GDP growth forecast upgraded amid high net migration and confidence surge
New Zealand’s economic prospects are on the rise, with Infometrics revising its GDP growth forecast to an average of 2%pa for 2024 and 2025, a significant increase from the previous 1.2%pa estimate.
The positive outlook is fueled by sustained high net migration, expected to remain near record levels, contributing to increased consumer spending and bolstering business confidence.
Gareth Kiernan (pictured above), Infometrics chief forecaster, highlighted the positive impact on business investment, despite a milder construction downturn.
“Aggregate household spending will be boosted by having a larger population. Although net migration is set to ease from its late-2023 peak of 132,300pa, we are still forecasting an inflow of almost 80,000pa at the end of this year,” Kiernan said in a media release.
“Additional people mean additional spending, and these more buoyant demand conditions for businesses will encourage more investment later this year and into 2025, while the downturn in construction activity will be less marked because the larger population also needs to be housed.”
High net migration, a crucial element in alleviating labour market pressures, has facilitated recovery from earlier workforce shortages, particularly during the critical period of 2021 and 2022 when borders were closed.
As the unemployment rate shows an upward trend, the growth in labour costs is expected to decelerate in 2024, consequently mitigating a significant contributor to sustained domestic inflation. This, coupled with evident indications of weakened global price pressures, is anticipated to bring headline inflation back within the Reserve Bank’s target band of 1-3%pa in the second half of this year.
“We now expect the Reserve Bank to cut the official cash rate from August this year, three months earlier than we were previously forecasting” Kiernan said. “Interest rate cuts will be gradual, taking the OCR to 4% by the end of 2025, but the easing will help foster more positive trends in spending and investment activity.”
Despite various upside inflationary risks, such as escalating international shipping costs due to the Red Sea conflict and the impact of high net migration on the housing market and infrastructure networks, Infometrics predicts that house price inflation will stay below 5%pa this year. The imposition of relatively high mortgage rates and the anticipated introduction of debt-to-income restrictions are expected to curtail the potential for a substantial increase in house prices.
“The soft Chinese economy also poses ongoing concerns for agriculturally focused regions throughout the next 18 months,” Kiernan said. “Weak export prices will weigh on revenue, creating a divergence in economic activity in the urban areas benefitting from high net migration and the provincial areas exposed to China’s slower economy. The soft landing currently being experienced by the economy will not be evenly spread across New Zealand.”
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