New Zealand’s Economic Turning Point: Retail Slumps, Inflation Holds, and Policy Shifts Await

New Zealand’s economy faces significant challenges as high interest rates, subdued retail spending, and inflationary pressures create a complex landscape. This roundup explores key developments, from declining retail sales and steady inflation rates to monetary policy adjustments and the currency’s technical outlook. Together, these factors paint a picture of an economy at a crossroads, with upcoming data and policy decisions likely to shape its trajectory in the months ahead.

New Zealand’s retail spending declined for the second consecutive quarter, with a 0.1% drop in the September 2024 quarter following a 1.2% fall in the previous quarter. High interest rates have dampened consumer sentiment, signaling a potential recession as GDP likely contracted again in Q3. Despite recent income tax cuts and a 50-basis-point reduction in the Official Cash Rate to 4.75%, consumer spending remains subdued. Prolonged downturns in manufacturing and services, coupled with falling employment, further highlight economic challenges. Third-quarter GDP data will be released on December 19.

The Consumer Price Index (CPI) for New Zealand rose 0.6% in the September 2024 quarter, contributing to an annual increase of 2.2%. Key drivers of quarterly inflation included higher costs for local authority rates (+12.2%), vegetables (+8.4%), and pharmaceutical products (+17%). These increases were offset by declines in petrol prices (-6.5%) and early childhood education costs (-22.8%), the latter reflecting the impact of the FamilyBoost rebate. Non-tradeable inflation, driven by domestic factors, rose 4.9% annually, while tradeable inflation, influenced by global markets, fell by 1.6%. Comparatively, New Zealand’s inflation aligns with the UK and EU at 2.2% but remains below the OECD average of 4.7%.

The Monetary Policy Committee (MPC) conducts seven reviews of the Official Cash Rate (OCR) annually as part of its mandate to achieve and maintain price stability. The government has established an inflation target range of 1% to 3% over the medium term, with a primary focus on the 2% midpoint.
Adjustments to the OCR influence broader interest rate levels. An increase in the OCR typically raises interest rates, thereby tempering demand and exerting downward pressure on inflation to align it with the target range.

The Reserve Bank of New Zealand is expected to lower the Official Cash Rate (OCR) by 50 basis points this week, following earlier reductions totaling 75 basis points. This adjustment would bring the OCR to 4.25%, aligning it closer to neutral levels of 3-4%. The rate cut is intended to reduce financial pressures as inflation slows down and unused resources in the economy, like labor and materials, become more available. Further reductions are anticipated in the coming months, with projections suggesting smaller, incremental cuts throughout 2025, potentially stabilizing the OCR around 3%. The pace of future adjustments will depend on economic data and evolving conditions.

The NZDUSD currency pair has been on a downward trend since September 30, when it reached a high of 0.63775. This decline was marked by the formation of a Shooting Star Japanese candlestick, followed by a “Death Cross” bearish reversal, which intensified the downward momentum and caused the Kiwi to drop to 0.58153.
The downtrend is further supported by the Momentum oscillator and the Relative Strength Index (RSI), both indicating negative movement. Specifically, the prices are trading below the 50-period EMA, the Momentum oscillator is below the 100 threshold, and the RSI remains under the 50 baseline.
If the downward momentum persists, traders may look to target potential support levels at 0.57820, 0.56962, and 0.55574. Conversely, should buyers regain control, potential resistance levels are estimated at 0.59208, 0.60366, and 0.61181.
Additionally, a closer examination reveals a positive divergence between the price and the Momentum oscillator, suggesting a potential upward correction.

In conclusion, New Zealand’s economy faces a challenging period, marked by subdued retail spending, stable yet nuanced inflation dynamics, and a cautious monetary policy approach. While the Reserve Bank’s rate cuts aim to ease financial pressures, the broader economic landscape remains under strain, with signs of recession and persistent weaknesses in key sectors. As the NZD continues its downward trend, upcoming GDP data and monetary policy decisions will be pivotal in shaping the nation’s economic recovery and stability moving forward.