In a period marked by complex economic dynamics, recent analyses from ASB and Auckland University of Technology (AUT) highlight a nuanced outlook for New Zealand’s economy. While ASB projects a potential easing of economic pressures with falling inflation and interest rates, AUT’s latest findings paint a more cautious picture, pointing to a possible worsening of unemployment.
ASB’s Quarterly Economic Forecast offers a glimmer of optimism amid economic strains. ASB Chief Economist Nick Tuffley acknowledges the ongoing challenges but emphasises a positive shift. “The economy has been showing increasing signs of brittleness under the continued pressure from high interest rates. Painful as it is though, inflation is getting under control,” Tuffley says.
He notes that recent trends suggest inflation could fall below 3 percent in the latter half of the year and remain contained beyond 2024.
Tuffley also observes that the Reserve Bank’s recent decision to cut the Official Cash Rate (OCR) will likely stimulate economic activity. “Now that interest rates have started falling, and will continue to, confidence will start to lift and people will start making and acting on decisions,” he predicts.
However, he cautions that while these measures are expected to boost consumer and investment spending, GDP is projected to remain flat-to-down for the remainder of 2024. “Falling interest rates will be a catalyst for renewed consumer and investment spending, spurring economic recovery over 2025,” he adds.
GDP, which has contracted in two of the past six quarters through to March 2024, is down 0.5 percent from its 2022 peak, and over 4 percent down on a per-capita basis.
Tuffley cautions that New Zealand household spending remains under some pressure, although it had a good start to 2024 compared with 2023. “Nevertheless, consumption volumes are nearly 3 percent down on a per-capita basis from early 2022 (when spending got a post-lockdown bump). We expect services spending will also see a paring back of growth in the short term while financial pressures remain.”
Despite these signs of potential recovery highlighted by ASB, AUT’s UR-Now model presents a sobering view on employment.
Developed by Professor Tim Maloney and his team, the model suggests that New Zealand’s unemployment rate may have surged to 4.8 percent as of July. Professor Maloney explains, “There have been recent predictions of pending recessions in New Zealand and many other developed economies. Unfortunately, lags in the release of the official unemployment rate prevent us from knowing what is currently going on in the labour market.”
The UR-Now model is designed to provide early warnings about shifts in the labour market, using real-time data on social welfare benefits and job vacancies. Maloney highlights the limitations of traditional data collection methods, saying, “Updates on our UR-Now model over the next two months could provide an advanced indicator of a further weakening in the labour market and an even larger jump in this figure prior to the next scheduled release of the official unemployment rate by Statistics New Zealand in early November.”
Adding to the concern, the Reserve Bank’s recent Monetary Policy Statement predicts that unemployment could rise to 5.4 percent within a year. This projection underscores a critical challenge as the economy navigates through the dual pressures of inflation control and rising unemployment.
Both reports highlight the complex interplay between economic recovery and labour market health, felt by many SMEs. While lower interest rates and controlled inflation might pave the way for a gradual economic rebound, the potential deterioration in employment conditions presents a significant hurdle that policymakers and businesses will need to address in the coming months.
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