Easing inflation
The health of the New Zealand economy has been a major talking point during and post the election. The impact of inflation has been felt by the majority of households as well as investors in domestic shares and bonds. The recent NZEIR Quarterly Predictions will therefore provide some comfort that easing inflation pressures in the New Zealand economy is becoming more apparent. This reflects a combination of softening demand and increased supply.
The Reserve Bank of New Zealand started increasing interest rates in October 2021 and the dampening effect on demand has become more apparent in recent months. Many households are now rolling off historically low fixed-term mortgage rates onto significantly higher rates. As households pare back on discretionary spending in the face of higher mortgage repayments, the effects of weaker demand is now broadening across the New Zealand economy.
More recently business indicators have pointed to a shift in the economy from constrained supply to weaker demand. During the COVID-19 pandemic, finding labour was the primary constraint on businesses, reflecting the severe labour shortages over this period. In the past 12 months this has changed, and the majority of firms are now reporting weaker demand as the primary constraint on their business. This has been a key concern for businesses which has been reflected in domestic share prices.
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Record high net migration drives turnaround in labour shortages
The surge in net migration inflows has been a key driver behind the remarkable turnaround in labour shortages. Annual net migration inflows are estimated to total over 128,900 for the year to October 2023. So far, the impact of these net migration inflows has been more apparent on the supply side of the economy. However, strong migration-led population growth should support demand across a range of sectors from 2025. In particular, stronger housing demand should underpin a recovery in construction activity.
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No further OCR increase in this cycle
If inflation pressures in the New Zealand economy continue to ease it will allow the RBNZ to keep the OCR on hold at 5.5% for the coming year. Annual CPI inflation is expected to fall with the 1 to 3% target band in the second half of next year. This will allow the central bank to move the OCR to less restrictive settings from late 2024 to early 2025.
In turn this easing of interest rates will flow through to the domestic markets and should see an improvement in share prices.
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These Quarterly Predictions are summarised from an independent review of New Zealand’s economic outlook by NZIER