Global demand clouds New Zealand’s growth outlook

There remains a degree of uncertainty over New Zealand’s growth outlook. The recent decline in dairy prices from softer global demand has added to the dampening effects of higher interest rates on demand. These challenges are particularly evident in the retail sector, retailers are now feeling downbeat in the face of softening retail demand.

On the upside, longer term migration-led population growth should support demand. So far, the recovery in net migration has been robust since the borders were reopened last year. The immediate impact of the net migration inflows has been to ease the current labour shortages. This should therefore reduce inflation pressures in the New Zealand economy.

The dampening effects of higher interest rates

The impact of the current migration-led population growth is offsetting the effects of higher interest rates. Although the Reserve Bank of New Zealand has indicated it did not expect to raise the Official Cash Rate (OCR) further in this cycle, the full impact of interest rate increases has yet to flow through the New Zealand economy. With over half of New Zealand mortgages due for repricing over the coming year. This is expected to further slow retail spending as many households roll off historically low fixed term mortgage rates and move onto significantly higher rates.

There are some signs of a recovery in parts of the economy. The pick-up in net migration, along with the reduced deposit requirements for borrowers and expectations that the OCR has peaked, is driving renewed interest in housing. The recovery in housing market activity is tentative and concentrated in the Auckland region.

More broadly the upcoming general election is adding to uncertainty over the general economic outlook.

Considering all these factors annual average growth in GDP is expected to ease below 1 percent over the coming years before picking up towards 3 percent from 2027.

The OCR is unlikely to increase further in this cycle

Stronger-than-expected net migration and Budget 2023, viewed with the uncertainty over how these competing

factors will play out and which will be the more dominant influence on inflation, the RBNZ is expected to keep the OCR on hold at 5.5 percent over the coming years. While the central bank, in its August Monetary Policy Statement, left open the potential for further monetary policy tightening, the OCR may have peaked in this cycle as the full impact of interest rate.

These Quarterly Predictions are summarised from an independent review of New Zealand’s economic outlook by NZIER.