Construction sector faces continued decline
New Zealand’s construction sector saw another significant decline, with activity dropping by 3.2% in the September quarter, far exceeding the expected 0.3% fall.
This marks the fifth consecutive quarterly contraction, underlining the challenges facing the industry as lower house prices, high interest rates, and elevated construction costs persist.
Kiwibank economists Jarrod Kerr, Mary Jo Vergara, (pictured above, from left to right) and Sabrina Delgado (pictured right) noted that the construction sector’s weakness is being exacerbated by a downturn in housing demand and ongoing business downsizing.
“Building activity has recorded a fifth consecutive quarterly decline. And there were falls across both the residential and non-residential space,” the Kiwibank team said.
The current pullback in construction activity has led to job losses across the sector, with construction roles accounting for nearly a quarter of all job losses over the past year.
Looking forward, the Kiwibank economists expect interest rate reductions to spur recovery in the housing market next year.
Interest rates must fall to boost recovery
While the Reserve Bank (RBNZ) has held interest rates steady throughout 2024, Kiwibank believes further rate cuts are necessary to reignite demand and stabilise the economy.
Recent indicators, including sluggish GDP growth and declining building consents, highlight the strain on the sector.
“The outlook for construction is going to be determined by the recovery in the housing market,” the economists said. “And with interest rates falling now, we expect the housing market to make gains into next year.”
Offshore influences dominate market movements
Global economic events continue to impact local markets, with weaker-than-expected Australian GDP data adding downward pressure on Kiwi yields.
Kiwibank’s traders highlighted the influence of offshore movements, noting volatility in interest rates.
“Kiwi yields ground lower last week under the weight of offshore moves,” said Ross Weston, head of balance sheet at the Treasury. “The weaker Aussie GDP was the main catalyst, pushing rate cut expectations forward into 2025.”
In the US, mixed employment data strengthened expectations of a 25bp rate cut by the Federal Reserve at its next meeting. Meanwhile, markets await the upcoming US CPI report, expected to show a modest 0.3% rise in consumer prices, keeping core inflation stable at 3.3%.
Currency market reacts to global shifts
In the currency markets, the New Zealand dollar weakened against the US dollar, falling 1.5% last week to around 0.5830. Kiwibank’s Senior Dealer Hamish Wilkinson attributed the decline to US economic data and renewed strength in the USD.
“A mixed bag US employment print reaffirmed expectations of a 25bp rate cut… The NZDUSD now lines up a retest of the recent November low at 0.5797,” Wilkinson said.
He added that the Reserve Bank of Australia’s upcoming meeting will likely influence the NZD, as traders watch for dovish signals that could push rate cuts earlier into 2025.
Outlook: Data, rates, and economic recovery
Looking ahead, key economic events this week include:
- New Zealand’s GDP partial indicators, including manufacturing data and household spending figures
- The RBA policy decision, where rates are expected to hold at 4.35%, though weak GDP could soften the tone
- The US CPI report, which will set the tone for the Fed’s rate path
With construction activity continuing to contract and economic pressures mounting, the need for interest rate cuts remains critical.
Kiwibank’s team expects rate relief to provide the boost needed to stabilise New Zealand’s economy and housing market as 2025 approaches.
Read the Kiwibank insights in full here.
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