Back in the band?

In presenting the November iteration of its Quarterly Economic Overview, Westpac's Senior Economist Michael Gordon struck a hopeful chord, leaning into momentum built over the course of the past two quarterly updates. 

Gordon told a packed room at the bank's Takutai Square headquarters on November 12, "The inflation dragon is back in the cave." 

Delivering an address on the latest local economic update, Gordon described the march back to more positive economic times as 'a slow, quite drawn out procession'. The report noted, "Inflation slowed significantly in the last six months such that it now looks likely to be comfortably near 2% for the first time since 2021. While domestically generated inflation remains high, the RBNZ now has more degrees of freedom to manage future challenges.

"The RBNZ has rightly stepped up the pace of easing as there’s no need for high interest rates when the task ahead is to stabilise rather than reduce inflation. The OCR can move closer to neutral more quickly and we expect another 50bp cut before Christmas."

Westpac's Overview says it expects further cuts early next year, with the OCR to fall slightly into stimulatory territory to 3.50% by May 2025. "However, the pace of easing should slow in 2025 as the OCR moves closer to neutral. This will also allow time to assess the impact of the significant cuts in 2024," it says.

Labour market trends continue to look favourable for franchisors seeking a greater choice of quality franchisees. "The labour market is set to continue softening as past weakness in output plays through... While hiring has been subdued for some time, it’s only in recent months that we’ve seen a shift to outright job losses.”

While trading conditions for franchises have largely been very tough in the latter part of this year, the signs are there for improving conditions in 2025, despite a prediction of weak investment spending still lasting over the next few months.

“In addition, there has been a sizeable lift in business sentiment in recent months with many businesses telling us they’re optimistic that the fall in interest rates will help to stoke demand over the year ahead... Although we haven’t seen widespread falls in operating costs, reports of large increases and the related pressure on margins have become less prevalent (though there are clearly some ongoing pain-points, like the cost of insurance and local council rates).”

Significant uncertainties remain, however. Westpac warns geopolitical tensions and the US election results could significantly impact financial markets and global trade, adding, "The RBNZ is well positioned to adjust policy if required. Such is the benefit of having the OCR close to neutral levels.

"It’s looking more likely that the OCR will spend some time modestly below neutral levels in the year ahead. But the economy seems well placed to recover as lower interest rates and improving export incomes provide support. Stronger business and consumer sentiment and stirrings in the housing market point to better times ahead."

"New Zealand’s large twin current account and fiscal deficits mean that adjustment is still needed. If those adjustments can't or won't happen, then the exchange rate will likely do the adjustment for us. But for now, we should enjoy being 'Back in the band!'"

 

Read the full Westpac Quarterly Economic Overview here.

We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.