Westpac publishes economic outlook for 'challenging' year

Westpac NZ expects 2024 to be a challenging year for the government, which will need to tighten fiscal policy while managing growing demand for public services.

The bank's economic outlook for 2024 sets the RBI's monetary policy case for a firm hold on interest rates, with no hike, as long as inflation continues to be tracked within its 1-3 percent target range this year.

„Official inflation will remain on hold through 2024, although the risk of higher interest rates cannot be ruled out if the economy and inflation fail to adjust fast enough,” Westpac chief economist Kelly Eckholdt said.

„Domestic inflation remains very sticky and is only slowly decelerating. The labor market is also adjusting similarly, but more slowly than the RBNZ expected. Both factors are likely to keep the RBNZ on the fringes for some time to come.”

Fiscal austerity is required

Eckhold said the government will be challenged to do its part to bring inflation under control by tightening fiscal policy.

Westpac Chief Economist Kelly Eckholdt
Photo: Provided by / LinkedIn

„Over the past few years, we've seen fiscal policy add to growth in the economy. It's put more pressure on interest rates over the past couple of years, as opposed to subtracting from it.”

Eckhold said loose fiscal policy has resulted in deficits, which must be addressed.

„The International Monetary Fund estimates that New Zealand has a fiscal deficit of about 4 percent of GDP, which is reasonably significant and should be corrected over the next few years.”

The government campaigned to reduce the deficit.

„The reality is that doing that is harder than it's said, especially in the context of a population that is growing reasonably fast, and as a result they will demand more services from the government.”

Eckholdt said businesses and households are expected to remain sheltered for the rest of the year, resulting in slower economic growth.

„We see economic growth of just 0.7 percent this year, which represents negative growth on a per capita basis, with the unemployment rate rising to 5 percent by 2024 and wage growth slowing as the economy continues its much-needed economic recovery.”

He said there are still plenty of external risks to create uncertainty.

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

Agriculture is recovering

„One bright spot is that the outlook for the agricultural sector looks strong as some of the worst fears regarding the dairy and forestry sectors have not been realized in 2023 – resulting in prices improving significantly. We see farm milk prices rising to $8.40 for the 2024/25 season.”

Eckholdt said climate change will continue to pose risks and rewards for the sector.

„Outside of dairy production, improved weather conditions in competitor markets should help reduce supply in the lamb, sheep and beef markets, and allow some improvement in prices. The horticulture sector is enjoying improved weather conditions rather than a terrible hit in 2023.”

A view of the housing market

Eckhold said the residential property market will benefit from strong population growth and upcoming changes in investor tax rules.

Westpac predicts house prices will rise 6 per cent in 2024 and 7 per cent in 2025, faster than inflation.

„New Zealand continues to surf the crest of a historic migration wave.”

Strong population growth will put pressure on the economy, he said, as the supply of new homes and infrastructure weakens and demand rises.

„It depends on how quickly the tide recedes and how the labor market absorbs what we expect to be a larger labor supply by 2024.

„The implication is that both monetary and fiscal policy need to be tighter to allow the economy to rebalance and inflation to fall,” he said.