Economy ‘very close to turning point’ says Westpac

In his introduction to this quarter’s Economic Overview, Westpac Chief Economist Kelly Eckhold writes, ‘The economy seems very close now to the turning point we have anticipated was coming for some time. The past few months have seen increasing signs that demand is cooling in response to the Reserve Bank’s interest rate increases over the past 18 months. That gives us confidence that inflation can be brought down from its current lofty levels. Monetary policy is working.

‘The key questions now are how easy will it be to bring inflation back inside the 1% to 3% target range, and will the economy slow sufficiently to allow this to happen?

‘The economy likely won’t slow as much as we feared a few months back. Net migration has rebounded faster than expected and population growth is set to rise to its highest level in decades. The world is back on the move after a few years of hunkering down, and New Zealand is one of the places where people want to come live and work. New entrants will bring valuable skills and experience to a labour market crying out for workers. But this valuable supply will also bring demand that will offset some of the impact rising interest rates are having.

‘None of this takes away from the point that the interest rate cycle is very mature and the peak in interest rates is near. The extra bit of work we think is required is very much in the vein of “a stitch in time saves nine”.’

Here are some highlights; the full report can be downloaded here.

Inflation

Inflation is past its peak, but it will be a long ride back to the Reserve Bank’s target. The past impact of supply-driven inflation is behind us leaving a hard rump of sticky demand-driven inflation. Monetary policy is working but an historic increase in migration looks set to add demand at an inconvenient time. More interest rate rises are required to finish the job. ‘Better to finish the job now than to have to come back with stronger more painful measures later,’ says the Overview.

Agriculture

2023 has been a tough year so far for farmers and growers, punctuated by red-hot cost inflation, rising debt servicing costs, falling returns and weather events. However, the second half of 2023 is shaping up better. Cost inflation is cooling rapidly, commodity prices are lifting, and interest rates are peaking. As such, the Overview expects sector profitability will improve from here.

Exchange rates

The New Zealand dollar has made gains recently following the RBNZ’s larger-than-expected 50 basis point OCR increase in April. Further gains are expected, with persistent US dollar weakness, favourable interest rate differentials and rising export revenues likely to add further support.

The impact of migration

Net migration has turned sharply positive again, as the reopening of the border has unleashed a pent-up demand to live and work in New Zealand. Westpac now expects a record net inflow of 100,000 people this year. But the pool of potential arrivals is very large, and there are plausible scenarios where the balance could be much higher. On the other hand, it’s possible that migrant inflows could peter out after their initial burst, in the same way that outflows of New Zealanders have (while they remain relatively high, they seem to have peaked in the third quarter last year).

There’s also a great deal of uncertainty around how this rebound in migration will flow through to the wider economy. On one hand, an influx of workers may help to take the upward pressure out of wages – employers are certainly hoping this will be the case. But in other areas they are likely to add to already-strong demand, particularly in housing, where population growth is set to outstrip the pace of homebuilding in the year ahead.

For businesses, the rise in population growth signals a sizeable boost to demand. That will help to offset some of the challenges that many businesses have been grappling with, such as the mounting pressures on operating margins. However, the boost to demand from high net migration is masking what will be a much tougher environment for many New Zealand households.

Comment

Generally, the impression given by Westpac’s and other banks’ economists is that we are near the turning point in the economy and can expect things to start to improve from here as the global economy recovers and takes New Zealand with it.

The bottom of a cycle always offers opportunities for those ready to take advantage of the growth to come. In an election year, we can expect politicians of all parties to make a great fuss of any positive and negative figures, and the general media to create clickbait headlines and ‘opinion pieces’ which could make it hard to get a realistic view. That’s why it’s essential for business buyers to do their homework. There is growth to come, and the chance to get in now and benefit as the economy improves – as long as you make the right choice. Be sure to take advice from franchise-experienced financial advisers before making any decision.

 See below for a summary of the economy in six charts. See full report here.

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