Forecasts weaker growth and higher unemployment
Westpac has updated its official cash rate (OCR) forecast after economic activity dipped more sharply than previously expected in the June quarter of 2024.
Headlining the release of Westpac’s August 2024 Economic Overview released today, the major bank now expects the OCR to be cut to 5.25% in the Reserve Bank of New Zealand’s (RBNZ) October meeting.
“We continue to expect a further 25-basis-point cut in November, leaving the OCR at 5% at year end,” said Westpac chief economist Kelly Eckhold (pictured above).
“Our longer-term forecast for the OCR is unchanged, with the OCR to fall to 4.5% at the May 2025 Monetary Policy Statement and for it to reach our current estimate of the terminal rate of 3.75% in early 2026.”
Hard yards: Living in NZ’s rolling maul recession
For almost two years, the New Zealand economy has been in a "rolling maul” recession, according to Eckhold – where one quarter of flat or slightly negative growth has merged seamlessly into another.
The economist said this has been driven deliberately by a Reserve Bank aiming to bring high sticky inflation back to target.
“Some hard yards have been covered in the last three months,” Eckhold said. “Increased pessimism among households and businesses about when rate relief might come, combined with hawkish RBNZ rhetoric has prompted more rapid adjustment.”
Eckhold tempered the forecast with a caveat: “The pace and extent of subsequent policy easing will depend on how quickly inflation pressures fall to levels more consistent with the 2% target midpoint”.
Despite numerous economic indicators trending downward, domestic inflation has remained a persistent thorn in the side, thwarting the Reserve Bank of New Zealand's efforts to cut the cash rate."
Eckhold said this metric still remains “uncomfortably high”, and this will continue to worry the RBNZ.
However, with New Zealanders finding themselves with a “noticeably weaker” economy and labour market, Eckhold said it looks likely that inflation will be pushed towards 2% given time.
Unemployment to rise
In terms of the justification of the waning economy, Westpac pointed to 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 said. “Importantly, we now also see definitive signs that the labour market is adjusting more quickly to the weak growth profile that has been in place for some time.”
Consequently, the major bank now expects 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.
“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 restriction,” Eckhold said.
Equally however, Westpac said it doesn’t expect the RBNZ to panic or embark on a more sudden easing path.
New Zealand continues to see core inflation measures falling relatively slowly – albeit more surely – in the year ahead.
Population growth is also likely to slow as migration inflows fall off sharply due to fewer opportunities available in the NZ labour market.
These developments now give the RBNZ room to consider tempering restriction, according to Eckhold.
“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,” he said.
“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.”
2025 and onwards
With inflation now just a touch above the top of the range and the lowest it has been in three years, the finish line now looks tantalisingly close.
Westpac said it's likely to remain tough for businesses and households for the rest of the year but improvement should be evident as OCR cuts, now expected to begin four months earlier than previously thought, hit the bloodstream and give some relief.
“We don't expect growth in 2025 to be stellar – the global growth environment remains subdued and fiscal policy increasingly restrictive,” Eckhold said. “But lower rates here and abroad will support better times ahead.”
“Firmer commodity prices will be a welcome relief for farmers. Inflation still has a way to fall to 2% – hence we don't see the RBNZ cutting either fast or deep. But by early 2026 rates should be close to neutral levels.
“The pace at which we get there will depend on how rapidly inflation approaches the target midpoint over coming quarters. Almost there .... finally.”
