Tariffs, weak spending delay NZ's economic rebound
BNZ’s chief economist Mike Jones (pictured) sees signs the economy may be steadying after a mid-year wobble – but not without continued drag from weak investment and soft labour markets.
Markets shrug off tariff talk
Despite renewed US tariff headlines, markets remain optimistic.
“Indicators of global risk appetite remain healthy and global equity markets have blasted through record highs,” Jones said.
That’s buoyed confidence globally, and “consensus forecasts for global growth were even nudged up a touch this month, for both 2025 and 2026 (to 2.3%y/y and 2.4% respectively).”
Still, trade tensions continue to cast a shadow.
“The dragging uncertainty associated with US trade policy, while lower than previously, looks set to stick around, a negative impost on investment particularly,” Jones said.
Reserve Bank chief economist Paul Conway reinforced this concern, warning that “the imposition of tariffs… ripple effects impact the New Zealand economy.” The US’s latest 10% levy on NZ exports, effective August 1, could weigh on export volumes and put downward pressure on prices.
NZ investment may be warming up
BNZ sees emerging signs of revived business investment intentions, with help from rural cashflows and government support.
“Surveyed investment intentions have not only established a foothold at above average levels but have pushed on further in recent months,” Jones said.
Data supports this trend: “In June we saw plant and machinery imports up 13%y/y, imports of transport equipment rising 19%, and those for intermediate goods up 21%,” Jones said.
While patchy, he said these signs “help assuage some of our prior concerns sluggish business investment might be a dragging anchor for the broader recovery.”
Conway echoed this sentiment but flagged caution, citing widespread “wait and see” behaviour: “When businesses aren’t sure what’s coming, they hold off hiring and delay big investments.”
Economy finds its feet after May dip
High-frequency data from June show “a partial steadying from May’s surprise and unwelcome wobble.”
However, the recovery remains muted. “Two of the better monthly indicators we watch…continue to openly question the extent of growth uplift we’ve got on the board,” Jones said.
BNZ now expects a second-quarter GDP contraction of -0.2% q/q, with the Reserve Bank’s nowcast lower still at -0.3%.
Despite this, Jones remains cautiously optimistic: “We still think the mid-year activity air-pocket will pass.”
But labour market recovery may take longer.
“Our forecast peak in unemployment has been shunted out to 5.4% in the final quarter of the year. Wage growth should thus continue to slow through to the middle of next year,” Jones said.
Inflation pressure continues to ease
BNZ is seeing lower inflation risks ahead.
“Our updated forecasts have CPI inflation peaking at 2.9% y/y in the current (third) quarter,” Jones said.
Housing-related prices led the decline. “Construction costs fell outright in Q2 for the first time since 2011,” Jones said. Meanwhile, “annual inflation in property maintenance prices fell to 1.4%,” and household appliances posted deflation of -0.9%.
These CPI components comprise five of the top 10 most sensitive to interest rates, highlighting the role of monetary policy in cooling the economy.
Conway said headline inflation is likely to fall to around 2% by early 2026, with “spare capacity and easing core inflation reinforcing this outlook.”
Rents signal oversupply, but vacancies stabilising
Annual rent inflation remains firm at 3.2% y/y – but not for new tenancies.
“Rents for new tenancies…are now deflating at a (smoothed) annual rate of around 2%,” Jones said. “That’s around the weakest in the history of a series going back to the mid-90s.”
Oversupply is most evident in Auckland and Wellington. However, there’s a sign the market may be finding equilibrium. “Rental vacancy rates have tracked roughly sideways at 3.3% for the past two months,” Jones said.
RBNZ on track for August cut
Jones believes the economic backdrop supports a further easing in interest rates.
“The net of recent growth and inflation goings on…is sufficient in our view to reintroduce some gentle downward pressure,” he said.
“A 25bps cut in August is as close to fully priced as it gets,” and a follow-up in October is also possible.
BNZ continues to forecast a 2.75% low in the OCR cycle.
“At a high level we still think the risks are falling evenly either side of this view but more recently there’s probably been more of a skew to the downside,” Jones said.
Conway backed this trajectory, noting “the committee sees scope to lower the OCR further if medium-term inflation pressures continue to ease.” With the OCR already reduced from 5.5% to 3.25% since August 2024, further cuts remain on the table as disinflationary global forces persist.
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