Is this finally the economic turning point New Zealand has been waiting for?

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1. 0:06Speaker 1: Kia ora, I'm Chelsea Daniels and this is The Front Page, a daily podcast presented by the New Zealand Herald. Could
2. 0:16Speaker 1: we finally be at an economic turning point? Westpac economists have forecast the economy will return to growth in the current quarter. They reckon there'll be a 2.1% growth across
3. 0:28Speaker 1: 2026 and even picking up to 3% next year, with exports and tourism doing the heavy lifting.
4. 0:37Speaker 2: So are we out.
5. 0:38Speaker 1: Of the woods, or is this just a brief respite before the next big shock? Today on the front page, Westpac chief economist Kelly Eckhold joins us to talk about
6. 0:48Speaker 1: what it means for your wallet, your job, your mortgage, and whether this.
7. 0:53Speaker 2: Recovery is for real. So, Kelly, how would you describe...
8. 1:01Speaker 2: the New Zealand economy right now?
9. 1:04Speaker 3: It's been flat. It had been improving late last year and at the start of this year, but it really took a setback with the Iran war. But I think
10. 1:14Speaker 3: now there's been a bit of adjustment, I think, to that now. It hasn't been as bad as what people worried about, I think. So that adjustment means that some
11. 1:23Speaker 3: of the underlying drivers that were driving growth even late last year are actually starting to show through.
12. 1:29Speaker 2: Again, I think.
13. 1:30Speaker 1: And is that where you get the line, the economy's kind of shaking it off?
14. 1:34Speaker 3: Yeah, that's right. I mean, there are a lot of good things going for the New Zealand economy at the start of the year. Really good commodity prices. The exchange rate was quite supportive. The interest rates were low. It
15. 1:44Speaker 3: looked like things were fitting into place. And then Donald Trump came all over the top of it and just kind of like put a bit of a dampener on everybody there for a while. Now, I think it's just being shaken off a bit.
16. 1:55Speaker 1: It interests me as well because energy prices are expected to remain elevated, obviously, for some time. And the future of this situation in the Middle East and the constraint of,
17. 2:05Speaker 1: you know, will they, won't they reach a peace deal?
18. 2:08Speaker 1: And you don't know, like you said, what Donald Trump's got up his sleeve next.
19. 2:12Speaker 2: Do you think that the markets... have kind of learned to live with that?
20. 2:16Speaker 3: I think they have to some extent. There's still quite a bit of volatility, though. I mean, the oil price has been in a $ 10 range, I think, in the last three or four days as different stories come around.
21. 2:26Speaker 3: But as we've gone through this, they've discovered that there is a lot of resilience in global supply chains. It's not to say that it hasn't been costless, but there
22. 2:36Speaker 3: has been some give and take through lots of things, which has made markets a lot more comfortable that while higher energy prices are probably causing what we call demand destruction,
23. 2:48Speaker 3: which is basically weaker growth in some countries and industries around the world. There's enough of other quite good things going on in the world, which means that they're able to cope with it.
24. 2:58Speaker 1: What do you think is the most important change in this outlook versus previous outlooks?
25. 3:04Speaker 3: I think the biggest change is that we have probably reduced our sense of the downside risks to the economy that were coming from the Iran war. You know, when
26. 3:16Speaker 3: we last did our forecasts back in May, they were right in the thick of it then. Oil prices, energy prices were higher. There was a sense that they would get better at some stage, but we didn't really know when.
27. 3:28Speaker 3: Since then, they have come down. There's still plenty of risk there, and I can't discount the possibility I'll be back telling scary stories again at some stage between now
28. 3:38Speaker 3: and Christmas. But the economy has started to shake that off.
29. 3:42Speaker 3: So we've seen better business and consumer sentiment. We've seen that from the indications of what actually happened in the last three or four months, the worst scenarios didn't look
30. 3:53Speaker 3: like they eventuated for the economy. And we can see some signs of strength emerging in parts of the economy that make sense as well.
31. 4:00Speaker 2: And that's why I think this outlook is making the headlines, right?
32. 4:03Speaker 1: Because we are getting sick of that kind of doom and gloom, you know, thrive to 2025, survive till the end of 2025, you know, that kind of thing.
33. 4:12Speaker 2: And people and consumers and businesses are obviously.
34. 4:15Speaker 1: their confidence is shaken during those times. So as soon as you see something slightly positive, like shaking it off and the economy is looking good around the corner, that
35. 4:24Speaker 1: kind of gives that sense of hope in a way.
