Latest news with #KellyEckhold
Business Times
26-05-2025
- Business
- Business Times
RBNZ set to make sixth rate cut and signal bias to more easing
[WELLINGTON] New Zealand's central bank is set to cut interest rates for a sixth straight meeting and signal it's open to further easing as US trade barriers dim the economic outlook. The Reserve Bank of New Zealand (RBNZ) will lower the Official Cash Rate (OCR) by 25 basis points to 3.25 per cent on Wednesday (May 28) in Wellington, according to 22 of 23 economists surveyed by Bloomberg. One predicts a 50-point reduction. The Monetary Policy Committee is expected to flag at least one more cut by projecting that the OCR could drop below 3 per cent this year. 'We see the RBNZ's OCR profile being revised down by around 20 basis points to around 2.9 per cent by the end of 2025,' said Kelly Eckhold, chief economist at Westpac in Auckland. 'Beyond this meeting, a data-dependent easing bias seems likely.' The RBNZ said last month it has scope to lower rates further as US tariffs create downside risks for both economic activity and inflation. While trade tensions have eased somewhat since then, ongoing uncertainty is still expected to dampen New Zealand's recovery from last year's recession. The RBNZ will publish its decision at 2 pm local time on Wednesday and governor Christian Hawkesby will hold a press conference an hour later. The bank will also update its economic forecasts, giving an indication of how much it expects global trade turmoil to impact on growth. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up 'Despite tariff de-escalation, we continue to view the US-China trade war as a net negative to the New Zealand economy and inflation over the medium term,' said Wesley Tanuvasa, an economist at ASB Bank in Auckland. 'Pronounced uncertainty means the RBNZ will want optionality on policy moves, so we'd expect cautious, data- and event-dependent commentary on the outlook for monetary policy.' Unemployment steady Recent data has been mixed. Unemployment held steady at 5.1 per cent in the first quarter, defying expectations it would rise. Commodity prices have been strong and inflation expectations have risen. Economists and the RBNZ expect inflation itself to accelerate towards the top of the central bank's 1 to 3 per cent target range from its current 2.2 per cent pace before slowing again next year. At the same time, the housing market is subdued, business confidence has dropped and the government delivered a tight budget last week that the Treasury Department expects will allow interest rates to fall further. Some economists forecast the RBNZ will cut the OCR to 2.5 per cent this year, while investors see a reasonable chance that it will be lowered to 2.75 per cent. 'In this kind of environment, there's plenty of leeway for strategy to play a role,' said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. 'We continue to expect that the RBNZ will ultimately deliver an OCR of 2.5 per cent, but we don't expect them to signal such an outcome at this stage.' BLOOMBERG
NZ Herald
13-05-2025
- Business
- NZ Herald
Inside Economics: What Trump's tariff truce means for NZ, why steak prices are rising ... plus the big sector struggling to recover
As of Tuesday, global markets are celebrating the agreement with China. After six weeks of quite vigorous and painful headbanging, a tariff truce has been reached. Instead of 145% tariffs on Chinese imports, the US will now charge just 30%, and the Chinese will charge 10% on US goods. Technically, Fitch Rating estimates the US effective tariff rate (ETR) for China remains at 31.8%, reflecting duties imposed on China prior to April 2 plus a 10% baseline tariff imposed on most countries. This is down from 103.6%. Japan, Mexico, Canada and Germany, which have the next-highest exports to the US, have ETRs exceeding 10.5%. Fitch estimates the US effective tariff rate is now 13.1%, a notable decline from 22.8% prior to the statement. So, to stick with the analogy, the headbanging hasn't really even ceased; it's just proceeding less violently. Yet it still comes as a relief. These are roughly the same-sized trade barriers that panicked markets on Liberation Day at the start of April. Context is everything, I guess. And Donald Trump is a master of imposing his context on the world. It doesn't change the harsh reality of what tariffs will do to domestic pricing in the US, and tariffs are still going to slow global growth. What it does do is take the most catastrophic scenario off the table or, more literally, out of the forecasts of the world's economists. So what about New Zealand? Should we be celebrating here? Well, I guess we can look at our KiwiSaver accounts again in a few days, and they might be close to where they were six weeks ago. Local economists have been cautious about making big assumptions about the trade war. For most, the base-case scenario included some sort of resolution to the China/US standoff. On that basis, I don't think the resolution will change the immediate outlook. Perhaps the biggest upside is that the relief sentiment running through markets may be infectious. If the worst fears of trade war apocalypse aren't hanging over us, perhaps we'll see a bit more confidence return to both the consumer and business outlook. There's already been a bit of revival of positivity in the past week or so. I tried to cheer myself up in my column on Sunday by looking at some of the economic bright spots. Meanwhile, Westpac chief economist Kelly Eckhold took a decidedly upbeat tone in the bank's latest Economic Overview, released yesterday. '2025 has started pretty well,' Eckhold wrote. 