With the first quarter of the year nearly gone, and with GDP having returned to growth, David Hargreaves has a quick check on the economy's pulse

Well, we now know the economy finished 2024 in better-than-it-had-been shape.

How is 2025 going so far?

Much as I hate to use the term ‘mixed’ - because it sounds a bit on-the-fence - well, mixed it appears to have been to date.

The early impression is of improving underlying economic conditions.

But this is being balanced by a cautious, even doubting, public.

As far as the general public and the business community are concerned, we appeared to get a nice bounce in sentiment after the Reserve Bank (RBNZ) started cutting the Official Cash Rate (OCR) in August of last year. And that lift in confidence seems to have carried us through to the end of the year.

But this appears to have been a bit of a ‘relief rally’ and it has been followed by something of a fall-off in confidence in the early part of this year.

We should remember it had only been as recently as late May 2024 that the RBNZ was forecasting an increased chance it would HIKE the OCR again in 2024, while no cuts to the OCR were forecast till the third quarter of of 2025. That's right, according to the RBNZ then, rates relief would still be some months away from now!

The abrupt reversal of this ‘stronger for longer’ rhetoric that saw rates then being cut in August of last year produced an  immediate surge in business and public confidence.

But this could be likened to beating your head against a wall. It's very nice when you stop. But then you realise you’ve got a headache.

A heady mix

For us the headache on this occasion stemmed from a combination of factors. One factor was simply that while banks had been cutting their mortgage rates some time before the OCR cuts started in August, it takes time for the lower rates to catch up with everybody. And this was the case last year even though much of the mortgage-possessing part of New Zealand's population had been fixing their mortgages for short terms in anticipation of falling rates.

Then there was unemployment. The unemployment rate at the end of 2024 was 5.1%, up from just 4% at the end of 2023.

Then, there was GDP. Our economy shrank by 1.1% in each of the June and September quarters - though we didn’t find this out till the data was released just before Christmas. A very merry Christmas present.

The rising unemployment and the falling GDP were largely a result of the high interest rates deployed in order to beat back inflation. The good news was inflation dropped back close to the targeted 2%. The bad news was the economy got flattened in the process and significant numbers of people lost their jobs.

So, if there was a surge of relief at the prospect in the latter half of 2024 that interest rates would not be staying high, this tended to fade in the face of the reality of a flagging economy.

Anyway, fast forward to March and we’ve now been informed the economy was not dead, just resting, and GDP increased 0.7% in the December quarter, well ahead of the RBNZ forecast of 0.3%.

However, the news of the GDP revival in the December quarter has come amid some, yes, mixed, results in what gets styled as high frequency data. 

All rather confusing, really

The BusinessNZ Performance of Manufacturing Index (PMI) in February showed NZ manufacturing expanding at its greatest rate since August 2022. However, the BNZ – BusinessNZ Performance of Services Index (PSI) actually slipped back into contraction in February, having broken out into expansion for the first time in 10 months in January.

Retail card spending rose strongly in December, but then dipped in January, before making a small rise in February. But it wasn’t a particularly convincing rise and sales figures were well down on what they had been for the same month a year earlier - and those sales figures are not adjusted for inflation.

The housing market looks to have stopped falling - but it’s not rising much either amid a glut of listings. The monthly mortgage figures are showing some large increases again after two deadly quiet years. But at the same time, there was a sizeable surge in the amount of non-performing loans in January.

So, overall in terms of the economy, what are we looking at here?

It’s a confusing picture probably brought about by the fact that we’ve had an economy in decline from which the subsequent recovery is uneven. Not all the bits of the economy are improving again at the same time. And unhelpful also is the volatile global situation.

My take on it is conditions in the underlying economy are possibly improving rather more quickly than we are necessarily aware of as the interest rate reductions begin to seriously kick in.

A big factor easy to overlook by us city slickers is that things are looking pretty damn good down on the farm at the moment after some hard times. Meat and dairy prices are well up, helped by a Kiwi dollar that’s well down - giving those exports a nice kick along.

Our terms of trade, a measure of purchasing power comparing  export prices and import prices rose 3.1% in the December quarter on the back of rising export prices, particularly for dairy, beef and lamb.

Our giant dairy co-operative Fonterra boosted its half-year earnings and dividends while being on track to pay a record farmgate milk price to farmer shareholders of probably about $10 per kilogram of milk solids.

The regions lead the way

The upshot is that there's going to be more money available to spend in regional NZ and so expect to see some nice tailwinds coming for the economy from the regions. For a while at least, this may create something of a two-tier effect, with the regions leading in buoyancy while the main centres lag. But as the buoyancy and confidence spreads, the cities will catch up.

It is early days.

To go back to the interest rates, the relief is just really properly kicking in now.

Because of the various lags involved, the yield for banks from mortgages, as per monthly RBNZ data, was still rising as recently as October - peaking at 6.39%. It then began falling only slowly. But now the falls are picking up pace. In January the yield figure fell from  6.29% to 6.21%. In terms of fixed rate yields, these had hardly moved till January. But then they dropped from 6.33% to 6.24%.

So, the rate reduction machine took a while to kick into gear, but it’s going now.

Help is on the way, at increasing speed. And the impact will be felt progressively more as the months go on.

Then it becomes about confidence and whether people have the confidence to spend and to make investment decisions.

The general level of confidence in New Zealand appears at any given time to be quite heavily influenced by the state of the housing market. So, it is definitely going to be interesting to watch how the housing market goes as this year progresses.

After that extraordinary 40%+ pandemic surge in house prices, there's been the inevitable hangover as the rising interest rates affected mortgage affordability. 

Investors re-emerge

Investors have notably sidelined themselves during this period, but in the latter half of 2024 started to re-emerge again.

The flip side to that though is that it's not completely clear the extent to which some investors may have over-extended during the pandemic frenzy and are - now that the bright-line (aka capital gains tax) test period has been cut back to two years again from 10 - keen to maybe reduce their exposure. 

Again, this, for me, all helps to paint the picture of an economy in which various things are moving in different directions with some up and some still down. 

Therefore, notwithstanding the December quarter bounce in GDP - after two truly terrible quarters - the recovery could take some time and remain uneven. 

I would certainly like to think our economy will be looking more buoyant by the end of this year - particularly with those rural sector tailwinds blowing - but our confidence as a country is no doubt pretty brittle. And our economy is definitely vulnerable to be being blown off course when that incredibly volatile global situation is considered.

I'm optimistic that come the end of this year we'll be feeling better about things and looking to 2026 with some confidence. But it's a pretty interesting world we're living in at the moment and in terms of what may transpire, nothing can be really ruled either in, or out...