Businesses, RBNZ optimistic about trading and economic conditions

With interest rates down and a Free Trade Agreement with the EU now in action, things are looking up for New Zealand business owners.

There’s no doubt that things have been quite tough for many New Zealanders. But, as signs of green economic shoots begin to emerge, it is time for businesses to start investing in future growth. There are several factors contributing to this phase of greater stability and improvement.

Reduced interest rates

As widely expected, the Reserve Bank of New Zealand (RBNZ) reduced interest rates by 50 basis points to 4.25% in November on the back of falling inflation.

It said inflation was converging towards the midpoint of its target range of 1% to 3%. And, if economic conditions continue to evolve as projected, it anticipated lowering interest rates again early next year.

Inflation has slowed significantly in recent months. Indeed, BNZ chief economist Mike Jones recently described inflation as well and truly beaten and said it was likely to stay that way in the short term.

The RBNZ, however, warned that employment growth could remain weak until mid-2025 and the financial stress for some would take time to ease. While wage growth was slowing, it said unemployment was expected to continue rising in the near term.

The RBNZ, however, was more upbeat on the economic outlook for next year, forecasting a recovery in economic growth as lower interest rates encouraged investment and other spending.

Gross domestic product (GDP) fell 0.2% in the June 2024 quarter, but New Zealand narrowly escaped a technical recession after a downward revision to 0.1% for the March quarter.

A technical recession is defined as two consecutive quarters of negative economic growth. So, economists will, no doubt, be eagerly watching out for Stats New Zealand’s announcement of third-quarter GDP figures on December 19.

Nonetheless, the RBNZ has predicted that annual average GDP growth will recover to around 2% by the end of 2025, as lower interest rates support a pick-up in demand across the economy.

Optimism ticks up

The RBNZ has said that multiple falls in interest rates have already buoyed consumer and business confidence.

In its Quarterly Predictions for December 2024, it said: “Firms in the retail and service sectors are feeling particularly upbeat about an improvement in general economic conditions. With these sectors being generally more exposed to households, the lift in sentiment in these sectors suggests expectations that lower interest rates will have a particularly positive impact on households.”

Various surveys confirm the RBNZ’s view of improving confidence.

The New Zealand Institute of Economic Research’s (NZIER) latest Quarterly Survey of Business Opinion, for example, revealed a noticeable uptick in business confidence in the September quarter.

It said a net 5% of firms expect a deterioration in general economic conditions over the coming months on a seasonally adjusted basis – a big drop from the net 40% of firms feeling downbeat in the June quarter.

And, while NZIER’s latest survey found that a net 31% of firms reported a decline in activity in the September quarter, only a net 2% expect weaker activity in the next quarter.

NZIER said the improvement in sentiment is most evident in the retail sector. Despite orders, sales and profitability remaining weak in the September quarter, a net 13% of retailers are feeling positive about the general economic outlook for the coming months. A net 8% of retailers are also expecting domestic demand to improve in the next quarter.

Elsewhere, recent data released by payment provider Worldline NZ shows consumer spending has improved. Payments across its network reached $3.09B in October 2024, up 0.3% from October 2023. This growth is projected to continue well into the festive season.

However, a survey from price comparison website PriceMe showed that consumers remain price sensitive, with 51% of New Zealanders planning to buy gifts during Black Friday sales, compared to 35% in 2023.

Favourable trading conditions

The RBNZ said economic growth rates in the US and China are expected to slow over the year ahead, while the growth outlook for Europe remains sluggish. Nonetheless, some economists believe improving export incomes will also provide some support to the economy.

One positive development here is New Zealand’s free trade agreement (FTA) with the European Union (EU) which came into force on 1 May 2024. That’s because the EU is one of the world’s largest trading markets and New Zealand’s fourth-largest trading partner.

The FTA has removed duties on 91% of New Zealand’s goods exports to the EU and as Deloitte notes, the agreement should deliver new quota opportunities worth over $600 million in annual export earnings.

In good news for New Zealand businesses, favourable quotas have been established for butter, cheese, milk powders and protein whey. Producers of red meat, dairy sectors, fish, seafood, honey, wine and some manufactured products and services will gain from the FTA.

The bottom line

BNZ’s Jones recently noted: “Forward indicators of New Zealand economic growth continue to turn less negative and confidence about the future has climbed. But any expectation that the economy might suddenly lurch back into significant growth mode is wide off the mark.

“It’s like trying to start a lawnmower that’s been on ice all winter. It takes time and can be painful. And even when it does start there’s going to be some blue smoke and spluttering before things get up and running properly.”

Jones said recent news flows appear to paint a picture of an economy that’s stabilising at best.

He added: “Future prospects have certainly lifted, but genuine expansion remains a story for (early) 2025.” For example, September PMI and PSI readings confirm that the manufacturing and service sectors are still struggling to get out of contractionary territory, even if activity has firmed a little from the extreme lows of June.

“We’ve also seen more evidence of the migration boom winding down, building consents remain in trend decline and retail spending while appearing to break the shackles of the downtrend, does not appear to have turned higher.”

So, is it time for your business to start positioning itself for an improved economy?

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