'We have seen ample signs that the recovery that we expect to take hold in 2025 is in fact beginning to take hold.' He is forecasting GDP growth to rise to 2.7% in 2025 and 2.8% in 2026. The strong growth for 2025 captures the rebound from the recession in the middle of last year. The annual average growth rate is projected to be just 1.1%, although it rises to 3% in 2026. The most heartening news about our economic outlook in the past couple of months has been that commodity prices for our key exports – dairy and beef – have held up through all the tariff turmoil. Dairy prices were up 4.6% across the board in the latest global dairy trade auction. That prompted ANZ economists to revise up their farmgate milk price forecast for the 2024-25 season (from $9.85 to $10.00/kg milksolid) and the 2025-26 season forecast (from $9.00 to $10.00/kg milksolid). This is expected to inject an extra $10 billion into the economy in the next two years (above and beyond the usual billions that dairy brings in). Beef bucks tariff pain Meanwhile, beef prices are also soaring. New Zealand red meat exports during March achieved record values for any month, with sales worth $1.26 billion, according to the Meat Industry Association. Values were up 34% compared to March 2024. Record beef prices are making headlines around the world now. The Financial Times (FT) has reported that the US cattle inventory has reached its lowest level in more than 70 years. 'A years-long drought in the American west has dried up grazing lands and US ranchers have been steadily shrinking their herds, creating a shortage that has raised the price of calves and ultimately other beef products,' the FT says. That is raising inflation fears for US consumers and won't be great news for steak and burger lovers in New Zealand either. We're already seeing plenty of media headlines about soaring, exorbitant local prices for butter and cheese. But on balance, New Zealand is overwhelmingly the net winner from high dairy and beef prices. This commodity price cycle could be just the circuit breaker the economic recovery needs. Rates relief In another relatively upbeat economic note, BNZ's Mike Jones highlights the 'primary sector cash that is now flowing strongly'. He also points out that the majority of 'positive cashflow from falling mortgage rates is yet to filter through, but will do so over the coming 6-12 months'. Advertised one-year fixed mortgage rates were about 2.4 percentage points below the peak, but the average rate being paid by borrowers (as at February) was only 0.2 percentage points below the peak, he wrote. BNZ, there's a cash flow of roughly $2.2b going back into mortgage-holders' pockets in the next six months. 'A good chunk of the extra cash may well go on paying the bills. But it should at least steady the unsteady recovery in retail spending seen since August,' he said. Jones also expects to see the OCR cut three more times – to 2.75% – adding to the positive momentum of the recovery. 'We remain of the view that the fledgling recovery is going to need a little more help,' he said. 'And, as the Finance Minister made clear again last week, there's not a lot of room for additional fiscal support [in the Budget]. So it's going to be the Reserve Bank and interest rates doing the work in the first instance.' Recovery from the bottom up A commodity export-led recovery is the right sort of recovery because the starting point is more foreign cash flowing into the country. If we were relying on a house price boom or the Government delivering a big-spending Budget, we'd really just be borrowing our way out of the mire. But it does mean that it will take longer for the recovery to be felt in cities like Auckland and Wellington that aren't so directly connected to the rural economy. The property and construction sectors are big drivers of the Auckland economy and they are both struggling to get traction right now. The residential property market has had a good start to the year on the listing front – there has been no shortage of sales activity. However, demand is still short of supply and prices have barely moved. New data from Quotable Value New Zealand shows home values rose just 0.10% in the three months to April to a new national average value of $914,504, which is 1.33% lower than the same time last year. The Auckland region was down 2.89% year on year, and 0.08% over the past three months; the Wellington region dropped 4.11% year on year, and 0.50% over the quarter to April. Christchurch and Hamilton bucked the