Differing messages on the economy

While the economy took its first step into recovery and ended 2024 on a better note, there are still pockets of significant weakness.

Construction alone took away 0.2% of growth, with a sizeable, but not unexpected, 3.1% decline in activity, Kiwibank says.

“High building costs and a still sluggish housing market is not an environment conducive of a lift in construction activity,” Mary Jo Vergara and Sabrina Delgado, Kiwibank economists say.

Meanwhile everything within the professional services landscape, from business services to public admin to media, continues to suffer under the weight of a deteriorating labour market. The number of total hours worked continued over 2024 fell a chunky 2.5%.

Looking out to next year, Vergara and Delgado say they’re optimistic and believe in the process – the  process of cutting interest rates until asset markets respond. “It is happening.

“The light at the end of the tunnel is coming out of the RBNZ. Policy settings are restrictive, but more interest rate cuts are coming. High interest rates have hurt, and the economy demands more easing.

However, the BNZ says any positive thoughts about the economy have been completely drowned by Westpac’s Consumer Confidence reading, which is simply awful.

BNZ head of research Stephen Toplis says considering what had been from the ANZ equivalent, and assuming optimism about falling interest rates would be largely offset by pessimism about the state of the economy and ongoing cost increases, the bank’s economists had thought that, on a seasonally adjusted basis, confidence would we broadly unchanged.

“We couldn’t have been more wrong.”

The headline confidence index slumped to 89.2 from 97.5 a quarter earlier. The decline in the seasonally adjusted series was broadly the same.

“If we exclude the misery of the last few years, and one quarter during the GFC, you must go back all the way to the deep recession of 1991 to see a reading this low.

“For our forecasts of household spending to prove anywhere near accurate consumer confidence will need to lift aggressively from here.

“It’s getting increasingly hard to see how this might happen. This is especially so when cost of living issues are a widespread concern which will not dissipate any time soon.”

Toplis says if ever there was a reason for the central bank to keep lowering interest rates then weak consumer confidence accompanied by heightened uncertainty and a softening labour market must be it.

Stars not exactly aligned

The stars of the fourth quarter are not so convincing to remain in the driver’s seat for growth over the rest of this year, despite getting a positive GDP print, ASB says.

However, the bank has revised its economic outlook for 2025 modestly upwards to reflect stronger base economic momentum.

Signs of recovery in kiwi incomes should support a more domestically driven recovery moving forward, say Mark Smith and Wesley Tanuvasa, ASB economists. 

“Despite this, we are less convinced the economy can fully maintain the Q4 momentum given broader global headwinds.”

Recovering domestic demand is still expected to kick in later this year that should begin closing spare economic capacity.

“Stronger GDP data is a welcome surprise, but on its own is unlikely to be significantly shift the dial for the RBNZ – we expect a further 50bp of cuts and a 3.25% OCR by year-end.

“We’re not out of the woods yet – the domestic demand backdrop looks patchy, and the global scene increasingly fickle,” Smith and Tanuvasa say.