Economy stabilising but growth remains uneven
New Zealand’s economy is showing signs of modest recovery, but persistent inflation and patchy growth have kept the Reserve Bank (RBNZ) cautious, according to Westpac’s July Market Outlook.
“New Zealand remains in an environment of better, albeit still bumpy, growth and rising inflation that is testing the limits of the RBNZ’s 1-3% inflation target range,” said Michael Gordon (pictured), senior economist at Westpac.
At its July policy review, the RBNZ left the OCR unchanged at 3.25%, citing mixed signals in recent data and global uncertainties.
“The ‘no change’ view seems to have won out on the understanding that it would only be a pause until August, when more information about the economy would be available,” Gordon said.
GDP stronger in Q1, but soft signals emerge
March quarter GDP surprised to the upside, rising 0.8% and outperforming both RBNZ and market forecasts.
While the December 2023 quarter was revised down from 0.7% to 0.5%, earlier quarters in 2024 were also adjusted slightly upward, easing the depth of the mid-year recession.
“Those recessionary quarters in mid-2024 mean that activity is still languishing 0.7% lower than a year ago, but the momentum is improving,” Gordon said.
Growth, however, was concentrated in a few sectors: professional services (up 2.7%, led by computing), machinery manufacturing (up 6.4%), and healthcare (up 1.4%). By contrast, communications, finance, real estate, and recreation services declined.
GDP nowcasts and activity data point to slowing
Despite the stronger Q1 GDP, more recent indicators suggest the June quarter may see slower growth.
“Our GDP nowcast is now tracking at around 0.2% for the June quarter,” Gordon said, adding that the RBNZ’s own nowcast had “actually turned slightly negative.”
Key indicators such as the manufacturing and services PMIs “both took a sharp step backwards in May.”
The housing market also stalled, with home prices rising just 0.1% (seasonally adjusted) and a longer median selling time.
Labour market data showed fresh weakness, with the Monthly Employment Indicator suggesting job shedding resumed and job ads remaining subdued.
“Business confidence fell in the wake of the US tariff announcement, though it has partly recovered since then,” Gordon said.
Domestic resilience offsets some downside risks
Despite softer short-term signals, underlying economic support remains.
“Homeowners are continuing to move on to lower mortgage rates as they come up for their next reset period, and rural regions are receiving an income boost from rising meat export prices and a second year of strong dairy returns,” Gordon said.
Business surveys reflect this tension. While NZIER’s Q2 Quarterly Survey of Business Opinion showed weak recent activity, firms were more optimistic about the future.
“It’s very much in the eye of the beholder as to which of these indicators best represents the underlying story,” Gordon said. “Although recent experience suggests that the more positive forward-looking indicator has been closer to the mark.”
Westpac has revised its Q2 GDP forecast down to 0.3%, from 0.6%, noting residual seasonality may be skewing June quarter figures lower – an effect also acknowledged by RBNZ.
Core inflation pressures remain in focus
Inflation remains a key concern. “We now expect annual inflation to rise to 2.8% in the June quarter, from 2.5% in March, and to reach 3.0% in September,” Gordon said.
Food prices are contributing to this rise, but “underlying inflation pressures also aren’t especially weak.”
Westpac expects core inflation (excluding food and energy) to stay around 2.7–2.8% through year-end.
“Notably, non-tradables inflation is easing only gradually and is likely to remain above average over the coming year,” he said.
While housing-related costs have softened, utilities and household energy prices continue to climb.
“We’re also facing another large increase in local council rates in Q3,” Gordon said.
Westpac still expects August rate cut
Despite holding in July, Westpac still expects the RBNZ to cut rates once more in 2025.
“We continue to expect one further 25bp cut in this cycle, delivered at the 20 August Monetary Policy Statement,” Gordon said.
Key data to watch include the Q2 CPI (July 21) and inflation expectations surveys due in early August. Westpac also expects the unemployment rate (Aug. 6) to rise more than the RBNZ forecasted in May.
International developments, especially US tariff policy and its impact on global growth and inflation, could also influence the RBNZ’s decision-making.
“The committee seems not to recognise any reduction in global risks right now,” Gordon said.
Key data ahead of the August 20 decision
Economists say several data points will shape the August MPS decision:
- Q2 CPI (July 21): Headline inflation expected to rise, led by food and energy.
- Labour market data (Aug. 6): Unemployment forecast to reach 5.3%.
- Inflation expectations (Aug. 7): Focus on five- and 10-year measures.
- Business confidence, PMI surveys, and global risks including US tariffs.
- Export commodity prices to gauge global demand resilience.
