The Australian-based economist who once caused something of a sensation by labelling the New Zealand economy as a 'rockstar' is expecting a "strong pick up" in economic growth here this year.
Paul Bloxham, HSBC's chief economist for Australia and New Zealand and economist Jamie Culling have done a detailed research note on the prospects for the NZ economy this year and say they expect our GDP will have shrunk by 0.5% across all of 2024, but it will rebound to 1.8% growth in 2025 and 2.5% growth in 2026.
The economists see the growth coming as the Reserve Bank (RBNZ) starts to take the handbrake off interest rates. Cuts to the Official Cash Rate began in August 2024, dropping it from 5.5% to 4.25% by the end of 2024 and with the RBNZ widely expected to further reduce it to 3.75% at the first review for the year on February 19.
The RBNZ itself is currently indicating the OCR may be around 3.5% by the end of 2025 - but the HSBC economists expect much more aggressive cuts and see the OCR being 3.00% by the third quarter of this year.
They expect these cuts to "pump prime a strong growth upswing".
"There are already some early signs of growth picking up. Business and consumer surveys have both improved, while card spending figures have also risen. The housing market appears to be stabilising, as mortgage lending has increased," Bloxham and Culling say.
"As households respond to lower interest rates, we expect a recovery in household spending, particularly from around the middle of 2025."
They say while weakness in the jobs market is likely to still weigh on activity in the near-term, they see the unemployment rate peaking and starting to fall later in 2025.
The influence of lower mortgage rates should provide some broad-based support for housing demand in 2025, the economists say.
"In short, New Zealand’s outlook in 2025 is a good deal more positive than in recent years."
However, they say the longer-term outlook for the country is more challenged by weak productivity.
"Although this is not a new challenge, productivity outcomes have been notably subdued post-pandemic."
The economists say policymakers ought to have a greater focus on ‘growing the economic pie’ and this requires a bold reform agenda and private sector support.
"We see that reforms could be spread across a number of areas. Reducing regulatory obstacles, improving competition, and attracting foreign investment, alongside targeted use of the public sector balance sheet, are among the ideas.
"A focus on improving New Zealand’s ‘growth engines’ would also help. We see agricultural and services exports as two key areas which can further support the economy."
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"A focus on improving New Zealand’s ‘growth engines’ would also help. We see agricultural and services exports as two key areas which can further support the economy."
Everyone should welcome a GDP increase due to an increase in exports, that is only good for our country.
I get that Trump's tariffs and strengthening of the USD will drive import inflation.
but NZ's main exposure to import inflation is oil and polymers, Trump's said he will bring oil prices down (which has already happened in the wake of his inauguration), this could potentially counter the weak NZD?
Trump has no practical control over lowering oil prices, but he can easily drive them up with tariffs and the potential retaliation - Canada is threatening to block off all of their energy exports to the US, which if it actually happens, will spike inflation in the US upwards.
The counter however, is not to lower oil prices, deal with the short to medium term struggle, diversify to other markets over time, watch the inflation rage in the USA and them continue to lose their global dominance as they have to print more to maintain their empire.
It is probably time we focus on the RBNZ's other functions now inflation has subsided.
So let's talk about financial stability. Can financial stability be maintained as the OCR falls towards NZ's neutral rate?
I'd argue that's a big NO with the current RBNZ settings.
That's because private debt in NZ is stretched and residential property 'investors' will stretch it further as they rush back into the market to secure their believed untaxed capital gains as houses 'double in value every 10 years'.
To me, financial stability as far as private debt is concerned would be best achieved by restricting both LVRs and DTIs, especially for residential property 'investors'.
Do we really want to do what we've done for the last 30 years, i.e. bid up house prices and call it 'economic growth'?
That's because private debt in NZ is stretched and residential property 'investors' will stretch it further as they rush back into the market to secure their believed untaxed capital gains as houses 'double in value every 10 years'.
Lol. Was just running the numbers on the next one. Will be nice to secure it before OCR drops shake out the sluggishness in housing markets currently.
So if the OCR has to be cut "much more aggressively" than the RBNZ is indicating, what is driving the positive GDP growth these economists are predicting?
"There are already some early signs of growth picking up. Business and consumer surveys have both improved, while card spending figures have also risen. The housing market appears to be stabilising, as mortgage lending has increased," Bloxham and Culling say.
Wouldn't this mean that the OCR track the RBNZ has indicated is about correct? If there is a situation where the OCR needs to be cut more than thought I wouldn't think that would be the case with a predicted 1.8% annual GDP growth for 2025 and 2.6% next year??
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