36. 4:28Speaker 3: I think that's right, yeah. I mean, and, you know, the thing with New Zealand at the moment, this economy is not all the same. I actually have a lot of global clients come and speak to us and all
37. 4:39Speaker 3: they know about New Zealand is what they read on a Bloomberg screen. And that's been the big thing that we've had to educate them with is that the New Zealand economy is not just the housing market, for example,
38. 4:51Speaker 3: and even within things like the housing market, there's some very different experiences depending on where you're sitting in the country.
39. 4:57Speaker 3: And that does reflect the fact that this current juncture sees a relatively unusual period where we've got really strong
40. 5:07Speaker 3: commodity prices, strong terms of trade, which is helping the external sector But in Auckland and Wellington, we just feel a bit morose because it's a bit hard to get
41. 5:17Speaker 3: a job. Your house price isn't going up, so you don't feel very poor. Real wage rates are negative right now because inflation is absorbing and a bit more any
42. 5:26Speaker 3: wage rises people are getting. And that's just the reality.
43. 5:29Speaker 3: That is what it is now, but should change if we look forward a year in the future.
44. 5:35Speaker 1: Yeah, the report points to improving disposable incomes. How quickly do you think households should expect to feel better off in those real terms?
45. 5:45Speaker 3: In real terms, it really critically depends on the Reserve Bank getting on top of inflation and also Donald Trump not creating more inflation as well while we're at it.
46. 5:56Speaker 3: The forecast suggests that inflation should be back below 3% certainly by early next year. So given that wage growth
47. 6:05Speaker 3: and income growth is already just above 3%, that's a bit of light at the end of the tunnel. But I think where people are going to really feel happiest about this is when they see signs of a stronger
48. 6:17Speaker 3: labour market. When they're not thinking that this is a no-hire, no-fire labour market, that actually there are opportunities out there, that's the sort of thing that I think will really
49. 6:26Speaker 3: boost household confidence and really boost spending. And, you know, we might be still three to six months away from that, really, realistically.
50. 6:34Speaker 1: The Reserve Bank has lifted the official cash rate by 25 basis points.
51. 6:38Speaker 2: That was in July. Do you think there'll be many more hikes?
52. 6:40Speaker 3: Ultimately, yes. In the short term, I think they've signalled pretty clearly they just want to take interest rates back to maybe around 3%. So we'll get the hike next week.
53. 6:49Speaker 3: I think we'll get another one before Christmas, unless the data tells them that there's either a lot of inflation or very strong growth between now and then. I suspect
54. 6:59Speaker 3: that might be about it for 2026. For next year, though, I think there'll be a bit more. I think interest rates will have to go to 4%. And the reason for that is that core inflation is right in the
55. 7:11Speaker 3: top quarter of the Reserve Bank's target range of 1% to 3%. And core inflation is not one of those things you can just move around willy-nilly. It moves slowly
56. 7:21Speaker 3: as economic circumstances change. And if we have a a strengthened economy next year, as we're forecasting, it will just be that bit harder to bring that inflation rate down
57. 7:31Speaker 3: to 2%, which is what the Reserve Bank says they want.
58. 7:34Speaker 3: So there's just going to be a bit more work required, I think, from them to be able to do that.
59. 7:38Speaker 1: What would a weaker New Zealand dollar mean for exporters, imported inflation and household costs?
60. 7:45Speaker 2: Because the dollar isn't doing... very well at the moment, is it?
61. 7:49Speaker 3: No, the Kiwi dollar has been relatively weak for a while, and that has really reflected the low interest rates that we have compared to other countries. Now, the Aussie cash
62. 7:59Speaker 3: rate is at 435. The Federal Reserve is in the high threes. Our interest rates were at two and a quarter, now two and a half. That's a long way short of what you would normally expect to see to see
63. 8:10Speaker 3: a strong New Zealand dollar. Normally, our interest rate should be a small margin above those countries. So we haven't really looked like a particularly attractive place to put your
64. 8:19Speaker 3: money if you're a global investor. That's been a doubled-edged sword, I think, for the economy. Exporters have enjoyed it because it's actually put a bit more juice into the returns
65. 8:29Speaker 3: that they were getting from the strong enough commodity prices.
66. 8:31Speaker 3: So that's quite good in that sense. But it has meant that your supermarket shop and a lot of the things you buy in the stores have just been a bit higher in price. And that trade-off is really the problem there.
67. 8:43Speaker 1: And if you're like me and buying people back home in Australia presents online on Australian websites, it's a bit of a shock when you get to the checkout and you realise that the New Zealand dollar actually isn't doing too good.
68. 8:54Speaker 3: Yeah, I mean, given where the Kiwi Aussie exchange rate is, your family should be sending you care packages here.