trend. Christchurch home values rose 1.35% year on year and 0.88% in the April quarter. Hamilton was up 0.36% year on year and 0.12% over the past three months. Concrete facts Meanwhile, on the construction front, things are looking tough. The sector was technically still in recession in late 2024 as the rest of the economy grew again. The GDP data showed construction fell 3.1% in the December 2024 quarter and has been declining since the March 2024 quarter. Hard data: The construction sector has been struggling. Photo / 123RF This week, we got data for the volume of ready-mix concrete poured in the first quarter of 2025. This is a good barometer for the construction sector, given that concrete is involved in almost all construction. Informetrics economist Matthew Allman noted that, while volumes rose 1.4% in the quarter to 939,000 cubic metres, the quarterly volume was still 'the second-lowest since mid-2014 (behind last quarter, excluding lockdowns)'. 'Volumes have been under 1 million cubic metres for six consecutive quarters, following three full years above 1 million (excluding lockdowns, all figures seasonally adjusted).' The trend in concrete volumes remained largely negative, he said. 'The case for a significant turnaround in the near term is weak, given lower residential and non-residential consent numbers seen over 2024.' Construction activity was largely lagging the rest of the economy, which had started to turn around over the past six months. Stats NZ's Selected Price Index upgrade Stats NZ says it will begin publishing indexes for electricity and gas as part of the monthly selected price indexes (SPI). It launched the monthly SPI release in November 2023. The SPI already includes the entire food and alcoholic beverages and tobacco groups, together with rental price indexes, parts of the transport group, and the accommodation services sub-group. The idea is to provide a more timely indicator for inflation and the cost of living (the full consumers price index comes out only quarterly). The addition of electricity and gas indexes means the monthly SPI now covers 46.5% of the consumers price index (CPI) basket, up from 45%. It's a small step, but wouldn't it be nice to see Stats NZ keep adding to the selected price indexes? We could eventually work our way to getting a full set of CPI inflation data every month, like they do in the US. The April 2025 SPI, scheduled for release on May 15, will be the first to include the indexes, which will be part of the housing and household utilities group. Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
Scoop
13-05-2025
- Business
- Scoop
Westpac Economic Overview, May 2025 – Rolling With The Punches
Press Release – Westpac New Zealand The New Zealand economy continues to show pleasing signs of recovery, notwithstanding uncertainty created by developments in US tariff policy, Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpacs May 2025 Economic Overview. Westpac has just released its May 2025 Economic Overview which discusses the outlook for the New Zealand economy and what it means for consumers and businesses. Overall outlook 'The New Zealand economy continues to show pleasing signs of recovery, notwithstanding uncertainty created by developments in US tariff policy', Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpac's May 2025 Economic Overview. 'While there are downside risks that need to be carefully monitored, our baseline forecast is that the economy will gradually strengthen over coming quarters, supported by lower borrowing costs and much improved prices for key export commodities.' Mr Eckhold noted that the outlook remains clouded by uncertainty regarding the final form and global response to US tariff policy; the extent to which that would depress growth in some of New Zealand's key trading partners; and the impact on prices obtained for our key commodity exports. 'A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold. 'We expect that the RBNZ will carefully balance downside risks to activity with the need to ensure that inflation settles close to the midpoint of the 1-3% target range. We forecast two more 25bps cuts to the OCR to a low point of 3% in the September quarter. The OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold noted. Activity Mr Eckhold noted that indicators suggest that the economy has continued to find its feet. 'After two quarters of contraction in the middle of last year, a second quarter of positive GDP growth is estimated to have occurred in the March quarter,' said Mr Eckhold. 'Looking ahead, the disposable incomes of mortgage holders are now beginning to rise as they refinance at the much lower interest rates now on offer. And with much-improved commodity prices also boosting incomes in the rural sector, we expect growth in domestic spending to gather pace as this year progresses. Together with a lift in export volumes – including a further recovery in tourist arrivals – annual GDP growth should strengthen to 2.7% this year and around 2.8% in 2026.' Interest rates and inflation Mr Eckhold said that while inflation was likely to remain in the upper half of the 1-3% target range, the RBNZ was likely to reduce the OCR to 3% over coming meetings. 