New Zealand economic recovery, Digi Mart USA News (New Zealand): New Zealand’s economy is improving, but the country’s largest bank says the recovery does not feel like one for everyone. The bank said the economy was being buffeted by several cyclical and structural forces that were hard to unpick, alongside an oil price shock.
The bank said the recovery remains intact for now. GDP has grown for four consecutive quarters, including a better-than-feared 0.2 percent quarter-on-quarter increase in the second quarter that lifted annual growth to 2.6 percent.
However, not everyone is experiencing the benefit, as the unemployment rate is higher than it has been in more than a decade, and inflation risks are concerning the Reserve Bank.
Senior economist Miles Workman said growth is being led by pockets of the economy, such as manufacturing and the tradable sector. Meat, dairy and international tourism exports are benefiting from robust demand and a low New Zealand dollar.
Monthly short-term visitor arrivals have finally recovered to around their 2019 level, and with the weak currency boosting visitors’ spending power and airline capacity up meaningfully, the coming summer could be among the country’s strongest tourism seasons.
Workman said the low New Zealand dollar is probably also giving the manufacturing sector a competitive advantage. However, tradable-oriented industries also tend to be the fastest-moving, both quick to recover and quick to slow.
Should this tailwind fade before the domestic economy gains momentum, New Zealand’s recovery could stall.
The domestic part of the economy is much weaker, and consumer confidence is low. Parts of the economy closely related to the housing market, as well as private consumption, are feeling headwinds because of the weak labor market.
Workman said he hopes the slower-moving non-tradable side of the economy will pick up steam over time, but with global headwinds and risks, the outlook is very uncertain.
Workman said that for many households, it would not feel like a recovery at all because the labor market is weak and they are facing higher costs. He said that with inflation where it is and threatening to remain elevated, the Reserve Bank must be cautious about how much recovery it is willing to tolerate, since strong growth could represent an upside inflation risk.
International risks include the potential for an AI-driven market crash and other countries running significant deficits. Workman said this is adding to caution across global financial markets, particularly the bond market, which New Zealand would not be immune from if global bond markets wobble.
He also pointed to the geopolitical backdrop and the oil shock.
Workman said the research shows that the inflation impacts of an oil supply shock tend to arrive quickly but do not persist for long, while negative activity impacts across the global economy appear with a lag of about one to two years. He described this as the largest supply shock in living memory, making the magnitude of its effects very difficult to calibrate.
He warned that by 2027 the global economy could be considerably weaker, which would leave New Zealand’s export earnings and broader economic momentum vulnerable.
The bank still expects the official cash rate to increase in December, February and March, taking it to 3.5 percent. That level is not expected to slam the brakes on economic output and growth, but it is also not stimulatory.
Workman said a persistently weak New Zealand dollar provides more monetary fuel to the tradable sector, which may require a higher-than-otherwise cash rate to offset if the Reserve Bank aims to keep growth near its trend level and prevent upside inflation risk from materializing.
