“In 2025, we project a stronger contribution to headline growth from households and businesses,” BMI said in a new report released today.
“We forecast that household consumption will add 1.1 percentage points (pp) to headline growth, up from a projected 0.2pp in 2024.”
However, it warned that financial conditions will remain “relatively tight” resulting in households contributing less than the 2 percentage points they provided before the rate hikes began in 2022.
Despite the RBNZ cutting the official cash rate from 5.5% in August to 4.75% in October, interest rates in 2025 would remain higher than pre-hiking cycle levels, BMI said.
“We expect the policy rate to end 2024 at 4.25% and to end 2025 at 3.25%, down from 5.50% at the end of 2023, but still substantially above the end-of-2021 rate of 0.75%.
“This interest rate outlook suggests that financial conditions will continue to be restrictive in the coming quarters, likely negatively impacting household finances and real GDP growth.”
New Zealand households were particularly sensitive to a high-interest-rate environment, “possibly more so than their counterparts in other developed markets” due to high levels of household debt, BMI said.
“According to data from the Bank for International Settlements, the household debt-to-GDP ratio in New Zealand was 91.3% as of Q1 2024. This figure is several percentage points above the developed market average of 70%, underscoring the greater financial vulnerability of New Zealand families compared to those in other developed economies.”
Trump risk
The downside risks to the growth outlook for 2025 remained tilted to the downside, BMI said.
“A second Trump presidency could have profound implications for developed market (DM) economies, including New Zealand, particularly those with substantial trade relationships with the US,” it said.
“The policies implemented during Trump’s first term, especially those related to trade, have already demonstrated the potential for significant economic disruption. Factors such as economic openness to trade, the intensity of trade ties with the US, and the effects of trade tariffs on global and national growth are likely to converge, potentially curbing growth momentum.”
These factors could influence financial conditions, consumer spending, and corporate investment, although the scale of the potential impact remained uncertain.
Trump’s proposed policies – including tax cuts, trade tariffs, and deficit spending – could also trigger a fresh wave of inflation.
“This scenario would likely compel the US Federal Reserve to halt its easing cycle and, in the worst-case scenario, potentially reverse it,” BMI said.
“If this happens, the RBNZ, along with other DM central banks, might be forced to either slow down their own easing cycles or outright raise interest rates to combat inflation.
“Such actions would lead to higher borrowing costs, potentially stifling growth and increasing economic uncertainty. The adverse effects of this scenario would negatively impact consumer spending and corporate investment, ultimately hindering overall growth in 2025.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
