

“We continue to see low economic growth at just 0.7% this year, an unemployment rate rising to 5.4% by mid-2025 and slowing wage growth as the economy continues its much-needed economic rebalancing.”

Interest rates and inflation

“Further falls in headline inflation are expected and inflation should be just below 3 percent in late 2024. However lower non-tradable inflation is required to sustainably drive inflation to 2%.”

“We think the RBNZ will be content with almost 2%’ inflation in 2025.” Mr Eckhold commented. “Monetary policy will force New Zealand to do the hard yards in 2024 but provide modest easing in 2025.”

Households and businesses

“Household debt is likely to remain manageable, even with the labour market weakening.”

“Businesses across the country have highlighted increasingly tough trading conditions, including pressures on margins.”

The labour market.

Mr Eckhold noted that the labour market was expected to continue to weaken through 2024 into 2025. “The evolution of wages, and business margins, will be critical in determining inflation and interest rates.”

External and primary sector outlook and risks

“Export volumes remain constrained by sub-par trading partner demand and environmental considerations, but primary sector earnings are set to modestly improve this year, supported by a rise in global prices, and a recovery in local production.”

Housing market outlook

“House price growth is expected to pick up through the back half of the year, with prices set to rise around 6% in 2024 and 7% in 2025.” Mr Eckhold commented. “Prices are being restrained by high interest rates and below trend growth but supported by strong population growth and associated rental demand”.

Fiscal policy

“The fiscal outlook is challenging with a prolonged tight fiscal stance required to return the books to surplus at a time when rapid population growth is lifting the demand for services.” Mr Eckhold commented.

“Our forecasts imply a much larger borrowing programme than depicted in the HYEFU” Mr Eckhold commented. “A lower nominal tax base mean lower tax revenues and strong population growth will make it hard for the Government to constrain spending beyond the next couple of years”.

Significant uncertainties cloud the outlook

Mr Eckhold concluded that some key risks include the pace and extent of labour market cooling, the persistence of domestic inflation and elevated geopolitical risks all imply an uncertain path ahead for the economy and financial markets.

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