Normally, when previewing a New Year, I stick to New Zealand-specific issues within our control. And I will (mostly) do that again this year.
It is, however, impossible to ignore the incredibly volatile global backdrop. Any number of issues could trip us up in 2025. (Tariffs, conflicts, political instability etc, etc.)
I think it would be a mistake to start second-guessing. We should just play the cards as they are dealt to us.
Volatility may offer opportunities as well as threats. We need to be vigilant. Much of that will hang on our government. Spot the dangers and the opportunities as they emerge, and deal with them. But don’t second guess – as I think too many observers and commentators are inclining towards.
That’s the substantial health warning out of the way. The following are some of the things I’m looking out for in New Zealand for 2025.
Ending 2024 with an inflation rate back in the 1% to 3% target range was a big deal. Can we keep it there though? (My detailed review of 2024 is here.)
Domestically generated inflation remained a concern through the past year. The so-called non-tradable rate was a still-elevated 4.9% as of the September quarter.
While some say the Reserve Bank (RBNZ) shouldn’t fixate on the domestically sourced inflation rate, the fact is it DOES worry about it and this concern influences the Official Cash Rate (OCR) settings.
If the RBNZ remains worried that domestic inflation pressures could continue we may yet see less interest rate relief over the coming year than hoped.
Imported, so-called ‘tradable’ inflation was running at -1.6% annually as of the September 2024 quarter. That’s the main reason our ‘headline’ rate dropped to 2.2%.
With the aforementioned potential global volatility this year, we can’t depend on low offshore inflation.
The RBNZ attempts, as much as possible, to ‘look through' one-off shocks to international inflation.
If, however, the effects prove ongoing, such as we saw with the global supply chain shock during the pandemic, then the impact becomes too great to ignore. And OCR action is needed.
So, whether inflation will stay in the 1% to 3% range is something to be watched. And this is obviously vital in what transpires with the OCR and with retail interest rates. And by implication with the whole economy.
The OCR will start 2025 at 4.25% and the RBNZ has given (surprisingly strong) indications that it will be reduced to 3.75% at the next review on February 19.
How low will it go?
How much lower will it go during the year? And, importantly, how much of the OCR reductions will be passed on by banks in borrowing and deposit rates?
The banks took on a front-running role in the second half of 2024, cutting rates even before the RBNZ began dropping the OCR in August.
New mortgage business for the banks has been sluggish in the past three years – certainly when compared with the roaring business they saw during 2020-21.
They have been keen to attract as much new borrowing as they can. But they won’t want to see the margin between what they lend money out at and what they borrow it for trimmed too much for too long.
We shouldn’t therefore assume bank interest rate reductions will exactly mirror the magnitude of OCR reductions over the next year.
According to the RBNZ about one-third of Kiwis have mortgages. So, lower mortgages will be significant in terms of what people can spend in 2025 and how this will stimulate the economy.
We should not, however, overlook the impact of deposit rates either.
In the period from 2019-21 the amount held with banks by households on term deposits dropped by over $20 billion as barely-existent rates of return prompted investors to look elsewhere.
Since the rise in interest rates after the middle of 2021 an extra $60 billion, which is a lot, has been tipped into term deposits by Kiwi households.
At what point now, however, as deposit rates drop, do people start looking around for somewhere else to park their money? And where do they park it?
Money looking for a home
Housing is usually the obvious answer in New Zealand.
Falling interest rates have a push-pull effect for depositors. They push them to put their money somewhere else. Lower mortgage rates ‘pull’ these same depositors into buying houses.
The first home buyers (FHBs) have been strong in the housing market over the past three years while the investors, particularly, have been pretty much sitting on the sidelines.
The attitude of investors will therefore be crucial for the market in 2025. Already there have been signs of a rise in activity (but from a low base) by the investors.
The RBNZ is forecasting 7% house price growth in the year.
But there are complications.
Rentals have flattened in recent times after strong gains through 2023. Just looking around Auckland suggests there’s a lot more inner-city accommodation available now than there was. Inbound migration reduced this year, which is likely a big reason. Outbound migration surged this year and is likely another factor.
Also, the RBNZ is now fully equipped with macro-prudential tools, having put in place debt-to-income restrictions (DTIs) this year to sit alongside the existing loan-to-value ratio (LVR) limits.
Investors will be encouraged by lower interest rates and by supportive government measures such as the restoration of interest deductibility and the lowering of the bright-line test threshold back to its original two years.
Against this is an uncertain outlook for rentals. And what sort of combined impact might the DTIs and LVRs together have as interest rates get lower? And then there’s migration. Will young people keep leaving in the same sorts of numbers as left this year? If they do, what happens to all the would-be first home buyers? What happens to homes that were bought by those migrating?
Ultimately the biggest issue for 2025 will be how quickly the economy begins to recover from the impact of the high interest rates.
