Is New Zealand's economic recovery finally within reach? The answer, according to Infometrics, is a cautious 'maybe'. While the country's economy may be on the mend, the road to recovery is fraught with uncertainty, and the future remains uncertain.
The economics consultancy predicts economic growth of 2.7% in the middle of next year, a four-year high. However, this forecast is heavily dependent on the geopolitical situation overseas, particularly in the Middle East. The recent volatility in this region has the potential to disrupt the country's economic recovery, as fuel prices remain lower than earlier this year.
Gareth Kiernan, the chief forecaster, notes that the likelihood of inflation persisting above 2% beyond mid-2027 has reduced, meaning there is less pressure on the Reserve Bank to raise interest rates. This, in turn, means that businesses may not need to pass on higher fuel costs to their customers, and the economy may be able to resume its recovery.
However, Kiernan also acknowledges that the recovery has been patchy and that the housing market and construction activity remain weak. This has led to a slower-than-expected recovery, with consumer spending flat last month after a 2.8% year-on-year increase in May.
The outlook for the economy is uncertain, with the outcome of the election later this year and unpredictable international events potentially derailing the recovery. Businesses and households have become fatigued from the buffeting they have endured over the last three years, and the current environment looks less challenging than expected.
Despite these challenges, there are reasons for optimism. The high export prices and good returns for farmers across meat and dairy are flowing through to broader economic indicators, particularly in the South Island. Additionally, business confidence and investment spending remain relatively upbeat, suggesting that firms are preparing for a resumption of the improvement in growth that seemed to be occurring at the start of this year.
In my opinion, the key to New Zealand's economic recovery lies in the ability of the Reserve Bank to manage interest rates effectively. If the bank can maintain a 'below neutral' setting in an economy in an upswing, it may be able to avoid the need for aggressive rate hikes, which could otherwise stifle economic growth.
However, the housing market remains a critical factor in the country's economic recovery. The sharp fall in housing prices has meant that many households have seen their housing wealth decline, which has a significant impact on consumer spending. As HSBC chief economist Paul Bloxham notes, housing price falls can have larger effects on the economy than price rises.
In conclusion, while New Zealand's economy may be on the mend, the road to recovery is fraught with uncertainty. The future remains uncertain, and the country's economic recovery will depend on the ability of the Reserve Bank to manage interest rates effectively and the housing market to rebound. As an expert, I believe that the country's economic recovery is within reach, but it will require careful management and a continued focus on supporting businesses and households.
