last updated 17/08/2023
NZ economy 'undergoing rebalancing'
last updated 17/08/2023
August 2023 – How fast will the New Zealand economy recover? The latest Westpac Economic Overview looks at the pros and cons, and we offer some key points for franchising
Several imbalances are clearly evident in the New Zealand economy, according to the latest Westpac Economic Overview. In his introduction, Kelly Eckhold, Westpac’s Chief Economist, writes, ‘Most fundamentally, while growth is slowing, the economy is running above its sustainable capacity and inflation is still very high. This is partly why the current account deficit remains very large. Meanwhile, the fiscal position remains in the red despite the unemployment rate sitting near historical lows.
‘The Reserve Bank of New Zealand (RBNZ) has appropriately tightened monetary policy to bring about a better balance between demand and the economy’s productive capacity. Given the marked tightening of monetary policy over the past couple of years, we are now in the period where we should be starting to see tangible progress on the “great rebalancing”. The key question is how fast will this rebalancing occur?
‘There are some encouraging early signs. Inflation is now off its highs (at least on a headline basis). Consumer spending has been weak indicating that households are tightening their belts as interest rates and other cost of living pressures bite.
‘There are also areas of concern. Domestically generated non-tradables inflation hasn’t fallen as fast as expected and core inflation remains high. The fiscal position is not improving as falling profitability is undermining business tax revenue and means the government is not currently assisting with the required rebalancing – its contribution may come in future years. And while the current account deficit has begun to narrow, it will likely remain elevated compared to pre-pandemic levels.
‘Much will depend on the extent to which slowing growth is reflected in a loosening of the labour market. Forward indicators suggest that employment growth will slow, but there is uncertainty about how quickly this will translate to slower growth in wages. For inflation to fall as quickly as the RBNZ has forecast, wage growth needs to slow towards levels consistent with a sustained low inflation environment and trend growth in productivity.
‘Our sense is that further monetary policy action is required to provide greater assurance that inflation will fall in a timely manner. This is why we see a further increase in the Official Cash Rate (OCR) later this year (the report suggests a final 25 base point increase in November) and a slow path downwards in a year’s time. But risks are significant in both directions. We will be closely watching the data – both at home and abroad – as we continue to assess where interest rates will need to go.’
The Overview also notes that, whatever the outcome of the election, the new government will face politically unpalatable choices between reprioritising existing services to fund new Budget decisions (ie. cut spending); and/or introducing policy decisions to change revenue settings (ie. increase taxes). Alternatively, the government could borrow more and push out the projected return to operating surplus, but that would risk breaching previously stated fiscal targets.
Key points for franchising
While the above has implications for business in general, there are some key points in the report of specific interest to the franchise sector.
Migration driving demand
Inflows of migrants exceeded departures by 78,000 in the year to May (compared to a net outflow of 20,000 people in the previous year). And with new arrivals to the country continuing to lift even as departures rise, net migration is on track to reach 90,000 by the end of this year. This upswing in migration is adding to the size of the labour force, helping to alleviate the staff shortages that many franchisees have endured. With the return to full trading hours, revenue should start to increase again.
The rapid turnaround in migration is also adding to consumer demand and is providing a boost to the housing market. This may also impact upon the demand for business opportunities.
Staffing to get easier
GDP growth is set to remain subdued over the remainder of 2023 and through 2024, with unemployment to rise from 3.6% currently to 5.2% by the end of next year. This increase in unemployment levels should provide an additional boost to the labour market, further reducing staff shortages. It may also help to reduce inflationary pressure on wages, making business ownership more attractive once again.
Homeowners to see equity restored
With population growth surging and expectations that borrowing costs are close to their peak, the sharp fall in house prices that began in late-2021 has now been arrested. Westpac now expects prices across the country to rise by almost 8% over 2024 (up from its previous forecast of a 2.5% rise). This will help restore the equity that people have in their homes, with a resulting impact upon their ability to fund a business purchase.
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