Heightened caution weighs on growth outlook - Quarterly Predictions, June 2024

May 28, 2024

New Zealand Institute of Economic Research (Inc)
Media Release, 28 May 2024

For immediate release

NZIER Quarterly Predictions, June 2024

Households and businesses are feeling more cautious in the face of higher interest rates and uncertainty about the new Government’s priorities regarding spending and public sector cutbacks. Heightened uncertainty about the outlook has unwound the post-election rebound in confidence and activity towards the end of 2023. Soft demand is now the dominant feature of the New Zealand economy, in contrast to the severe supply constraints which had been the key concern for firms over the COVID-19 pandemic. 

Despite strong migration-led population growth, we forecast weak annual average economic growth of around 1 percent for the coming year. On a per capita basis, economic activity is contracting as households and businesses reduce spending and investment, given the headwinds they face. In particular, many households have pared back discretionary spending in the face of significantly higher mortgage repayments as they roll off historically low fixed-term mortgage rates. We expect that as households continue to reprice onto higher mortgage rates over the coming year economic activity will slow further. 

Inflation easing, but with some upside risk  

Although inflation has continued to ease, there are pockets of domestic inflation pressures. The continued high level of non-tradable inflation suggests there are still capacity pressures in parts of the New Zealand economy. In particular, housing-related costs such as rents and the price of services have risen more quickly than inflation. 

We continue to expect an OCR cut from around mid-2025

The RBNZ surprised markets with its latest May Monetary Policy Statement, which indicated a later start to the monetary policy easing cycle than previously and discussed the potential for an OCR increase given the persistence of high non-tradable inflation. Before the RBNZ’s surprisingly hawkish statement, there was widespread market speculation of a rate cut this year. 

We do not expect the RBNZ to hike the OCR in this cycle, given its communications earlier this year, which indicated the threshold for doing so would be very high. Instead, we expect the central bank will remain cautious as to when it commences its easing cycle. We continue to forecast the RBNZ to cut the OCR from around mid-2025 once it is confident it has reined in inflation sufficiently to keep it around the 2 percent inflation target mid-point over the coming year. We see keeping the OCR on hold until then as the most sensible course of action, given the deteriorating growth outlook and the upside risks to inflation. 

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members. 

For further information, please contact: 
Christina Leung, Principal Economist & Head of Membership Services 
christina.leung@nzier.org.nz, 021 992 985