ASB reviews the major economic themes that shaped 2024
As 2024 nears its end, ASB Senior Economist Mark Smith (pictured above) recaps the year’s economic risks and outcomes while identifying emerging trends for 2025.
From pessimism to cautious optimism in 2024
Despite significant challenges, cautious optimism is replacing the pessimism seen at the year’s start.
The five primary risks for 2024 included inflation persistence, fiscal discipline, population growth, the housing market, and geopolitical tensions.
Smith said that while inflation eased, domestic price pressures remain sticky. Meanwhile, slowing immigration, fiscal strains, and a subdued housing market underscored economic volatility.
On the geopolitical front, a Republican sweep in the 2024 US elections raises questions about trade policy and global economic stability, especially under a second Trump administration.
What to watch in 2025: Key trends
NZ interest rates: How low will they go?
Interest rates are on a downward path after years of volatility, with the expected to deliver another 100 basis points of cuts in 2025. This will bring the OCR down to 3.25%, well within the “neutral” range of 2.75-3.75%.
Lower mortgage rates, anticipated to drop to 5-6%, will provide relief for households, injecting cash into the economy. However, Smith warned that persistent inflation or unexpected global shocks could see the RBNZ adjust its easing trajectory.
Return to low and stable inflation
After years of inflationary turbulence, New Zealand’s Consumer Price Index (CPI) is expected to stabilise near 2.6% by the end of 2025, ASB said.
While tradable inflation will likely return, sticky domestic costs – such as services, local authority rates, and insurance – may slow progress.
Lower inflation will ease pressures on household budgets, reducing the weekly cost of living increases to below $10 – a significant drop from the COVID-era spikes of more than $100 per week.
Consumer spending and housing market rebound
Following a sluggish 2024, both consumer spending and the housing market are poised for recovery in 2025. Lower interest rates and moderating inflation will alleviate financial strain, encouraging spending in retail, services, and construction.
Smith predicts house prices will rise between 5-10%, though it will take until 2026 to surpass previous record peaks. Regional differences will persist, and affordability challenges remain a barrier for many.
Economic rebalancing: Boosting export growth
New Zealand’s commodity export sector has been a bright spot in 2024, supported by higher global demand, favorable conditions, and a weaker NZ dollar. Dairy sector incomes alone are forecast to increase by $4 billion next season.
While export opportunities are strong, Smith emphasised the need to improve productivity and export intensity. New Zealand currently lags behind OECD averages, with export volumes constrained by labour, land, and capital limits.
Geopolitical risks: Trump 2.0 and trade concerns
The re-election of Donald Trump as US President raises significant questions for global trade and New Zealand’s export markets.
Smith warned that a return to “America First” policies, including new tariffs, could disrupt international trade flows and fuel market volatility.
“The trade policies are of most concern for a small open economy like NZ. NZ exporters will need to be nimble, particularly for those selling into US markets,” Smith said.
While a trade war could bring uncertainty, Smith pointed out potential upsides, such as the NZ dollar acting as a shock absorber and increased Chinese stimulus supporting demand for New Zealand exports.
2025 outlook: Challenges and opportunities
Looking ahead, Smith underscored the need for flexibility and forward-thinking policies to navigate global and domestic economic uncertainties. From easing inflation and lower interest rates to trade disruptions and housing market shifts, 2025 promises to be a year of transition for New Zealand’s economy.
“The lesson for 2025 will be to expect the unexpected,” Smith said, pointing to the likelihood of continued economic and financial market volatility.
For more details, read the full ASB report here.
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