69. 9:06Speaker 4: And so all of that's happening against the backdrop of what were really big challenges from the oil price. Of course, Inflation's too high. That's still a headwind. We do want
70. 9:15Speaker 4: to see unemployment coming down. But this is the story which I shared at the budget, which is, yep, it's been tough, but every indicator tells us things are going to get better and better if we stick to the
71. 9:26Speaker 4: plan this government is delivering.
72. 9:30Speaker 1: So what I found interesting in the outlook as well is the focus on China's domestic market. So how does looking at China's domestic growth help us here in New Zealand?
73. 9:40Speaker 3: Well, It's an important thing for us because China's our biggest trading partner and quite a lot of our exports, particularly our commodity exports, derive from demand in China. And
74. 9:52Speaker 3: also some of our services exports, like tourism, also derive from that as well.
75. 9:57Speaker 1: And those two are actually helping us shake it off, so to speak, haven't they? tourism exports.
76. 10:01Speaker 3: That's right, yeah, tourism exports. What happened earlier in the year is the government changed the visa rules for Chinese tourists to make it easier to come. That seems to
77. 10:10Speaker 3: have really ignited extra demand from the Chinese tourists to come here compared to go to somewhere else. So that's quite good. But in general, the Chinese consumer is really
78. 10:21Speaker 3: under the gun. Unemployment rate there is probably quite high.
79. 10:24Speaker 3: I mean, you can look at the official statistics if you like, but I think there's probably.
80. 10:29Speaker 1: More than that.
81. 10:31Speaker 3: The housing market is very weak. Credit growth is very weak.
82. 10:36Speaker 3: People have a lot of exposure to a very weak property sector there. So as a result, the Chinese consumer isn't spending money like they were perhaps 10 years ago.
83. 10:48Speaker 3: And that at the margin means that we have less demand for the stuff we try to sell them, whether that be a nice holiday or whether that be a nice cut of beef or some fancy dairy products.
84. 10:59Speaker 1: What other countries should we be looking at in terms of their domestic growth?
85. 11:03Speaker 3: Well, the next two big trading partners are the United States and Australia. And Australia has been a real standout for us because that Australian economy up until recently has been performing really well. And you can see that especially
86. 11:14Speaker 3: in tourism, actually. I mean, if you go anywhere near Queenstown at the moment, you'd wonder if you're in Sydney rather than Queenstown, to be honest. The tourist arrivals there have been really good, and the lower exchange rate is
87. 11:25Speaker 3: really encouraging them to come. Same with Americans as well.
88. 11:28Speaker 3: The US economy has generally been quite strong, and New Zealanders look like a cheap place to go. Some of the shine has been taken off that with the Iran war and the high jet fuel prices making it a
89. 11:40Speaker 3: bit more expensive. But further afield, like last week we put out a paper on the India FTA in conjunction
90. 11:49Speaker 3: with the New Zealand IBF. And that's an opportunity, I think, because that's a massive market. There's a couple of billion people there. They're getting richer. Richer people generally start to consume more protein and the sorts of stuff that we
91. 12:00Speaker 3: tend to export. We could imagine that there could be a lot more services exports going through to India. For example, students coming in here and movements of people These are
92. 12:12Speaker 3: the things that can probably really help diversify our export base if we look forward 10 years. Because there's been enough problems with individual markets, I think, in the last
93. 12:22Speaker 3: five to two years to realise it's not a good idea to have all your eggs in one basket.
94. 12:26Speaker 1: What would convince you that the recovery is genuinely established rather than kind of another short-lived improvement?
95. 12:34Speaker 3: I want to see that labour market strengthened. That's what I really want to see. That was the disappointment, I think, from the last three or four months. The forecasts I would have told you at the start of the year
96. 12:45Speaker 3: would have envisaged we would be seeing a lower unemployment rate about now, and that just doesn't look very realistic right now. But when we actually see that, we're seeing some employment growth, which is good, but it needs to
97. 12:57Speaker 3: be strong enough to keep up with population growth so that you bring the unemployment rate down. We want to see job ads growing more strongly. I'd really like to
98. 13:06Speaker 3: see them growing more strongly also in places like Auckland and Wellington because that's where the weakness has been in the economy. Because when you see that, I think you'll see a stronger performance in the services sector. And the
99. 13:17Speaker 3: services sector is 70% of the economy. So if you really want a good, strong year, OK, it's good to have the farmers going great guns and it's great to have the tourists here. But actually, if you could have
100. 13:27Speaker 3: people out there in the shops buying stuff, going on holiday, spending money in hotels... you know, that's where you'll see a well-balanced and strong economy.
