New Zealand’s economy remains weak, but falling inflation offers room for further rate cuts and stimulus.

New Zealand’s economy contracted by 0.2 percent in the second quarter of 2024, a decrease from the marginal 0.1 percent rise reported in Q1. This weak result led to a 0.5 percent decline in annual growth for the year ending June 2024, highlighting the depth of challenges faced by the economy. While tighter monetary policy aimed at combating inflation was the trigger of the current downturn, subdued global growth and record-high emigration rates further exacerbated the slump and weakened domestic confidence.

Inflation has shown signs of easing, dropping from 4.0 percent in March to 3.3 percent in June. If current trends continue in Q3, annual inflation is projected to drop to 2.3 percent, which will be within the Reserve Bank of New Zealand’s (RBNZ’s) target range of 1.0 to 3.0 percent. However, the RBNZ has not waited for this to respond, cutting the Official Cash Rate (OCR) by 25 basis points in August and a further 50 basis points in October. The sharp rise in unemployment and troubling growth performance has prompted policymakers to pull the trigger on easing to boost growth and alleviate the strain on households and businesses.

As inflationary pressures continue to ease, further rate cuts are expected. However, the RBNZ will be cautious with its approach and will monitor the response from the market to avoid a strong resurgence in demand.

The labour market continues to weaken, driven by a decline in economic activity, reducing labour demand, and the 81,000 migrant departures recorded in the year to July 2024. This trend has pushed unemployment to 4.6 percent in June, representing a 1.4 percent increase since Q4 2021.

High interest rates have subdued economic activity, but the commencement of monetary policy easing and recent income tax cuts by the government are expected to see modest improvement in the outlook.