New Zealand Economy Shows Signs of Recovery Amid Ongoing Risks

The New Zealand economy is displaying signs of recovery, with a range of economic indicators showing improvement, although significant risks persist. Recent data indicates a positive trend in consumer confidence, retail sales, and construction, crucial for sustaining economic momentum.

Retail Sector Sees Strong Growth

In the third quarter of 2023, retail sales volumes increased by 1.9 percent, marking the strongest quarterly growth in nearly four years and exceeding consensus expectations by three times. While this figure may have been bolstered by one-off purchases of automobiles and electronics, it nonetheless suggests a notable shift in retail activity. The recovery has been supported by strong cash flows from the primary sector, lower interest rates, and a resurgence in international tourism.

More timely indicators from Statistics New Zealand and additional card spending data indicate that this momentum is likely to continue into the fourth quarter. Over the past three months, annual growth in spending on BNZ cards averaged 7 percent, with November figures reaching 7.7 percent. This broad-based increase in discretionary spending reflects a significant change in consumer behavior.

Construction and Manufacturing on the Rise

Residential construction, which typically plays a pivotal role in influencing New Zealand’s economic cycle, is also showing encouraging signs. The November manufacturing Purchasing Managers’ Index (PMI) rose to 51.4, indicating expansion, as any reading above 50.0 suggests growth. Additionally, October building consent issuance has remained robust, with consents now 24 percent higher than the low recorded in April. This aligns with expectations that residential building activity will increase throughout next year, despite some constraints on growth due to underlying fundamentals.

Particularly impressive has been the rise in townhouse and apartment consents, which increased by 27 percent and 52 percent respectively since April. Stand-alone house consents have also seen a strong increase of 17 percent. These trends have been most pronounced in regions like Auckland, Canterbury, and Wellington.

Economic Growth Projections

While these positive signs are promising, they do not eliminate all risks associated with a sustained economic recovery. Forecasts suggest that annual growth could reach 2-3 percent by the second half of 2024. The third quarter GDP figures, set to be released soon, will be pivotal for understanding the trajectory of recovery following a -0.9 percent contraction in the previous quarter.

Economic analysts are anticipating a strong 0.9 percent bounce-back in GDP, which would indicate an annual growth return to positive territory for the first time in 18 months, with expectations of 1.3 percent year-on-year growth.

Identifying Ongoing Risks

Despite these encouraging developments, several risks remain. Changes in global dairy markets, for instance, could have adverse effects on New Zealand’s economy. Dairy auction prices have recently dropped by 22 percent from their peak in May due to increased global milk supply. Consequently, Fonterra has lowered its milk price forecast for the season to $9.50 per kg, with further risks leaning towards the downside.

Concerns about population growth also pose a potential challenge. New Zealand’s appeal as a migration destination is being tested by the robust economic environment in Australia, which may attract workers away from New Zealand. Recent data indicates that net migration figures have stabilized at annual rates of 10,000-12,000, reflecting a decline in outflows.

Another aspect to monitor is the recent rise in wholesale interest rates following the Reserve Bank of New Zealand’s (RBNZ) decision to lower the official cash rate by 25 basis points on November 26, 2023. Since that announcement, wholesale interest rates have increased by 30-55 basis points, which could impact mortgage rates and, subsequently, household spending.

Outlook for Mortgage Rates

The increase in wholesale rates may limit the potential for further declines in mortgage rates, particularly for longer-term fixed rates. While borrowers have begun extending the terms of their mortgage borrowings, the share of new loans on terms of one year or less has decreased from 83 percent in February to 75 percent in October.

Despite the upward pressure on mortgage rates, it is worth noting that most borrowers facing rate resets will likely transition to lower rates than previously held. Approximately 37 percent of all fixed-rate borrowings are set to reprice in the next six months, which should help maintain household disposable incomes.

In a lighter vein, a recently released summer BBQ cost index indicates a 7.5 percent increase in the cost of ingredients over the past year, driven by rising prices for butter, cheese, and bread. Despite this increase, BBQs remain a relatively economical dining option compared to the overall 25 percent rise in general prices reported by the Consumers Price Index since 2020.

The economic landscape in New Zealand is evolving, with encouraging signs of recovery tempered by notable risks. As the country moves into 2024, it will be essential to monitor these developments closely to gauge the sustainability of this upward trend.