BNZ senior economist Doug Steel says the economic weakness supports further cuts by the Reserve Bank. Photo: RNZ
- Scratch 2024 as a write off economically
- Economy probably contracted 0.1 percent this year
- ANZ says 2025 may be faster and more furious than expected
- Interest rate cuts to spark activity, but Reserve Bank may halt at 3.5 percent cash rate
This year is set to be a write off for the economy, but the prospects for 2025 and beyond have a rosy glow about them.
Two closely followed industry reports covering the manufacturing (PMI) and services (PSI) sectors remained deeply in contraction territory, where they have been for much of the year.
BNZ senior economist Doug Steel said there were flickers of improvement in both sectors, but putting the two indices together showed an economy that has been going backwards.
"Our economic forecasts are for GDP (gross domestic product) to contract again in Q3 before starting to gradually recover. The PCI (composite index) suggests some downside risk to our forecasts."
He said the economic weakness supported further interest rate cuts by the Reserve Bank (RBNZ).
The ANZ's latest economic outlook concurred that 2024 would be negative, with a forecast of a 0.1 percent fall in growth.
But it said the economy was on the cusp of better times.
"While economic conditions remain challenging here and now, and in fact we have revised our near-term GDP forecast marginally lower, the RBNZ's signalled preference to return to a neutral policy stance quickly has laid the path for a faster recovery from the second half of 2025."
Next year was still not likely to be a standout for growth, with the ANZ expecting annual growth of 1.1 percent, before gathering pace in 2026 to 3 percent.
Lower rates, higher growth
The catalyst for the improvement is expected to be the RBNZ moving rapidly to cut the official cash rate to 3.5 percent by the middle of next year, and then sit steady.
"Lower interest rates, house price falls petering out, easier credit conditions, a softish New Zealand dollar and more have all contributed to easing financial conditions that suggest better times ahead," the ANZ report said.
"The upgrade to activity reflects a stronger recovery in domestic demand, with the faster normalisation in policy settings driving a cyclical recovery in investment as firms make up for delayed investment activity, while consumption rises as debt-servicing costs fall and real incomes continue to recover from the erosion caused by high inflation."
The report said if the economy recovery was slower than expected then the RBNZ "will not hesitate to take the OCR into stimulatory territory".
Bumps and Trump
The ANZ said the outlook was not without challenges with the labour market set to keep weakening, sending the unemployment rate to a peak of 5.5 percent by the middle of 2025 before it falls below 5 percent the year after.
And the policies of Donald Trump's new administration are also expected to have implications for the global economy, particularly in trade.
"Broadly speaking, it's likely that the indirect impacts of increased protectionism in the US - such as weaker demand outside of the US - will have a larger impact on New Zealand than the direct impacts," the report said.
