WhentheOnlyCertaintyisUncertainty
New Zealand’s economic story is reasonably easy. With inflation easing, interest rates are coming down, and that lays the deposit on growth and housing market activity lifting in 2025 and 2026.
Growth is the backbone of any economy and housing market, and we are on an improvement trajectory.
Onward and upward
An economic rebound is underway following a recession in 2024 and a large decline in gross domestic product, and an especially large decline in gross domestic product per capita which is population adjusted growth.
Forward activity indicators such as the ANZ Business Outlook Survey and New Zealand Quarterly Survey of Business Opinion point to an inflection point for the economy. Housing market activity is picking up as are auction clearing rates. As time goes on, lower interest rates and higher export earnings are expected to support economic growth.
House prices are expected to rise 4-10 percent, following declines in 2023 and early 2024. The market is now stabilising and showing signs of improvement.
We want a quality and enduring upswing though, not a flash in the pan one. That will require an improvement in productivity. Look no further than the roading network as an example of productivity inhibitors.
When the only certainty is uncertainty
A key variable shaping the outlook is uncertainty. It’s beyond our control. There are positives and negatives when it comes to what uncertainty means. When uncertainty is high, caution can prevail.
New Zealand needs to appreciate the wider global context as this is driving a lot of the uncertainty.
Uncertainty was mentioned 56 times in the RBNZ’s February Monetary Statement, compared with 16 times in the November Monetary Policy Statement. Interest rates got 48 mentions. A lot centred around trade and policy uncertainty and the global channel not the local one. The new president in the United States has come to do deals, and weaponised trade policy as a leverage point.
The RBNZ noted that “Global economic uncertainty has risen significantly since November, following recent trade policy announcements by the United States. In the near term, we expect that heightened economic uncertainty will constrain business investment amongst our trading partners and in New Zealand.”
New Zealand is the two-bit player at the international roulette table
New Zealand is not disconnected from the rest of the world. from Here are some key channels to think about.
When we think about the world, the main focus is typically on global growth and what it means for commodity prices which represents somewhat of a backbone of the rural economy in particular. Or how Middle East geopolitics are impacting oil prices.
The International Monetary Fund’s (IMF) projects global growth of 3.3 percent both in 2025 and 2026, which is below the historical (2000–19) average of 3.7 percent. The forecast for 2025 is broadly unchanged from that in the October 2024 World Economic Outlook (WEO), primarily due to upward revision in the US, which has showed resilience, offsetting downward revisions in other major economies. The overall picture, however, hides divergent paths across economies and what the IMF note is a “precarious global growth profile”.
Oil prices have risen and fallen, courtesy of shifting global demand but also geopolitical tension. Despite global growth being below trend, the ANZ NZD Commodity price index for January hit a new all-time high. World prices are up 15% in the past year, but NZD prices have increased 25%.
New Zealand has reconnected with the rest of the world with New Zealand tourism departures around pre-Covid levels. Inbound tourism is a big part of the economy. Inbound tourism numbers are at 85 percent of pre-Covid levels. We have some work to do enticing people back down-under.
China is our largest trading partner, and the US is second. We play in both camps and tension between the two is not helpful. We also need to keep a close eye on the adjustment taking place in China’s property market with real house prices falling almost 10% in the past year.
The world is fragmenting
Populism is rife. Last year, the Chief Economist of the International Monetary Fund referred to dissatisfied population’s, with the trend for world growth slowing, the emergence of populism, population ageing in many countries, rising pressure on government fiscal positions, which leaves limited resources to tackle key issues such as climate change and other challenges or improving policy.
We saw numerous documents released in 2023 such as the Ministry of Foreign Affairs Strategic Foreign Policy Assessment, “Navigating a Shifting World”, which made it clear the world was shifting and New Zealand needed to shift too. Where New Zealand is shifting too is still not clear or how we are going to double exports in an uncertain world with a lot of tension between the US and China.
New Zealand continues to see strong, though easing, migration inflows. Provisional net migration estimates for the December 2024 year compared with the December 2023 year were arrivals of 155,800, departures of 128,700, resulting in an annual net migration gain of 27,100. The gain was made up of 74,200 non-New Zealand citizens and a net migration loss of 47,100 New Zealand citizens. Better growth prospects, and affordable housing locally would encourage those New Zealand citizens to stay.
Security is now also an important consideration when it comes to trade. The US, and associated trade partners are restricting China’s access to certain technology. Security in food (which play into New Zealand’s strength), energy and technology, as essentials, are paramount. The US president is threatening countries with tariffs. That will not be good for global growth or inflation. Security comes at a cost, and the threat of tariffs is now being used as a weapon.
Inflation stickiness is impacting the NZD and longer-term interest rates
Inflation is a global phenomenon, not just a local one. As global inflation has retreated, central banks around the globe have been lowering interest rates. The United States Federal Reserve, European Central Bank, Bank of England and Reserve Bank of Australia have all been lowering interest rates, just like the RBNZ has.
However, some countries, such as the United States (US) has seen inflation progress stall. With that comes an interest rates cost: they need to be higher for longer. This has rippled around the globe and seen longer-term bond yields remain higher, which impacts longer-term borrowing costs here. The RBNZ controls and influences short-term borrowing costs via changing the Official Cash Rate (OCR), but longer-term borrowing and interest rates are more influenced by offshore.
Interest rate curves (the gap between a one-year rate and a 10-year rate) are taking on more traditional shapes. Investors expect to receive more for a holding a 10-year bond over a short-term one because there is uncertainty over things like growth, inflation, and government borrowing. We call this the term premium. This is why longer-term borrowing rates tend to be higher than short-term ones.
With the RBNZ cutting the OCR in response to a weak economy and easing inflation, and the US Federal Reserve on hold, the New Zealand dollar has fallen below 0.60. That is good for exporters and the rural sector will be important source of growth in late 2025 and 2026 but a lower currency adds to costs and inflation. An overseas holiday costs New Zealanders more but a foreigners holiday here costs less.
A lower NZD/USD also makes New Zealand cheaper to invest in. We can expect some global interest in New Zealand, particularly if the government makes moves tidying up the rules around overseas investment. Overseas investment is an area we need to see improvement. It is not just about the money flowing in, but the access to new ideas, markets, distribution networks and technology.
A two-horse election race
Locally, we might now start to see some election uncertainty. The current government is showing signs of losing the initiative. The Labour party was viewed as being best placed to handle 5 of the top 10 issues and 9 of the top 20 in the October 2024 edition of the IPSOS Issues Monitor. That’s signalling we are now in a two-horse election race.
The National party was viewed as best placed to handle just three of the top 10.The Greens climate change, and housing was split between Labour and National.
That was a big change from 2023, when National was viewed as best to handle 8 of the top 10 issues.
Cue a shift in polling sentiment, which we have now seen in the latest three polls. Economic direction could change.
Perhaps the only certainty at present is uncertainty, both locally and globally.
There is a positive side to that. You quickly work out who is any good, and of substance. Weak players get exposed in volatile times. The performance of many firms listed on the NZX has not been great.
The 1990’s and 2000s was characterised at the era of the “great moderation”. We saw good growth, certainty and low inflation. The 2020’s looks different. Life will go on, just at a different pace and with more volatility. Good players will still prosper.
While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. The content does not constitute advice.
