With the end of 2024 approaching, there’s no better time to talk about what’s in store for 2025. We’ve updated our outlook for the year ahead. And we’re confident that it will be a better year. Especially the second half of the year.

It’s all about cuts to the cash rate. We’ve seen 125bps of easing thus far, and we forecast another 125bps to come. A cash rate of 3% is our forecast terminal rate, where policy settings are neither stimulating nor restraining growth. Continued cutting of the cash rate is justified by low and stable inflation around 2%. Although we see greater risks to the downside, that necessitates further policy easing.

As interest rates fall, growth will gain momentum. Business and consumer confidence improves with every rate cut delivered and expected. Activity should lift from here. We forecast economic growth of 2.2% over 2025, up from no growth in 2024. The labour market, however, is expected to deteriorate further. Labour demand lags the broader economic cycle. The unemployment rate is expected to continue climbing to a peak of 5.3% in the middle of 2025. From there, it is a slow descent as the economy recovers.

2025 will be a year of two halves. The first half will be a bumpy ride with glimpses of growth. And the second half will see an uplift in activity that will spring to life in 2026.

Check out “Pick a path: ‘Alive in 25’ or ‘Thrive in 25’” for more on our outlook – it’s loaded with pretty charts.

Now, as excited as we are to leave 2024 behind, there’s still a couple of major data releases to get through first…

First up, Treasury’s Half Year Economic and Fiscal Update (HYEFU). Tomorrow, the Government will open its books for all to see. And we’ll get a refresh of Treasury’s economic and fiscal forecasts. Despite an earlier delivery of chunkier than expected rate cuts back at the May budget, recent comments from Treasury’s Chief Economic Advisor forewarn a downgrade to their economic projections. In part, the signalled softer outlook stems from the Kiwi economy proving weaker than Treasury’s forecasts back in May. However, further comments from Treasury’s Chief Economic Advisor also suggest a downwards revision in trend productivity growth. Ultimately, the weaker starting point will mean a weaker fiscal outlook with shortfalls in tax revenue. And as such, the forecast return to surplus will likely be pushed back another year into 2028/29.

And come Thursday, we’ll see how the Kiwi economy performed over the September quarter. By our calculations we expect the economy contracted a further -0.3% over Q3 – a marginally larger contraction than the RBNZ’s -0.2% forecast. However, there’s more uncertainty than usual around our pick given StatsNZ’s has tweaked its methodology in calculating GDP. The changes have resulted in some chunky upwards revisions to historical prints. The revisions have shown that in the two years to March 2024, the Kiwi economy is nearly 2%pts larger than previously estimated. So, we’re likely to see some of the depth of the recession we’ve had revised away. That’s not to say there isn’t some serious weakness and pain out there. Because regardless of the changes and revisions, the Kiwi economy remains in a recessionary environment. And the September quarter likely recorded another contraction.

Weakness is likely to be spread across the board with our estimates showing around half of the industries in decline over the quarter. But it's the goods producing industries - manufacturing, construction, and the utility services (electricity, gas, water, & waste services) that are looking to be the largest drivers in the contraction. Monthly PMIs remained in contraction. While building activity, as we flagged last week, contracted for the fifth quarter in a row. And topping it all off, the surge in wholesale electricity prices is likely to weigh heavily on the utility services.

There will likely be some relief in the primary industries, with some strength across agri. Dairy production was up over the quarter with higher payouts. And a recovery in export log prices will likely see a rebound in forestry, compared to last quarter’s chunky decline. But the services industry will likely show little growth. Retail sales, though slightly higher in Q3, were still in decline. And we’re expecting to see further declines across wholesale trade. Professional services are soft, particularly with ongoing job losses.

So, it’s still pretty ugly out there. But bear in mind that the cash rate had only been cut 25bps over the September quarter. So, there is good news coming. The September quarter should mark the final decline in economic output in this cycle. And with an extra 100bps of cuts over the December quarter, Q4 should be a better quarter. Though with rates still well above neutral we’re not expecting anything that will shoot the lights out. We still have a bit of time (and more rate cuts to come) before the Kiwi economy regains momentum.

