Westpac Economic Overview, August 2024 – Nearing The Finish Line.

Overall outlook

“Recent information suggests that economic activity has been tracking weaker than previously expected, which should help moderate domestic inflation pressures over time,” Westpac Chief Economist Kelly Eckhold commented on the release of Westpac’s August 2024 Economic Overview.

“With inflation likely to move back inside the 1-3% target range in the September quarter, we expect the RBNZ will begin tempering policy restriction at the October Review. The pace and extent of subsequent policy easing will depend on how quickly inflation pressures fall to levels more consistent with the 2% target midpoint,” Mr Eckhold cautioned.

Activity

“While the economy managed modest growth in the March quarter, activity appears to have declined significantly in the June quarter. As a result, we now think that economic activity will end this year little changed from a year earlier,” Mr Eckhold said.

“Less restrictive monetary policy conditions should help lift growth to around 2% next year. The economy’s productive potential will be weighed down by a slowdown in population growth, as the recent migration impulse fades.”

Interest rates and inflation

“Weakness in prices for imported goods means that annual headline CPI inflation should be comfortably below 3% in the September quarter. However, non-tradable inflation remains elevated and needs to decline markedly over the coming quarters to sustainably drive inflation close to 2%.”

“We think the RBNZ can soon afford to adopt a less restrictive policy stance. However, in common with other central banks, we expect the RBNZ will be reluctant to loosen monetary conditions too rapidly, at least until it gains greater confidence that domestic inflation pressures have been quelled.”

The labour market

Mr Eckhold noted that the labour market was expected to continue to weaken through 2024 into 2025. “Data suggests that demand for labour has been weakening this year and that the unemployment rate is likely to continue moving higher in coming quarters to a peak of around 5½% by the middle of next year.”

Mr Eckhold continued “Weaker conditions in the labour market mean that net migration is likely to slow sharply over the coming year, leading to much slower growth in the labour force than seen in recent times.”

Households and businesses

“Households spending is likely to remain subdued over the coming months,” commented Mr Eckhold. “Many New Zealanders are keeping their wallets firmly shut in the face of higher living costs and a weakening in the labour market. That signals some further tough conditions in the retail and hospitality sectors.”

“New Zealand households are better placed to benefit from any RBNZ OCR cuts as a high proportion of mortgages are coming up for repricing in the next six months” noted Mr Eckhold. “While it took a while for rate hikes in recent years to flow through to households, we can expect the cuts to hit the bloodstream much faster. That's good news for cash strapped households.”

“Businesses continue to highlight tough trading conditions, including pressure on margins. In the near-term, we expect a further reduction in businesses’ investment spending as firms respond to these pressures.”

External and primary sector outlook and risks

“While a recovery in the horticulture sector will lift exports this year, export growth more generally remains constrained by sub-par trading partner demand and environmental considerations impacting the primary sector. Primary sector earnings are set to improve modestly, however, supported by a rise in global agricultural commodity prices.”

Housing market outlook

“Reflecting the current malaise in the economy, we now expect little growth in house prices this year,” Mr Eckhold commented. “However, with mortgage rates now beginning to decline, we expect confidence will soon begin to return in the housing market. Consequently, we expect house prices to lift around 6% next year and by about 4½% in 2026.” 

Fiscal policy

“The fiscal outlook remains challenging with a prolonged tight fiscal stance required to return the books to surplus,” Mr Eckhold said.

“Our forecasts imply a lower tax take than projected in Budget 2024. Combined with upward pressures on spending that will be difficult to contain, we think a return to surplus is more likely in 2028/29 – a year later than the Treasury is forecasting at present.”

Significant uncertainties cloud the outlook.

Mr Eckhold noted that uncertainties about the pace and extent of labour market cooling, the persistence of domestic inflation and elevated geopolitical risks mean that households, businesses and financial markets need to keep an open mind about how the economy will play out over coming quarters. 

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