Can we fix it?
Normally recessions come from some naturally occurring blow to the economy. The recession we’ve just had was engineered by the RBNZ. Does that mean it’s easier to fix?
The psychological impact of the interest rate reductions so far has seen a big improvement in the mood of the country. Business and consumer surveys are showing much greater confidence.
However, I think a still unanswered question is how much lasting damage has been done by the high interest rates. A concern throughout the 2021-23 OCR hiking cycle was always that people may have been doing it tougher than they let on.
It’s still possible therefore that the RBNZ ‘overcooked’ the rate hikes and the damage is greater than we might like to think.
Confidence can be brittle and easily knocked. So, it is still by no means clear that the upticks we are seeing in intended activity - as expressed, for example in business surveys - will convert to actual activity as 2025 progresses.
Okay, so plenty think about.
There is much more that could be said about a year to come that might really offer anything - both positive and negative.
The above, however, are the key things I’m looking out for in 2025.
Many ‘ifs’ cloud the picture.
If inflation stays under control, we can see interest rates continue to come down.
And if that happens spending may increase and the economy may start to move again.
But ‘if’ something untoward does happen internationally then this could blow everything off course.
As I said at the start though, we shouldn’t second-guess. We just need to carry on and do our thing. And hope that we end up with a better year than the one we’ve just had.
*This article was first published in our email for paying subscribers first thing Thursday morning. See here for more details and how to subscribe.
46 Comments
To me it certainly feels like things are trending downwards. So many company 'restructures' with associated job loses, so many businesses (particularly hospitality) closing their doors many of which are solid, established businesses, so many people moving or considering moving overseas. Chrismas will no doubt inject a bit of money into the system but I think the hangover in the New Year will be a bad one.
For sure, a lot of people are talking about moving overseas. Amongst my peers - mostly early to mid-50s - quite a few of us are considering moving on. A couple of my friends have mentioned they're waiting until they and their spouse pass 55 years of age and then will make the move.
You don’t need to apologise for pessimism here! I’ll apologise for optimism - I think the recession will wear off next year. I’m picking a mixed year, some good news, some bad, but overall some GDP growth. (Queue PDK with a comment about GDP growth being impossible).
We’ve had GDP growth for most of the last 20 years, the big difference at the moment is that the RBNZ has the brakes on (but they’re taking their foot off). Good Fontera payout, mortgage rates coming down, houses becoming more affordable, hopefully no floods or disasters, sounds like an improvement.
Needing mortgage rates to come down to 5% to encourage discretionary spending, says there's something deeply flawed.
Only 1/3 have mortgages so there's 2/3 with plenty to spend...
The debt tap needs to stay off for a while unless it can be encouraged to flow into areas that need growing. House prices don't need more growth.
The recession has affected the wrong end of the economy.
I forgot the sarc tag.
That ratio also highlights why the OCR is a worse tool now than it was 30-40 years ago, and has a more lopsided effect.
I'm guessing the proportion of mortgages was higher in the past so interest rate effects were better spread across the economy.
It also highlights how meaningless a lot of economic data is.
We have a fairly big mortgage, this OCR hasn’t been fun for us either, and I stupidly didn’t fix very long at < 3% like some did.
You recently said you had two above average incomes, so you may be in a similar income position. We tend to live fairly cheaply, don’t have flash cars / gadgets / etc or eat out much
I suspect we aren't going to see mortgage rates much south of 5% which will keep a lid on house price increases. If they increase by 7% next year I will eat my hat.
People leaving to Australia will keep unemployment lower than it would be otherwise, but I still think it will peak over 5.5%.
I also predict that the coalition will implode before their full term is up
How many of them are simply the children of a New Zealander who has returned because they cant get a benefit in Australia? Or the families of 501 deportees? Or Australian retirees who don't qualify for an Australian pension so they thought they'd move to NZ and get ours?
We ship all our productive people to Australia, and in return we get the beneficiaries back.
How many of them are simply the children of a New Zealander who has returned because they cant get a benefit in Australia?
With opportunities, pay and jobs so plentiful in Australia, why would they need a benefit there? Jump on to youtube and search for Australia cost of living crisis. This report says food bank queues are up by 60%. (5) The confronting reality of Australia’s cost of living crisis | Big Australia - YouTube
Based on the Australian articles I sometimes read, the young people in Australia are overwhelmed, hopeless and crushed under the weight of the cost of living crisis and high cost of rents.
As I always say, the grass always seems to appear greener on the other side, so Kiwis go to Aus. Truth is Ausies are probably coming to NZ for a "better future" lol:) Stay in NZ I reckon and try to make it into a better country rather than abandoning it for Aus only to find yourself struggling there.
Normally recessions come from some naturally occurring blow to the economy. The recession we’ve just had was engineered by the RBNZ.