'We expect the RBNZ to deliver a 25bp cut in the OCR at the 28 May meeting. And given that uncertainties surrounding the global economic outlook are unlikely to quickly dissipate, a further 25bp cut seems more likely than not at either the July or August meetings.' Mr Eckhold noted that this is likely to be the low point for this cycle, with the RBNZ expected to be cautious as it seeks to support the economic recovery while not reigniting inflation pressures. 'While there is plenty of water to go under the bridge over the next 18 months, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold added. External and primary sector outlook 'Despite the global uncertainty created by US tariff policy, the prices received for most of NZ's key export commodities have remained resilient in recent months. We reaffirm our forecast for the current season's farmgate milk price at $10.30/kgMS. And despite the recent rebound in the New Zealand dollar, our early forecast for the 2025/26 season remains $10.00kg/MS. Stronger primary sector earnings will be a boon to rural communities,' said Mr Eckhold. 'Stronger export prices and volumes – including a continued recovery in tourist inflows – should lead to significant narrowing of the current account deficit to around 3½% of GDP this year, compared with around 6% of GDP in 2024. In combination with the Government's fiscal strategy, this should take some downside pressure off New Zealand's sovereign credit rating', added Mr Eckhold. Households and businesses 'The squeeze on households' finances has begun to ease,' said Mr Eckhold. 'Around 80% of all mortgages will reprice at lower interest rates over the next 12 months, boosting disposable incomes for those households. Together with growth in rural incomes and growing consumer confidence as the labour market stabilises, this should provide a boost to household spending,' Mr Eckhold noted. 'Last year's downturn and growing spare capacity in the economy caused businesses to scale back investment spending. However, investment spending should begin to pick up later this year as businesses gear up for higher levels of demand. We also expect strong growth in investment spending in the public sector as the infrastructure deficit is addressed' Mr Eckhold added. Housing market outlook 'Mortgage interest rates have fallen significantly over the past year, driving a pickup in activity in the housing market. While a large inventory of homes for sale is presently constraining growth in house prices, we expect that annual house price growth will begin to lift towards 6% as that inventory is gradually worked through.' Mr Eckhold commented. 'A lift in prices for existing homes should support a recovery in residential construction activity from late this year. The resulting increases in housing supply should prevent growth in house prices running too far ahead of the growth in nominal incomes.' The labour market Mr Eckhold noted 'After declining last year, employment levels have broadly stabilised in recent months. Given ongoing growth in the labour force, the unemployment rate is expected to edge higher to a peak of around 5.3% this year, before beginning to trend down next year as the economic recovery gathers steam and hiring picks up.' Mr Eckhold added, 'Given the slack that has emerged, wage and salary growth in the private sector has moderated significantly over the past year and is now close to levels consistent with 2% inflation and trend productivity growth.' Fiscal policy Mr Eckhold said 'Government spending is expected to shrink relative to GDP, as the Government seeks to deliver on its strategy of returning the fiscal books to surplus. While it won't be a direct driver of growth, there is much the Government can do though regulatory policy and infrastructure investment to help unlock the growth potential of the economy.' Mr Eckhold added, 'Our forecasts imply a higher tax take than projected in the HYEFU, and almost certainly a higher tax take than will likely be unveiled in Budget 2025. If our forecasts play out, there may be scope for the Government to achieve a return to surplus while still spending a little more in priority areas.'. Significant uncertainties continue to cloud the outlook Mr Eckhold noted 'While our baseline forecast is a positive one, households, businesses and financial markets need to keep an open mind about how the economy will play out over coming quarters.' 'There remains significant uncertainty about the final form of US tariff policy and how this will impact global growth, inflation and financial markets. A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold. 'We expect to gain more clarity over the next few months as trade negotiations take place and as economic data begins to cast light on how trading partner growth has been impacted by recent developments. There also continue to be other geopolitical risks that if realised could affect the economic outlook,' concluded Mr Eckhold.
