Further interest rate cuts are coming, but why does everything still feel so bleak? Stewart Sowman-Lund explains for The Bulletin.
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It’s the economy, stupid
Yesterday we looked at three big issues set to dominate a lot of the year – and this morning we have more of those big picture calls. The Spinoff’s published its predictions for what will suck up air time in politics in 2025, and unsurprisingly, there’s a lot of talk about the state of the economy. “We have a structural deficit. It has to be solved. There are no painless solutions,” wrote Eric Crampton, chief economist at the New Zealand Initiative. “The economy, stupid,” said founder of The Spinoff, Duncan Greive. “The whole theory of the coalition is that they’re the parties of business, that they understand how to make lines go up. The rest of the Anglosphere is somewhere between cautiously positive and flying, while our economy is falling apart. It needs fixing, and fast.”
Business community concerned
It all contributes to what can broadly be described as “bad vibes”. It may now be almost five years since the start of the Covid-19 pandemic, but the economy and the cost of living remains a dominant, though easing, concern among the public and, according to new research, the business community as well. The Herald’s Chris Keall reported yesterday (paywalled) that 77% of senior managers identified economic uncertainty as the primary threat to their organisation over the next 12 months, compared to just 13% last year. Respondents from larger firms were more likely to be optimistic about the year ahead, the survey found.
In a Q&A for the Herald, new EMA chief John Fraser-Mackenzie was similarly pessimistic. “Even with lower interest rates and the economy recovering, it will take time to rebuild balance sheets before there is any meaningful investment in growth,” he said. The government has identified that economic growth has to be a focus this year, intending to open us up to further foreign investment. Finance minister Nicola Willis told the Herald’s Thomas Coughlan (paywalled) that the goal was to “have more invested here in industries and projects that will drive growth and development”.
Interest rate cut coming next month
From the outside, it feels slightly confounding that the economic outlook and the general mood remain so gloomy while interest rates have been on a downward trajectory. The Reserve Bank has been widely picked to make a further 50 basis point cut to the official cash rate next month, and indeed governor Adrian Orr signalled as much during the November update. However, that may now be a line call. As BusinessDesk’s Rebecca Howard explained yesterday (paywalled), a weakening New Zealand dollar coupled with a strengthening US economy (and a new president waiting in the wings) may prompt our central bank to go with a more cautious option in February. “The anticipated 50 basis point cut… should not be considered a done deal,” BNZ senior economist Doug Steel said. “Indeed, we think there is much more chance of a 25 than a 75.”
The NBR’s Nicholas Pointon has a good write-up on our current economic situation, for subscribers only, explaining that as a general rule countries with higher interest rates tend to attract foreign investment, increasing demand for that country’s currency compared with those offering lower rates.
Consumer spending muted
Meanwhile, in more unwelcome news for businesses, consumer spending growth was at its lowest level in five years in 2024, reported RNZ. Data showed that consumer spending through retail merchants, excluding hospitality, rose just 0.8% last year, while the average transaction declined by 0.6%. While transaction numbers may have been marginally up, payments company Worldline said the annual underlying spending growth was the lowest in the last five years. As noted by The Post, while there was the traditional flurry of pre and post-Christmas spending, it wasn’t enough to push spending above levels seen in major cities a year earlier – December spending was down 0.7% on 2023. Hospitality businesses also suffered, reported Worldline, with total spending down 2.7% on the year before.
