- Article
- Global Research
- General Research Insights
- Macro and rates outlook
New Zealand in 2024
- Inflation is falling and unemployment is expected to rise as rate hikes weigh on growth …
- … though a recent pick-up in migration could support GDP and slow disinflation
- A focus on growth engines and improving productivity could boost the long-term outlook
Inflation meets surging migration
High inflation has been the primary challenge facing New Zealand’s economy for quite some time now. In response, the Reserve Bank of New Zealand (RBNZ) has delivered a hefty amount of monetary tightening, lifting its cash rate by 525bp to 5.50%. Both headline and core inflation have remained well above the RBNZ’s 1-3% target band, partly reflecting a heavily constrained supply side.
However, towards the end of 2023 there were clearer signs of disinflation underway, following GDP falling in three of the past four quarters. We think the ongoing transmission of tight monetary policy is likely to weigh on growth in the first half of 2024, loosening the jobs market and driving a further fall in inflation, such that in the second half of the year, inflation is likely to be back in the RBNZ’s target band. This should open the door for RBNZ cuts – we have the first cut pencilled in for the fourth quarter of 2024.
A key risk to the outlook stems from the recent surge in inward migration. While helping to improve the supply of labour, it is expected to support demand, particularly for housing, which may slow the disinflation process. Lessons could be drawn from Australia, where the migration surge arrived earlier in 2023 and supported growth but also boosted housing prices, rents and likely underpinned inflation as well.
Lessons could be drawn from Australia, where the migration surge arrived earlier in 2023
Against this backdrop, the recently elected centre-right coalition government faces a tough balancing act. Any boost to net spending, in line with some of the announcements made during the election, risks adding to inflation, and keeping interest rates higher for longer.
Policymakers ought to focus on New Zealand’s ‘growth engines’, in our view. Reconnecting with the world, through export competitiveness, alongside attracting foreign investment and removal of ‘red tape’, could improve New Zealand’s long-term growth outlook. There is also a need to take policy action that lifts productivity growth, which has been particularly poor following the pandemic. Improving the supply side of the economy would be the best way that policymakers could help the RBNZ disinflate the economy further.
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