Westpac Economic Overview, October 2024 – Back In The Band!

25 October

Westpac has just released its latest Economic Overview, detailing the potential path ahead for the New Zealand economy and what it means for businesses and consumers.

Overall outlook

“Recent information suggests that economic activity has remained subdued since our last update,” Westpac Chief Economist Kelly Eckhold commented on the release of Westpac’s October 2024 Economic Overview. “However, with inflation now comfortably back inside the 1-3% target range, and monetary policy settings moving back towards a neutral stance, we expect the economy to begin to strengthen over coming quarters.”

“The ultimate path of interest rates will depend on how the economy responds to easier financial conditions and how quickly remaining inflation pressures fall to levels more consistent with the sustained achievement of the 2% target midpoint,” Mr Eckhold cautioned.

Activity

“We estimate that the economy contracted modestly in the September quarter. However, financial conditions have eased significantly in recent months and fiscal measures are now supporting household incomes. We expect that activity will expand modestly in the current quarter,” Mr Eckhold said.

Looking ahead, Mr Eckhold said: “The return of monetary policy settings to broadly neutral levels should help lift annual growth to a little over 2% next year and close to 3% in 2026.” Mr Eckhold noted that “the economy’s productive potential will be constrained by slower population growth, with net migrant inflows likely to fall temporarily towards zero next year.”

Interest rates and inflation

Mr Eckhold said: “Weakness in prices for imported goods played the key role in driving annual headline CPI inflation down to 2.2% in the September quarter. Non-tradable inflation remains elevated and needs to decline further if the RBNZ is to keep overall inflation close to the 2% target midpoint over the medium term. This will likely require a further moderation of wage growth over coming quarters”.

Mr Eckhold continued, “While the composition of inflation remains somewhat troublesome, headline inflation close to 2% will help anchor inflation expectations. Therefore, we think that the RBNZ can afford to move policy back towards a broadly neutral stance. We expect a further 50bp cut in the OCR next month. Thereafter, we expect the pace of easing to slow, allowing the RBNZ more time to assess the impact of the easier financial conditions that are being delivered. We expect the OCR to reach a low-point of 3.5% next year – slightly below our estimate of neutral”.

Households and businesses

Commenting on the household sector, Mr Eckhold said: “In recent months there have been some welcome signs that the downtrend in consumer spending may have halted, possibly helped by personal tax cuts. Even so, in the near term, conditions are likely to remain tough in the retail and hospitality sectors, with concerns about job security likely to weigh on discretionary spending for a while yet.”

Looking further ahead, Mr Eckhold noted that “New Zealand households are well placed to benefit from further RBNZ OCR cuts as a high proportion of mortgages are coming up for repricing in the next six months. That should allow growth in spending to strengthen over the course of next year.”

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

Housing market outlook

“We expect house prices will rise by around 8% next year and by about 5% in 2026,” Mr Eckhold commented. “The housing market underperformed our expectations over the past year, with prices moving sideways amidst low sales and plentiful listings. However, with mortgage rates now declining, indicators point to a lift in buyer interest, and we expect confidence will return to the market. That strengthening in the housing market should also support a recovery in residential construction activity from the second half of next year.”

The labour market

Mr Eckhold noted that the labour market was expected to continue to weaken over the next six months or so. “We estimate that the unemployment rate increased to around 5% in the September quarter and that it will likely continue moving higher to a peak of around 5½% by the middle of next year. Thereafter, growth in activity should be sufficient to at first stabilise the unemployment rate, followed by a downtrend in 2026 as the recovery strengthens.”

Mr Eckhold continued: “In the near term, weaker conditions in the labour market mean that net migration inflows are likely to slow further, leading to much slower growth in the labour force than seen in recent times.”

External and primary sector outlook

Mr Eckhold noted “A recovery in the horticulture sector has played a key role in lifting exports this year, and a promising start to the dairy season bodes well for exports over coming months. More generally, prospects remain constrained by slightly sub-par trading partner demand and environmental considerations impacting the primary sector. Even so, primary sector earnings are set to improve over the coming year, supported by a rise in agricultural commodity prices. This will be a boon to rural communities, in particular.”

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 slightly lower tax take than projected in Budget 2024. Combined with upward pressures on spending that may prove 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 continue to cloud the outlook

Mr Eckhold noted “Households, businesses and financial markets need to keep an open mind about how the economy will play out over coming quarters. The upcoming US elections could have implications for the economic outlook, interest rates and the exchange rate. More generally, geopolitical risks remain elevated. There are also uncertainties about how the economy and inflation will respond to the forecast easing of financial conditions.”

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