Westpac has forecast a tough grind this winter with inflation and unemployment growing, impacting households and businesses alike.
Westpac Chief Economist Kelly Eckhold commented, “Households and businesses will feel uncomfortable this year. Growth is not at disastrous levels but is weak, and the labour market will do a greater share of the required adjustment,” on the release of the bank’s May 2024 Economic Overview.
“We continue to see low economic growth at just 0.7 percent this year, an unemployment rate rising to 5.4 percent by mid-2025 and slowing wage growth as the economy continues its much-needed economic rebalancing.
The review outlines some key risks: including the pace and extent of labour market cooling, the persistence of domestic inflation and elevated geopolitical risks. These all imply an uncertain path ahead for the economy and financial markets.
Interest rates and inflation
Past interest rates are now having their peak effect meaning a better inflation forecast for 2025.
“Further falls in headline inflation are expected, and inflation should be just below 3 percent in late 2024. However lower non-tradable inflation is required to sustainably drive inflation to 2%.
“We think the RBNZ will be content with almost 2%’ inflation in 2025. Monetary policy will force New Zealand to do the hard yards in 2024 but provide modest easing in 2025.”
Households and businesses
House prices will increase faster than inflation due to population growth, rental demand, and new investors entering the market.
“Household debt is likely to remain manageable, even with the labour market weakening.
“Businesses across the country have highlighted increasingly tough trading conditions, including pressures on margins.”
The labour market
The labour market is expected to continue to weaken through 2024 into 2025. “The evolution of wages and business margins will be critical in determining inflation and interest rates.”
External and primary sectors
“Export volumes remain constrained by sub-par trading partner demand and environmental considerations, but primary sector earnings are set to modestly improve this year, supported by a rise in global prices and a recovery in local production.”
Housing market
“House price growth is expected to pick up through the back half of the year, with prices set to rise around 6% in 2024 and 7% in 2025,” Kelly said.
“Prices are being restrained by high interest rates and below trend growth but supported by strong population growth and associated rental demand”.
Fiscal policy
“The fiscal outlook is challenging with a prolonged tight fiscal stance required to return the books to surplus at a time when rapid population growth is lifting the demand for services.
“Our forecasts imply a much larger borrowing programme than depicted in the HYEFU.”
“A lower nominal tax base means lower tax revenues and strong population growth will make it hard for the Government to constrain spending beyond the next couple of years”.
SPONSORED
