Plenty of twists and turns to come

Inflation persistence

Will global and New Zealand inflation continue to ease back to historically low levels, or will inflation rates hold up for longer?

ASB senior economist Mark Smith says more than 90 bps of OCR cuts are priced in for 2024. The bank is estimating CPI inflation ended last year at 4.5%, the lowest since mid-2021, but above inflation rates in the US, Canada, Eurozone and UK. Annual NZ CPI inflation is expected to ease over 2024, ending the year below 3%.

Fiscal policy

Will fiscal policy objectives be met without igniting inflation, further delaying the return to surplus, or keeping the account deficit elevated? 

Smith says fiscal policy needs to do its bit to help lower inflation but the government must tread carefully. Creaky infrastructure needs to be rebuilt and critical services maintained. The risk is that significant fiscal belt tightening deepens the current cyclical downturn and/or cuts into muscle and adversely impacts NZ’s longer-term economic performance.

Population growth

Will record net immigration rates continue and what will be the economic, labour and housing market impacts?

ASB expects resident population growth to slow heading into 2025 from about 130,000 in 2023 to 80,000 at the end of 2024 and 45,000 by the end of 2025. Risks are tilted towards net inflows holding up for longer, with widespread implications for medium-term inflation and infrastructure.

Housing

Will strong population tailwinds or stretched affordability and debt servicing/rising unemployment headwinds dominate?

Affordability remains stretched, with rental yields below the cost of funding. Headwinds persist - high debt servicing costs, the cooling labour market (unemployment looks set to approach 5.5% by year-end), with migration not providing the usual boost this time around, although there are upward pressures on house rents. Smith expects house prices to rise 7%  to 10% this year, but it will take until mid-2025 to surpass 2021 record peaks.

Geopolitics

This year will be huge as half of the globe goes to the polls at a time of heightened geopolitical tensions with social cohesion showing signs of fraying. Smith says the large number of elections and other geopolitical risks (Gaza, Ukraine) could trigger pronounced volatility and result in some seismic changes in market, economic and social direction.

A US Trump victory will mean US and global interest rates will likely be higher. The preference of the Trump administration for a weaker USD could help efforts to lower inflation in NZ (via a stronger NZD) but it would not be greeted fondly by exporters.