Hawkish inflation concerns face dovish labour and growth reality
New Zealand’s economy remains sluggish heading into August, with Westpac economists expecting a further 25bp cut to the official cash rate (OCR) as the Reserve Bank (RBNZ) aims to support a recovery that’s yet to gain decisive traction.
“The winter of discontent has descended on the New Zealand economy since May,” said Kelly Eckhold (pictured left), Westpac NZ chief economist. “In some respects, business and consumer sentiment has soured, raising questions on exactly when the long-awaited pickup in the economy will become broader based and more sustainable.”
While some sectors – particularly agriculture – are seeing strong returns, the broader domestic picture is uneven.
“Inflation remains too high, but the economy still has significant excess capacity,” Eckhold wrote in a Westpac economic report.
Inflation remains sticky, but easing likely to continue
Annual inflation has lifted to 2.7% and may reach 3% in coming quarters. However, Westpac economists believe the current level of spare capacity leaves room for further monetary easing.
“It’s unlikely that the RBNZ will call time on the easing cycle just yet as the economy is yet to decisively and sustainably turn,” Eckhold said.
He added that while inflation was not expected to fall back quickly, much of the recent rise has come from administered costs like rates and utilities – suggesting non-tradables inflation may only ease gradually.
Mortgage rate pass-through still in motion
Eckhold highlighted that the full effects of past OCR cuts have yet to flow through to households.
“Only half of the expected easing in mortgage rates has passed through to the rates paid by households,” he said. “As households continue to refinance, the effective mortgage rate will continue to decline, further stimulating spending.”
Investor activity has picked up, but housing supply – now back to 2015 levels – could become constrained again as demand continues.
Global growth risks ease, policy boost incoming
Global growth sentiment has stabilised since May, with Chinese stimulus and strong export prices supporting the rural sector.
Domestically, the government’s “Investment Boost” package announced in the budget is also expected to spur capital expenditure, particularly in the agricultural sector.
“The tractors are piling up on the dock as dealers scramble to meet orders,” Eckhold said.
Labour market shows softness despite better-than-expected print
In a separate commentary, Westpac’s Michael Gordon (pictured right) said the June quarter labour data showed the unemployment rate rose to 5.2%, with employment falling 0.1% – broadly in line with RBNZ forecasts. While slightly better than Westpac’s expectations, the figures still signal subdued conditions.
“The results were in line with what the Reserve Bank assumed in its May Monetary Policy Statement,” Gordon said. “We see a 25bp OCR cut as highly likely, leaving the door open for further easing if needed.”
Labour force participation fell to 70.5%, its lowest since 2021. Meanwhile, private sector wages rose 0.6% in the quarter, and 2.2% annually – the slowest annual pace since mid-2021.
Gordon said the minimum wage hike had a modest impact, while broader wage pressure continues to ease.
Doves argue more stimulus is needed
Eckhold said the OCR is likely still above neutral and must fall further to generate the above-trend growth needed to absorb spare capacity.
“Until the OCR is moved to a clearly stimulatory level, growth is unlikely to reach the pace required,” he said.
Weak job ads and soft wage growth, especially in construction and other rate-sensitive sectors, reinforce the case for easing.
“A prolonged period of above-trend unemployment means that wage growth could fall further, putting additional downward pressure on non-tradables inflation,” Ekchold said.
Trade tensions linger, but risks lower than feared
While uncertainty has eased, new US tariffs on New Zealand exports remain a downside risk.
“There’s room to ease further to insure against the risk of unexpectedly weak economic outcomes,” Eckhold said.
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