Economy to pick up despite high inflation and unemployment, Westpac experts predict
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The economy is poised to pick up this year and the Reserve Bank is close to ending interest rate cuts, despite the prospect of
higher inflation and unemployment
, according to Westpac Bank economists.
In their latest economic overview, they forecast better economic times on the back of continued strong agricultural exports, the effect of lower interest rates on household budgets, and
less global risk and uncertainty from trade and tariffs
.
Chief economist Kelly Eckhold said the
economy had probably stalled
in the June quarter, but it would not last.
"Uncertainty associated with the trade war, ongoing cost of living pressures and the still slow pass through of past OCR (official cash rate) cuts into household budgets have been weighing on activity.
"Looking further ahead, the disposable incomes of mortgage holders are rising as they continue to refinance at the much lower interest rates now on offer," he said.
"And with high export commodity prices also boosting incomes in the rural sector, and the government's 'Investment Boost' policy encouraging the bringing forward of investment, we expect growth in domestic spending to gather pace as this year progresses."
Eckhold said globally the outlook was not as bleak as feared when the US announced its "Liberation Day" tariffs in April, because the worst case scenarios have been avoided so far.
"The US tariff framework now looks clearer. New Zealand's 15 percent tariff is disappointing but manageable and it remains the case that the country that will be hurt most by tariffs is the US itself.
"Despite the volatility, exporters have weathered the storm, and in many cases are successfully passing on tariff costs to their customers."
He expected strong dairy and meat export prices to continue through the year, which along with improving tourism numbers would support activity.
Eckhold said they expected inflation to edge higher towards the top of the 1-3 percent target band, and unemployment would also nudge up as well, but these were expected to be temporary and would start easing before the end of the year.
Westpac was forecasting house prices to rise 3-4 percent this year, and by 6 percent next year, while the government was expected to keep relatively tight control on its finances as it looked to return to surplus in 2028/29.
"There's a non-trivial risk that credit rating agencies might stop giving us the benefit of the doubt, increasing the stakes for fiscal management in coming years," Eckhold said.
He said the Reserve Bank would make one more 25 basis point cut in the official cash rate to 3 percent next week, but then move to the sidelines.
"It's probable that 3 percent will mark the low point in the current cycle provided that activity picks up as expected. The speed and strength of the recovery will determine whether further policy support is needed.
"For now, we continue to ask ourselves: Are we there yet?"
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