Scoop
12-05-2025
- Business
- Scoop
Westpac Economic Overview, May 2025 – Rolling With The Punches
Press Release – Westpac New Zealand The New Zealand economy continues to show pleasing signs of recovery, notwithstanding uncertainty created by developments in US tariff policy, Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpacs May 2025 Economic Overview. Westpac has just released its May 2025 Economic Overview which discusses the outlook for the New Zealand economy and what it means for consumers and businesses. Overall outlook 'The New Zealand economy continues to show pleasing signs of recovery, notwithstanding uncertainty created by developments in US tariff policy', Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpac's May 2025 Economic Overview. 'While there are downside risks that need to be carefully monitored, our baseline forecast is that the economy will gradually strengthen over coming quarters, supported by lower borrowing costs and much improved prices for key export commodities.' Mr Eckhold noted that the outlook remains clouded by uncertainty regarding the final form and global response to US tariff policy; the extent to which that would depress growth in some of New Zealand's key trading partners; and the impact on prices obtained for our key commodity exports. 'A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold. 'We expect that the RBNZ will carefully balance downside risks to activity with the need to ensure that inflation settles close to the midpoint of the 1-3% target range. We forecast two more 25bps cuts to the OCR to a low point of 3% in the September quarter. The OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold noted. Activity Mr Eckhold noted that indicators suggest that the economy has continued to find its feet. 'After two quarters of contraction in the middle of last year, a second quarter of positive GDP growth is estimated to have occurred in the March quarter,' said Mr Eckhold. 'Looking ahead, the disposable incomes of mortgage holders are now beginning to rise as they refinance at the much lower interest rates now on offer. And with much-improved commodity prices also boosting incomes in the rural sector, we expect growth in domestic spending to gather pace as this year progresses. Together with a lift in export volumes – including a further recovery in tourist arrivals – annual GDP growth should strengthen to 2.7% this year and around 2.8% in 2026.' Interest rates and inflation Mr Eckhold said that while inflation was likely to remain in the upper half of the 1-3% target range, the RBNZ was likely to reduce the OCR to 3% over coming meetings. 'We expect the RBNZ to deliver a 25bp cut in the OCR at the 28 May meeting. And given that uncertainties surrounding the global economic outlook are unlikely to quickly dissipate, a further 25bp cut seems more likely than not at either the July or August meetings.' Mr Eckhold noted that this is likely to be the low point for this cycle, with the RBNZ expected to be cautious as it seeks to support the economic recovery while not reigniting inflation pressures. 'While there is plenty of water to go under the bridge over the next 18 months, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold added. External and primary sector outlook 'Despite the global uncertainty created by US tariff policy, the prices received for most of NZ's key export commodities have remained resilient in recent months. We reaffirm our forecast for the current season's farmgate milk price at $10.30/kgMS. And despite the recent rebound in the New Zealand dollar, our early forecast for the 2025/26 season remains $10.00kg/MS. Stronger primary sector earnings will be a boon to rural communities,' said Mr Eckhold. 'Stronger export prices and volumes – including a continued recovery in tourist inflows – should lead to significant narrowing of the current account deficit to around 3½% of GDP this year, compared with around 6% of GDP in 2024. In combination with the Government's fiscal strategy, this should take some downside pressure off New Zealand's sovereign credit rating', added Mr Eckhold. Households and businesses 'The squeeze on households' finances has begun to ease,' said Mr Eckhold. 'Around 80% of all mortgages will reprice at lower interest rates over the next 12 months, boosting disposable incomes for those households. Together with growth in rural incomes and growing consumer confidence as the labour market stabilises, this should provide a boost to household spending,' Mr Eckhold noted. 'Last year's downturn and growing spare capacity in the economy caused businesses to scale back investment spending. However, investment spending should begin to pick up later this year as businesses gear up for higher levels of demand. We also expect strong growth in investment spending in the public sector as the infrastructure deficit is addressed' Mr Eckhold added. Housing market outlook 'Mortgage interest rates have fallen significantly over the past year, driving a pickup in activity in the housing market. While a large inventory of homes for sale is presently constraining growth in house prices, we expect that annual house price growth will begin to lift towards 6% as that inventory is gradually worked through.' Mr Eckhold commented. 