101. 13:38Speaker 1: Now, I see that there's a special topic that you've highlighted in the report. Is the election the biggest elephant in the room in terms of business uncertainty right now?
102. 13:49Speaker 3: I think it probably is. It's a close race, you know, left and right both have plausible routes to winning here based off the polls. And we do have this new
103. 14:00Speaker 3: Kingmaker emerging in the middle with the Opportunities Party, and between them and New Zealand First, they seem to be the ones who may be the deciding factors in determining who gets to form the next government. And the challenge
104. 14:11Speaker 3: there for businesses, well, what does this mean for the business environment? Because the policy prescription that's being proposed by the right looks very different to the one on the left.
105. 14:22Speaker 3: It maybe doesn't generate very much difference in terms of bottom line fiscal outcomes, but But the mix of taxation and spending is quite significant and will matter for individual sectors.
106. 14:34Speaker 2: And benefits as well.
107. 14:35Speaker 3: Yeah, yeah, that's right. Yeah, I mean, for households, for example, on the left is the opportunities for a lot more cost of living support and things like that. Tax is
108. 14:47Speaker 3: a big issue as well. There are winners and losers when taxes go up, for example, and that creates uncertainty. Yeah.
109. 14:54Speaker 3: And we have to remember as well that some of the parties in the middle, like New Zealand First and Opportunities, have advocated from some really significant reforms and things like
110. 15:03Speaker 3: the energy sector, the supermarket sector. The Opportunities Party wants to do a very big reset of tax and this
111. 15:10Speaker 3: universal basic income, which could have quite big implications for the real estate sector, for example, as well. So there's lots of risk and uncertainty there. And that's the stuff
112. 15:21Speaker 3: that business worry about, I think.
113. 15:23Speaker 1: Yeah, and if you had a business and you wanted to build a business case to do something or invest in a market or something, and then you don't know whether the investment fund is going to be there in
114. 15:33Speaker 1: six to eight months' time, I can see where you'd kind of stop yourself and be like, hang on, why are we putting all this work into this portfolio of ideas and prospectus and things like that?
115. 15:45Speaker 3: That's exactly the concern, yeah. There could certainly be some industries who might be just thinking, oh, We need to delay this decision until November and December so we know what the lay of the land is.
116. 15:54Speaker 1: Another elephant that you've pointed out, El Nino.
117. 15:57Speaker 2: How do you see that affecting the economy?
118. 16:00Speaker 3: It's still uncertain because not all El Ninos are the same.
119. 16:05Speaker 3: Sometimes they have a big impact and sometimes they don't.
120. 16:09Speaker 3: We reasonably would expect drier conditions across the country and certainly we can see drier conditions across the world as well.
121. 16:17Speaker 3: So a lot of our competitors in quantities markets arguably have been hit a bit harder than we have so far.
122. 16:23Speaker 3: We'll find out in January and February when we have our summer to see how big a drought is going to be. The impacts of that are, again, a double-edged sword.
123. 16:31Speaker 3: On one hand, there'll be less agricultural production, so maybe we'll have a bit less milk to be able– and maybe the sheep will have to go to the works a bit earlier because there won't be grass for them
124. 16:41Speaker 3: to eat– But on the other hand, there will probably be increased shortages of meat, dairy in global markets, which means prices will go up as well.
125. 16:53Speaker 2: So what we do have, it'll be like gold?
126. 16:56Speaker 3: It'll be more valuable, that's right. So I could imagine actually that the farming sector is relatively insulated from that perspective.
127. 17:05Speaker 3: The household sector may not be happy because maybe some of the price of the dairy and the meat products you get at the supermarket might be going up. If not because there's a particular shortage of things here, but
128. 17:17Speaker 3: I could easily imagine producers in Europe and South and Central America could really be undermined by what could be quite dry conditions. And our producers tend to be more
129. 17:27Speaker 3: efficient than others as well. So they tend to come off a bit better, I think, than some of those other countries.
130. 17:33Speaker 2: Thanks for joining us, Kelly.
131. 17:34Speaker 3: Thanks very much.
132. 17:35Speaker 1: Pleasure.
133. 17:38Speaker 2: That's it for this episode of The Front Page.
134. 17:41Speaker 1: You can read more about today's stories and extensive news coverage at nzherald.co.nz.
135. 17:48Speaker 2: The Front Page is hosted and produced by me, Chelsea Daniels.
136. 17:52Speaker 1: Kane Dickey is our studio operator, Richard Martin, our producer and editor, and our executive producer is Jane Yee.
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