Altogether, it’s a busy last week. And we’ve only covered the events happening here at home! In the US, the Fed is likely to deliver another 25bp cut on Thursday. Meanwhile over in the UK, the BoE is expected to remain on hold at 4.75% before returning for more gradual rate cuts in 2025... See our weekly calendar below for more on the international space this week.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, the curve remains largely unchanged.

“A quiet week in Kiwi rates last week with the curve largely unchanged. With little in the way of domestic catalysts, NZ rates took their cue from offshore, though only half-heartedly. Rates seemingly happy to stay in in a fairly well-defined range as receivers step in to fade any significant moves higher and payers come in on dips. Though the recent theme of curve steepening carried on unabated with US 10yr up 25bps over the week seeing our 10yr dragged higher over the week.

In contrast to NZ Australian rates had a much more eventful week with some of this volatility making it over the Tasman. First was the dovish tone of the RBA statement which was taken by markets as paving the way for rate cuts early next year. However, later in the week Aussie employment data came in much strong than expectations seeing rates go full circle unwinding some of the cuts priced in.

All the excitement in NZ rates have been left for the last full week of the year with HYEFU tomorrow and GDP on Thursday. This week also sees Fed, BOE, and BOJ decisions to cap off the year.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, central banks set direction.

“A big week of central bank activity is set to dominate currency direction for the final full week of trading for 2024. Whilst rate decisions from the BOJ and BOE are expected to bring no change to borrowing rates, the Federal Reserve is anticipated to reduce its Fed Funds rate by 25bp to 4.375% (midpoint of its 4.25 - 4.50% target band). More importantly however, investors will be on watch for any commentary around the Fed’s intentions heading into 2025 - a year that is expected to bring a level of uncertainty around the speed of Fed easing given renewed inflation concerns as result of incoming Trump protectionist policies. Last week, the NZ Dollar continued its run of recent declines and with it pressuring through to new 2-year lows - trading lower by 1.3% across the week. Opening Monday's trading at circa the 0.5760 level, as highlighted in our updated FX Tactical note last week, the current zone represents a key support area to potentially define the Kiwi's direction in the near to medium term. Historically the early December and Xmas period has proved to be a bullish period for both risk assets and the NZ Dollar from a seasonality perspective. However, despite a continued steady run higher in global equity markets, the Kiwi has yet to benefit from any form of Santa rally. Thursday's double shot FOMC decision and 3Q NZ GDP is potentially set to be a big moment in determining either a relief rally from current levels or opening the door towards a 55-cent handle in coming weeks.” Hamish Wilkinson, Senior Dealer - Financial Markets.

The Week ahead

• Here at home, the Half Year Economic and Fiscal Update (HYEFU) and Q3 GDP report are the main events on the domestic calendar this week (see above).

For financial markets, focus will be on central bank policy decisions this week:

• US Federal Reserve: expected to lower the federal funds rate by 25bp to 4.25-4.50% as disinflation continues and the jobs market cools. The dot plot will be the focus. Given the stream of Goldilocks data, it's likely the Fed will revise down its expected easing for 2025. The September dot plot showed the median projection at 3.4%, implying 100bp of cuts by the end of next year. The year-end forecast may be lifted, signalling a more gradual pace of rate cuts in the near-term.
• Bank of England: expected to hit pause as inflation drifts north, away from the BoE's 2% target. Prior to the policy decision, November inflation will be released. Market consensus is for a reacceleration in the headline rate to 2.6% from 2.3%. The BoE pencilled in a lift to 2.4%. The rise will likely be driven by an increase in core goods price inflation as the large price falls in 2023 drop out of the annual calculation. Services inflation is also expected to stay elevated at 5%. The stickiness in services supports a more gradual easing approach by the BoE.
• Bank of Japan: expected to hold rates at 0.25%, however another rate hike is likely in the new year. Wage and price data suggest the BoJ will be able to achieve and sustain 2% inflation. The economic backdrop allows the BoJ to normalise policy settings in 2025.

See our Weekly Calendar for more data releases and economic events this week.