'A lift in prices for existing homes should support a recovery in residential construction activity from late this year. The resulting increases in housing supply should prevent growth in house prices running too far ahead of the growth in nominal incomes.' The labour market Mr Eckhold noted 'After declining last year, employment levels have broadly stabilised in recent months. Given ongoing growth in the labour force, the unemployment rate is expected to edge higher to a peak of around 5.3% this year, before beginning to trend down next year as the economic recovery gathers steam and hiring picks up.' Mr Eckhold added, 'Given the slack that has emerged, wage and salary growth in the private sector has moderated significantly over the past year and is now close to levels consistent with 2% inflation and trend productivity growth.' Fiscal policy Mr Eckhold said 'Government spending is expected to shrink relative to GDP, as the Government seeks to deliver on its strategy of returning the fiscal books to surplus. While it won't be a direct driver of growth, there is much the Government can do though regulatory policy and infrastructure investment to help unlock the growth potential of the economy.' Mr Eckhold added, 'Our forecasts imply a higher tax take than projected in the HYEFU, and almost certainly a higher tax take than will likely be unveiled in Budget 2025. If our forecasts play out, there may be scope for the Government to achieve a return to surplus while still spending a little more in priority areas.'. Significant uncertainties continue to cloud the outlook Mr Eckhold noted 'While our baseline forecast is a positive one, households, businesses and financial markets need to keep an open mind about how the economy will play out over coming quarters.' 'There remains significant uncertainty about the final form of US tariff policy and how this will impact global growth, inflation and financial markets. A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold. 'We expect to gain more clarity over the next few months as trade negotiations take place and as economic data begins to cast light on how trading partner growth has been impacted by recent developments. There also continue to be other geopolitical risks that if realised could affect the economic outlook,' concluded Mr Eckhold.
Scoop
12-05-2025
- Business
- Scoop
Westpac Economic Overview, May 2025 – Rolling With The Punches
Westpac has just released its May 2025 Economic Overview which discusses the outlook for the New Zealand economy and what it means for consumers and businesses. Overall outlook 'The New Zealand economy continues to show pleasing signs of recovery, notwithstanding uncertainty created by developments in US tariff policy', Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpac's May 2025 Economic Overview. 'While there are downside risks that need to be carefully monitored, our baseline forecast is that the economy will gradually strengthen over coming quarters, supported by lower borrowing costs and much improved prices for key export commodities.' Mr Eckhold noted that the outlook remains clouded by uncertainty regarding the final form and global response to US tariff policy; the extent to which that would depress growth in some of New Zealand's key trading partners; and the impact on prices obtained for our key commodity exports. 'A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold. 'We expect that the RBNZ will carefully balance downside risks to activity with the need to ensure that inflation settles close to the midpoint of the 1-3% target range. We forecast two more 25bps cuts to the OCR to a low point of 3% in the September quarter. The OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold noted. Activity Mr Eckhold noted that indicators suggest that the economy has continued to find its feet. 'After two quarters of contraction in the middle of last year, a second quarter of positive GDP growth is estimated to have occurred in the March quarter,' said Mr Eckhold. 'Looking ahead, the disposable incomes of mortgage holders are now beginning to rise as they refinance at the much lower interest rates now on offer. And with much-improved commodity prices also boosting incomes in the rural sector, we expect growth in domestic spending to gather pace as this year progresses. Together with a lift in export volumes – including a further recovery in tourist arrivals – annual GDP growth should strengthen to 2.7% this year and around 2.8% in 2026.' Interest rates and inflation Mr Eckhold said that while inflation was likely to remain in the upper half of the 1-3% target range, the RBNZ was likely to reduce the OCR to 3% over coming meetings. 