Westpac economists have changed their view and now see the Reserve Bank (RBNZ) cutting the Official Cash Rate (OCR) in both October and November.
In addition the economists think GDP could have sunk by as much as 0.6% in the June quarter 2024 and they reckon that unemployment is set to go higher and faster than they earlier though, reaching 5.6% next year (it was 4.3% as of the March quarter 2024).
In a brief preview of their new forthcoming economic forecasts, Westpac's chief economist Kelly Eckhold says recent data suggest that economic activity dipped "more sharply than previously expected" in the June quarter of 2024.
"This is evident in a raft of higher frequency indicators such as business and consumer confidence and the Purchasing Manager Indices. We think that GDP fell 0.6% in the June quarter. Given this weak performance, it looks likely that growth will continue to be subdued in the second half of 2024," Eckhold says.
GDP grew by 0.2% in the March quarter. But this followed on from economic contractions in four out of the previous five quarters. In terms of GDP per capita - remembering that the country has had a big recent inflow of migrants - this has contracted by more in recent times than during the aftermath of the Global Financial Crisis.
If the Westpac economists are correct with their pick, the 0.6% contraction in the June quarter would be the biggest we've seen in the current downturn, with the previous biggest being 0.5% in the December 2022 quarter.
Eckhold says that the Westpac economists are now seeing "definitive signs" that the labour market is adjusting more quickly to the "weak growth profile" that has been in place for some time.
"We now expect the unemployment rate to move more quickly to a higher peak of 5.6% in 2025. Recent data on filled jobs show this weaker trend has been firmly in place since early April and picked up in May and June."
Labour market data, including the June quarter unemployment figures, are being released on Wednesday (August 7), with the RBNZ having forecast a rise from 4.3% to 4.6%, while most major bank economists (including those at Westpac) expect 4.7%.
Eckhold says these weaker growth and labour market trends and expectations will give the RBNZ "comfort" that the path of inflation towards 2% is more assured than had been the case earlier in 2024.
Hence the expectation for an earlier cut to the OCR, which has been on 5.5% since May 2024. The Westpac economists had earlier picked a November start date for cuts, but now think the RBNZ will cut in both October and November.
The financial markets are certainly also expecting cuts to the OCR sooner rather than later. Markets have currently priced in a nearly 75% chance of a cut as soon as at the next OCR review on August 14, while a cut in October is more than fully priced in and more than three 25-basis-point cuts are priced in by November.
The RBNZ is charged with getting inflation into a 1% to 3% range, with an explicit target of 2%. Inflation has been outside the target range for three years. However, as at the June quarter, the annual rate of inflation as measured by the Consumers Price Index (CPI) was 3.3% down from 4.0% in the March quarter.
Eckhold says that combined with recent softer-than- expected headline inflation outcomes – which show that the 1-3% target range will likely finally be reached in the September quarter – "the RBNZ will have confidence to begin tempering the degree of [OCR] restriction".
"We don’t see the RBNZ panicking and embarking on a more sudden or protracted easing path," Eckhold says.
"Domestic inflation remains uncomfortably high, and this will continue to worry the RBNZ. We continue to see core inflation measures falling relatively slowly – albeit more surely – in the year ahead. So, while there is certainly a case for reducing the degree of restriction, we don’t see the RBNZ being keen on getting too far ahead of itself and moving quickly toward or into easy territory. Rather, we expect the RBNZ to take a measured and data dependent approach. The future path of the OCR will be determined by the data, and not the calendar."
The Westpac economists longer-term forecast for the OCR is unchanged, with the OCR to fall to 4.5% as at May 2025 and for it to reach "our current estimate of the terminal rate of 3.75% in early 2026", Eckhold says.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.