The First Step In A Tentative Recovery

14 March

• On Thursday we will see how the Kiwi economy ended 2024. And by our estimates, it’s looking like the economy will have taken its first step in its recovery.
• We’re expecting the economy lifted 0.3% over the December quarter, in line with the RBNZ’s forecasts. Greenshoots are emerging with an uplift across retailing, accommodation, and transport. But overall, the scorecard is still mixed with industries like construction, mining, and business services still doing it tough.
• The outlook is improving, with more rate relief on the way. We expect momentum to build as we approach a more neutral rate environment. However, growing global downside risks could pose a headwind for the Kiwi economy’s recovery.

Most of us have already moved on from 2024— and trust us, we’re eager to leave it behind too. Excluding Covid periods, 2024 saw the Kiwi economy experience its weakest six-month stretch since 1991. So yeah, it’s no wonder we’re ready to move on. But alas, there is one more data point to report on before we can finally wave goodbye to the year that was. On Thursday we’ll see how the Kiwi economy performed over the end of last year. And on the bright side, by our calculations, we ended the year on a better note. We expect activity across the Kiwi economy lifted 0.3% over Q4 – in line with the Reserve Bank’s forecast.

It's certainly an improvement from the prior two quarter’s hefty declines in activity of around 1%. But after such a fall, the rebound is rather muted and reflects the ongoing weakness in the economy. We expect the economy is still 1.4% smaller than it was in December 2023. But we’re acknowledging this as the first step in the economy’s recovery. We’ve had 175 bps of rate cuts since August last year. And more rate relief is on its way. With each cut the restrictiveness of the current environment eases. And over time, we expect this to translate into stronger economic activity.

We’re already seeing some green shoots. December’s 0.3% expansion in activity is likely to be driven by an increase across retailing and accommodation. As well as a sizable pick up across the transport group. And a rebound in the utilities space from last quarters chunky decline will also help. That said, the scorecard is still quite mixed with a number of industries still doing it tough. Construction continues to be a weak point in the economy off the back of still high building costs and a sluggish housing market. While business services have also lost their lustre in the face of waning demand.

It should be noted that there continues to be a great degree of uncertainty around New Zealand’s GDP numbers. Since COVID, the sharp fluctuations in activity during lockdowns, coupled with the temporary loss of tourism—a highly seasonal sector—have made it difficult to pinpoint the seasonal components of the data. As a result, revisions to historical prints have been common with each new release. And there is a strong chance that next week’s numbers may be revised (in either direction) in future updates. Stats NZ recently introduced a new method for seasonally adjusting the data, but whether the new method will prove effective is yet to be seen. We anticipate that there will still be a period of adjustments and refinements ahead. And as such, still expect to see a degree of volatility in the numbers.

It's these revisions and volatility in the GDP numbers that have seen the Reserve Bank pivot away from its focus on GDP to higher frequency data. Given that GDP data is inherently a lagging indicator, we would argue that higher-frequency data has always been more valuable for a more timely understanding of the economy. As a result, next week’s GDP numbers very well may carry less weight in shaping the RBNZ’s perspective. And besides, it’s always the outlook which matters most.

And the outlook is improving. Next week, we’re likely to see that the economy took its first step towards recovery at the end of last year. And with more rate relief on the horizon, we expect this recovery to continue. For now, with the cash rate still above neutral, demand and economic activity will remain slightly constrained in the short term. But looking ahead, as we move closer to a neutral rate environment, we anticipate momentum to grow. That said, growing downside risks to the global outlook do pose a potential headwind for the Kiwi economy’s recovery. And should the downside risks persist, then a move to a cash rate below 3% may be needed to get us back on track.

© Scoop Media