'We expect the RBNZ to deliver a 25bp cut in the OCR at the 28 May meeting. And given that uncertainties surrounding the global economic outlook are unlikely to quickly dissipate, a further 25bp cut seems more likely than not at either the July or August meetings.' Mr Eckhold noted that this is likely to be the low point for this cycle, with the RBNZ expected to be cautious as it seeks to support the economic recovery while not reigniting inflation pressures. 'While there is plenty of water to go under the bridge over the next 18 months, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold added. External and primary sector outlook 'Despite the global uncertainty created by US tariff policy, the prices received for most of NZ's key export commodities have remained resilient in recent months. We reaffirm our forecast for the current season's farmgate milk price at $10.30/kgMS. And despite the recent rebound in the New Zealand dollar, our early forecast for the 2025/26 season remains $10.00kg/MS. Stronger primary sector earnings will be a boon to rural communities,' said Mr Eckhold. 'Stronger export prices and volumes – including a continued recovery in tourist inflows – should lead to significant narrowing of the current account deficit to around 3½% of GDP this year, compared with around 6% of GDP in 2024. In combination with the Government's fiscal strategy, this should take some downside pressure off New Zealand's sovereign credit rating', added Mr Eckhold. Households and businesses 'The squeeze on households' finances has begun to ease,' said Mr Eckhold. 'Around 80% of all mortgages will reprice at lower interest rates over the next 12 months, boosting disposable incomes for those households. Together with growth in rural incomes and growing consumer confidence as the labour market stabilises, this should provide a boost to household spending,' Mr Eckhold noted. 'Last year's downturn and growing spare capacity in the economy caused businesses to scale back investment spending. However, investment spending should begin to pick up later this year as businesses gear up for higher levels of demand. We also expect strong growth in investment spending in the public sector as the infrastructure deficit is addressed' Mr Eckhold added. Housing market outlook 'Mortgage interest rates have fallen significantly over the past year, driving a pickup in activity in the housing market. While a large inventory of homes for sale is presently constraining growth in house prices, we expect that annual house price growth will begin to lift towards 6% as that inventory is gradually worked through.' Mr Eckhold commented. 'A lift in prices for existing homes should support a recovery in residential construction activity from late this year. The resulting increases in housing supply should prevent growth in house prices running too far ahead of the growth in nominal incomes.' The labour market Mr Eckhold noted 'After declining last year, employment levels have broadly stabilised in recent months. Given ongoing growth in the labour force, the unemployment rate is expected to edge higher to a peak of around 5.3% this year, before beginning to trend down next year as the economic recovery gathers steam and hiring picks up.' Mr Eckhold added, 'Given the slack that has emerged, wage and salary growth in the private sector has moderated significantly over the past year and is now close to levels consistent with 2% inflation and trend productivity growth.' Fiscal policy Mr Eckhold said 'Government spending is expected to shrink relative to GDP, as the Government seeks to deliver on its strategy of returning the fiscal books to surplus. While it won't be a direct driver of growth, there is much the Government can do though regulatory policy and infrastructure investment to help unlock the growth potential of the economy.' Mr Eckhold added, 'Our forecasts imply a higher tax take than projected in the HYEFU, and almost certainly a higher tax take than will likely be unveiled in Budget 2025. If our forecasts play out, there may be scope for the Government to achieve a return to surplus while still spending a little more in priority areas.'. Significant uncertainties continue to cloud the outlook Mr Eckhold noted 'While our baseline forecast is a positive one, households, businesses and financial markets need to keep an open mind about how the economy will play out over coming quarters.' 'There remains significant uncertainty about the final form of US tariff policy and how this will impact global growth, inflation and financial markets. A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold. 'We expect to gain more clarity over the next few months as trade negotiations take place and as economic data begins to cast light on how trading partner growth has been impacted by recent developments. There also continue to be other geopolitical risks that if realised could affect the economic outlook,' concluded Mr Eckhold.
