Survive ‘til 25: It’s A White-Knuckle Ride. We’ve Updated Our Forecasts.

• The Kiwi economy is weak, because of aggressive monetary policy. Higher interest rates hurt. And the economy will struggle to grow this year. We continue to forecast an improvement in the outlook. But we’ve pushed out the timing of the turnaround.
• It’s all about inflation. Kiwi inflation has fallen at pace, but the road to 2% is laden with frustrations. Home-grown inflation is proving persistent and problematic. However, the weak economy should ease price pressures. We forecast inflation below 3% by year-end.
• If the economy, and inflation importantly, evolves as we expect, then we see the RBNZ delivering the first rate cut in November. We are cognisant that the risks are tilted toward a delayed kick-off. Regardless, we are confident that the next move in rates is down.
• On the ground, “survive ‘til ‘25” is the mantra we’re hearing. It’s a white-knuckle ride, but next year will be a better year. And it’s at the hands of the RBNZ.

The Kiwi economy has clearly weakened since we last looked under the hood. Over the past 18 months, the economy has been at a standstill, recording a double-dip recession. And the forward-looking indicators point to an economy that will struggle to eke out much growth in 2024. We have downgraded our forecasts for the Kiwi economy. We now see the economy growing just 0.1% this year, down from an already soft 0.5%. The RBNZ has been among the most aggressive central banks in a quest to tame inflation. The “higher for longer” rates environment hurts. And the impact of restrictive monetary policy is undeniable.

At the end of the day, it’s all about inflation. Kiwi inflation has fallen at pace from a 7.3% peak to 4%. We always knew that leg of the descent would be the easiest. A rapid deceleration in imported inflation has done most of the hard yards. It is the path back to 2% that is laden with frustrations. Home-grown inflation is proving persistent which is problematic. Rents, insurance costs, and council rates are all moving in the wrong direction. A slightly stimulatory fiscal pulse, in the near-term, isn’t helping either.

It will be a slower return to 2% from here. But aggressive tightening from the RBNZ is working. Current and expected weakness in the economy should quell domestic inflation pressures. The labour market is already responding as demand indicators soften. The unemployment rate has lifted off its lows, and we expect it to exceed 5% by the middle of next year. Wage growth is moving south and will ensure a sustainable return to target. We still forecast inflation falling back within the RBNZ’s 1-3% target band by the end of the year. It’s been a long time coming - three years above the target band, to be exact.

Where does this leave monetary policy? For now, the RBNZ are in a holding pattern. There’s no need for further tightening. The RBNZ’s heavy hand has hurt households and halted business investment. But it is too early to cut interest rates. Inflation remains outside the target band. And interest rates will remain restrictive for now. But we think the RBNZ will be able to ease policy earlier than they currently expect (second half of 2025). If the economy evolves as we expect, we forecast the first rate cut to come in November. The risks, however, are tilted toward a delayed kick-off. Regardless, we are confident that the next move in rates is down. We may be wrong on timing, but it’s the direction and magnitude of policy moves that’s important.

Rate cuts will be a breath of fresh air in a rather deflated economy. The housing market is also in need of rate relief. House prices have not performed as strongly as we had expected. Since the trough, prices are up just 2.3%. The expected pivot in monetary policy and tweaks to investor tax policy, should bolster demand. Rental yields are also strengthening, with rising rents and soft house prices. And investors should be enticed back to market. However, it is more a story for 2025. We’ve pushed out our forecast lift in house prices. It is not until next year that we see house price gains of around 5-6%.

2024 may be another lacklustre year for growth, but it’s always darkest before the dawn. And the good news is, dawn is approaching. We see the economic outlook improving into next year. Because 2025 will be the year of significant rate cuts.

We are privileged to meet many of Kiwibank’s business banking clients. And the anecdotes and insights we gain are invaluable. One client summed up our current situation perfectly: “We must survive until 25”. It’s a white-knuckle ride for many, but next year should be a better year. And it’s at the hands of the RBNZ.

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