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Westpac Economic Overview, February 2024 – Staying The Course

Westpac has just released its latest Economic Overview.

Overall growth outlook

“2024 looks set to be a year where households and businesses hunker down, and where the Reserve Bank stays the course by maintaining high interest rates to ensure inflation falls,” Westpac Chief Economist Kelly Eckhold commented on the release of Westpac’s inaugural Economic Overview for 2024.

“We see economic growth at just 0.7% this year, which represents negative growth in per-capita terms, an unemployment rate rising to 5% over 2024 and slowing wage growth as the economy continues its much-needed economic rebalancing.”

Interest rates and inflation

“The Official Cash Rate will likely remain on hold in 2024, although the risk of higher interest rates cannot be ruled out if the economy and inflation fail to adjust fast enough.”

“Domestic inflation remains very sticky and is only slowly declining. The labour market is similarly adjusting but more slowly than the RBNZ expected. Both factors seem likely to keep the RBNZ on edge for a while yet.”

“Nevertheless, we have increased confidence that inflation will return to the RBNZ’s 1-3% target range this year – hence we don’t see the RBNZ raising rates now.”

External and primary sector outlook and risks

“Geopolitical risks are elevated and the external economic environment is weak. Both factors continue to suggest a challenging outlook for NZ businesses.”

“A bright spot is that the outlook for the agriculture sector seems stronger as some of the worst fears of 2023 regarding the dairy and forestry sectors were not realised – as a result prices have notably improved. We see the farmgate milk price rising to $8.40 in the 2024/25 season,” commented Mr Eckhold.

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“Outside of dairy, improved climatic conditions in competitor markets should help reduce supply in lamb, sheep and beef markets, and allow some improvement in prices. The horticulture sector is enjoying much improved weather conditions than the terrible hit it received in 2023.”

Housing market outlook

“The housing market is having a flat patch, with limited momentum in early 2024. But strong population growth and forthcoming changes in investor tax rules should underpin prices later in 2024 – hence we still see prices rising by 6% in 2024 and 7% in 2025, faster than inflation.”

Migration, population growth and fiscal policy

“New Zealand continues to surf the peak of a historic migration wave. The outlook hinges on how quickly the wave recedes and how the labour market absorbs what we expect to be still high levels of labour supply through 2024.”

“Very strong population pressures will continue to stress the economy. Fiscal policy will need to accommodate increasing demand for core government services at a time when the Budget needs to be trimmed. The supply of new housing and infrastructure is weakening given past increases in interest rates at a time when demand for housing is increasing.”

“The implication is that both monetary and fiscal policy will need to be tight to allow the economy to rebalance and inflation to fall,” Mr Eckhold concluded.

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