High Interest Rates and Public Sector Spending Cuts Impact NZ Economy and Property Sector

Date Published: 9 May 2024

Key Facts

• New Zealand’s Official Cash Rate has been held at 5.5% for a year, but the impact is just starting to fully manifest in the economy.
• Retail banks are starting to reduce new rates but the average mortgage rate has risen as homeowners refix their loans.
• Increased pressure on the economy has led to a decline in the property and construction sectors and a rise in unemployment.
• Government spending cuts are affecting various sectors, including telecommunications.
• The Treasury is downgrading its forecasts due to the country’s recession, which is equal to the 3.9% decline seen after the Global Financial Crisis.
• The upcoming budget will detail public sector spending cuts to facilitate income and property tax cuts.
• It’s estimated that 4020 jobs could potentially be cut in the public sector, with some predictions even going to 7500.
• The OECD has recommended considering a capital gains tax and increasing revenue to manage unsustainable cost pressures.
• Economic recovery is not expected until 2025, when households and businesses will start to feel improvement.
• The RBNZ is expected to start cutting interest rates in November.

Article Summary

The effects of a steady Official Cash Rate at 5.5% for the past year are increasingly impacting the New Zealand economy. Although retail banks are lowering their new rates, many homeowners are refixing their loans, leading to a steadily rising average mortgage rate. The NZ economy is experiencing a crunch, with sectors such as property and construction in serious trouble and unemployment rates climbing.

Government spending cuts have begun to impact various sectors including telecommunications. Firms like Spark NZ have reported weaker demand due to these cuts. Further economic stress is anticipated with potential job cuts as the Coalition Government plans to detail cuts in public sector spending within their first budget to compensate for income and property tax cuts.

The pressure on the NZ economy is unlikely to ease soon. Chief Economist at BNZ, Mike Jones, predicts no significant signs of economic recovery until 2025. Meanwhile, the OECD recommends the consideration of a capital gains tax and revenue increase to manage future cost pressures.

The measures to combat these challenges include the expected reduction of interest rates by the RBNZ in November. This step together with the proposed policies in Budget 2024 could be key in helping the NZ economy recover and bounce back to its normal growth rate, as suggested by OECD economist Clare Lombardelli.

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