Kiwibank: Economic Recovery Slows, Interest Rate Cut Needed

New Zealand’s economic rebound is proving sluggish, according to Kiwibank economists, who have revised growth projections downward. Challenges from abroad and a struggling housing market are contributing to a more protracted recovery period than initially anticipated, impacting businesses and households alike.

Revised Economic Outlook

Kiwibank’s economists now predict a mere 0.9% growth for the current year, a notable decrease from their earlier estimate of 1.4%. This adjustment reflects the reality that the economy, still recovering from the “recession the Reserve Bank made us have,” is facing considerable headwinds.

Mary-Jo Vergara, a senior economist at Kiwibank, noted the slow pace of recovery. She stated the economy is “crawling” after a challenging period for businesses and families. The downturn in the manufacturing sector has also been “steep” and disappointing.

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“We’re thinking one more cut to 2.5% will be necessary to actually see the economy recover and stimulated.”

—Mary-Jo Vergara, Senior Economist

Despite some expectations of a potential end to the easing cycle, Vergara believes a further reduction to 2.5% in the official cash rate is necessary to stimulate the economy. A recent report from the BNZ-Business New Zealand Performance of Manufacturing Index (PMI) showed a significant drop in April, with a reading below 50 indicating contraction.

Factors Influencing the Slowdown

The economists attribute the sluggish recovery partly to global uncertainties, which are significantly impacting businesses. Additionally, the anticipated slowdown in global economic growth is weighing on the domestic economy. The external sector, however, is showing strength, driven by increased export prices, particularly from dairy products.

Overall, the economic outlook suggests a delayed recovery, with anticipated improvements expected in the second half of this year and into 2026, assuming the housing market stabilizes and supports household consumption and the labor market. Unemployment rates are reaching a peak, but employment growth is projected to rebound by the end of the year. In April 2024, the consumer price index rose 0.6%, according to Stats NZ (Stats NZ).