I'm not sure I buy this line of reasoning. If the absence of insanely loose monetary policy results in a recession, can we really say that is was the reversion to normal interest rates that caused it? Is the RBNZ really to blame, or was holding interest rates unnaturally low just concealing problems elsewhere?
My prediction:
To get any meaningful economic growth going, we're going to need retail mortgage rates with at least a 4. So the RB and pundits can bang on about non tradable inflation being of concern all they like. But under that defensive scenario the economy (and our beloved property market) is going nowhere.
Or people could give up their mountains of debt. I know people who have mortgages on "investments" easily paid off by selling the property who are struggling along not spending while they wait for their super eligibility to kick in.
If we want to see a change, we need to get the banks to start calling in non-performing non-OO mortgages.
Zwifter, i understand the need for envious elder-bashing. A million bucks still is a lot. But what if the old folks want to leave you an inheritance, investments as well as the house? It's what you kids are wanting, cos you say they ruined it for generations after/whatever. Time for retribution.
Then your elderly parents won't want to tear through the capital. So assuming they are a couple on NZ Super (about $40,000 a year) , but they want an extra $20,000 a year for rates, insurance, some well-deserved treats, a trip to see the granddies? a million at 4% is $20,000 a year before tax. And that interest rate may well be lower in a year. So can you begin to see how they still have to be a tad frugal, monitor the finances, factor in eating into that capital sum? It's more pragmatism than old-folk post-depression fearful parsimony, perhaps.
A million a year at 4% is $40,000, Super is $41,500. Mortgage free home and a couple of new cars, most people would never have had that much disposable income their whole lives. Its an mental attitude to money, not one based on need. TD's have been closer to 6% so that's $100K a year.
Thanks for pointing that out, Zwifter. I have dyscalculia so usually double check before posting. But forgot today, Finances& retirement planning are especially a problem for the neurodivergent, as you can see with the example of myself. Up to 30 percent of a population might be ND or suffering g some sort of cognitive impairment.
Could it also be that the majority of the older gen have aimed for nothing more than their retirement? To have the lifestyle they couldn't have while they worked their way to 65?
They may have done well as the early "investors" in the residential property boom, sold up and retired in another location to live their retirement dream. They have some cash in the bank or liquid safe investments, a mortgage free home, and some flash toys. It's all going to go into the retirement village. Anything left over for the "kids" might be a bonus but not the plan.
They thought they had it so hard, and the next gens have it so easy. There's a reason they're also referred to as the Me generation.
We obviously have no datasets or meaningful analysis to know who's financially set, and who's still "struggling" in the older cohort.
Old fears die hard.
Their parents may have struggled through 2 "great" wars, the first half of the 1900's when NZ was effectively still being developed. They may have had nothing given to them, but when did the "boomer" gen work any harder, or struggle more than anyone else?
Many possibly grew up with a fear/shame of being poor and now still think they never have enough. It's an affliction that affects the majority of humankind.
At what point now... do people start looking around for somewhere else to park their money? And where do they park it? ... Housing is usually the obvious answer in New Zealand.
I always find this reasoning weird. Nobody puts money in a house, they exchange a financial asset (their term deposit balance) for a non-financial asset (a home). However, the seller then receives the financial asset money (net of any outstanding mortgage payment if there is one). So, there is still money looking for a home, right?
The finance industry has convinced everyone their home is a financial asset, and that money should always be chasing investment and returns. And via debt leverage so as not to use their own money. It's why "investors" are the favoured class.
Note that the author's default investment thinking is houses
Investors will be encouraged by lower interest rates and by supportive government measures such as the restoration of interest deductibility and the lowering of the bright-line test threshold back to its original two years.
It's a narrative that's taken hold and the "top" 10% are still the biggest beneficiaries. Meanwhile the 90% keep losing purchasing power, think the government is to blame, and the economy goes nowhere according to expected metrics.
When you realise how words and language are used to programme it gets weirder.
The things to watch out for will be:
1.An external shock from geopolitical events.
2. Net migration turning negative, if the forecasts come to fruition.
3. How low the OCR gets and subsequent mortgage rates.
4. Job losses and unemployment increasing.
5. Whether the government use fiscal policy to support the economy in any meaningful way.
6. The narratives used when the summer selling season fails to deliver anything other than a small bump to the housing market.
7. The coalition government when those swing voters realise this government is not getting anything back on track other than donors policy initiatives.
re 5/ any govt even with a brain the size of a pea starts to realise that the next election is coming up, things are too soft to win comfortably so action needs to be taken and the economy got back into gear.
re 7/ I'll never vote for the Labour govt again and I don't want to pay a wealth tax so the current idiots will still have my vote next time around. I imagine that they have a buffer with people like me. The weak link will be can NZ First get to the 5% mark again.
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