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Westpac NZ expects 2024 to be a challenging year for the government, with the need to tighten fiscal policy while managing growing demand for public services.
The bank's economic overview for 2024 sets out its rationale for the Reserve Bank's monetary policy to stay the course on interest rates, with no hikes as long as inflation continues to track down to within its 1-3 percent target range this year.
"The official cash rate will likely remain on hold in 2024, although the risk of higher interest rates cannot be ruled out if the economy and inflation fail to adjust fast enough," Westpac chief economist Kelly Eckhold said.
"Domestic inflation remains very sticky and is only slowly declining. The labour market is similarly adjusting but more slowly than the RBNZ expected. Both factors seem likely to keep the RBNZ on edge for a while yet."
Fiscal tightening required
Eckhold said the government will also be challenged to do its part to bring inflation under control with a tightening of fiscal policy.
Westpac chief economist Kelly Eckhold Photo: Supplied / LinkedIn
"In the last few couple of years we've actually seen fiscal policy tend to add to growth in the economy as opposed to subtract from it. And that's put a lot more pressure on interest rates in the last couple of years."
Eckhold said loose fiscal policy had resulted in a deficit, which needed to be addressed.
"The International Monetary Fund estimate that New Zealand had a structural fiscal deficit of about 4 percent of GDP, which is reasonably significant and will need to be corrected over the next few years."
Bringing down the deficit was a what the government campaigned on.
"The reality though is that doing it is harder than saying it, particularly in the context of a population that's growing reasonably quickly, and as a result they'll be demanding more services from the government."
Eckhold said businesses and households were also expected to hunker down over the year, resulting in sluggish economic growth.
"We see economic growth at just 0.7 percent this year, which represents negative growth in per-capita terms, an unemployment rate rising to 5 percent over 2024 and slowing wage growth as the economy continues its much-needed economic rebalancing."
He said there were still plenty of external risks to create uncertainty.
"Geopolitical risks are elevated and the external economic environment is weak. Both factors continue to suggest a challenging outlook for NZ businesses.
Agriculture recovering
"A bright spot is that the outlook for the agriculture sector seems stronger as some of the worst fears of 2023 regarding the dairy and forestry sectors were not realised - as a result prices have notably improved. We see the farmgate milk price rising to $8.40 in the 2024/25 season."
Eckhold said climate change would continue to pose risks and rewards for the sector.
"Outside of dairy, improved climatic conditions in competitor markets should help reduce supply in lamb, sheep and beef markets, and allow some improvement in prices. The horticulture sector is enjoying much improved weather conditions than the terrible hit it received in 2023."
Housing market outlook
Eckhold said the residential property market would benefit from strong population growth and forthcoming changes in investor tax rules.
Westpac forecasts house prices to rise 6 percent in 2024 and 7 percent in 2025, which would be faster than inflation.
"New Zealand continues to surf the peak of a historic migration wave."
He said strong population growth would put pressure on the economy as the supply of new housing and infrastructure is weakening while demand is increasing.
"The outlook hinges on how quickly the wave recedes and how the labour market absorbs what we expect to be still high levels of labour supply through 2024.
"The implication is that both monetary and fiscal policy will need to be tight to allow the economy to rebalance and inflation to fall," he said.