For the past two years, inflation has dominated the economic discussion for New Zealanders. Finally, the tide may be turning, but there‘s still some way to go before we can say the war is won.

Meanwhile, a range of new variables look set to play key roles in the equations of economists as they attempt to work out what the year has in store for us in 2024.

We asked some of New Zealand’s leading experts what they thought the top economic issues to watch next year would be.

Here are the top three… and a few outside picks.

Migration

Nudging out inflation as the number issue, just, the nation’s rapidly increasing population is certain to have a big impact on the economy in 2024.

Economists admit the net outcome is hard to forecast. We’re effectively running a giant experiment having closed the borders for the best part of two years and then flicked a switch to hit a record net migration gain (128,900 in the year to October).

On the one hand, adding more workers is disinflationary, taking pressure out of the labour market, on the other, adding more consumers is inflationary. More people means more spending.

“The impact on the labour market is visible already, but the impact on the housing market (rents, for starters) is becoming clearer,” said ANZ chief economist Sharon Zollner.

“Importing 200,000 people into a weakening economy is an interesting experiment. A year ago the RBNZ essentially admitted they were going to deliberately cause a recession; but now population growth is supporting overall activity even as monetary policy bites.”

“Is that good news? For a shop, maybe, but not if it means per capita growth needs to be weaker for longer to sustainably bring inflation back down to target.”

Meanwhile Gareth Kiernan and Brad Olsen, at Infometrics, warn that the biggest side-effect could yet be re-inflating housing.

“My biggest concern is that if migration fails to moderate in 2024… housing affordability concerns will worsen again,” said Infometrics chief forecaster Kiernan.

“It’s going to take time for any of the new government’s changes to have an effect on the supply of housing and provision of associated infrastructure, and even then they might not be doing enough to turn things around. Without an improvement in the housing demand/supply imbalance, we end up with inequality issues being exacerbated further.”

ASB’s Nick Tuffley agrees: “Whether migration starts to taper off soon or not will influence the RBNZ’s assessment of the inflation risks from migration.

“The more sustained the inflow is, the more likelihood of housing-related inflation pressure – construction cost inflation (which has eased substantially to date) and rents (which appear to be accelerating). Beyond housing, the infrastructure pressures (and need to keep pace) will also factor, though with a longer lag. The consumer spending angle looks like it is less of a worry given that, even with the strength of migration, consumption volumes have been essentially flat over the September 2023 year.”

In a close race with inflation, migration took top spot on the list of concerns with BNZ’s Stephen Toplis’ infrastructure worries acting as tie-breaker.

New Zealand’s growing infrastructure deficit is effectively the flipside of the immigration debate.

“There is nothing new in New Zealand having an infrastructure deficit but we have got to a stage where we simply can’t avoid confronting this issue any longer,” says BNZ head of research Toplis. “The questions then become: How do we get the people to put the necessary infrastructure in place? How is it prioritised? Who pays for it? How is it funded?

Inflation

Ok, there was no way around it. Inflation is still stuck well outside the RBNZ’s target band as we head in to the new year. It is easing but like our waistlines when we hit that post-holiday diet, the last bit is expected to be tough to shift.

“We remain fixated on inflation, at least until the beast is broken,” said Kiwibank chief economist Jarrod Kerr.

Several economists who picked inflation as one of the top three for 2024 stressed the non-tradeable part of the equation – in other words the domestic price pressures, as opposed to imported costs like oil prices (which have already returned to normal).

ASB chief economist Nick Tuffley warns that we need to watch non-tradeable inflation and the housing components of in particular.

“This is the sticky part of inflation, and the housing components will be sharply in focus for signs that the migration boom is flowing into inflation. Construction cost inflation has eased substantially. But if the migration boom prompts a fresh lift in housing construction, then construction costs could be stronger than anticipated and hold inflation up for longer. Likewise, there is evidence that rents are being boosted by the pressure on the housing stock from the sharp increase in population.”

ANZ’s Zollner still has it at number one on her list.

“The RBNZ has thrown down the gauntlet. 2024 is the year where it will be revealed whether the RBNZ did too much or the RBNZ didn’t do enough,” she says.

“Of course, it could also be the year where it’s revealed that the RBNZ absolutely nailed it. That’s what most of us are effectively forecasting, but there’s not a huge margin for error.”

Inflation was finally falling, said Westpac chief economist Kelly Eckhold.

”But at close to 5 per cent, it’s still running red hot,” said Westpac chief economist Kelly Eckhold.

“Households’ budgets are being squeezed as more and more cash gets sucked out of their wallets each time they go through the check out. While we typically think of inflation as the economy’s temperature gauge, right now it’s probably a better measure of how hot the RBNZ Governor is feeling.”

The RBNZ was clearly feeling the heat and needed conditions to cool down, he said. And as long as inflation – especially the domestic components – stayed high, OCR cuts would remain off the table.

“Yes, it has come down a bit but it is still too high for comfort,” warned NZ Initiative chief executive Oliver Hartwich.

“In the absence of more frequent official data (which is a joke, but that’s a different matter), we are fortunate to have GDPLive (https://gdplive.net/Dashboard#graph). It currently estimates inflation to be around 5.6 per cent, and if it’s not substantially lower by the end of next year, we should be very worried.”

One economist keeping the inflation focus external was Cameron Bagrie, who has picked US inflation as key. How the US Federal Reserve is seeing inflation would define global interest rate settings, he said.

Fiscal policy

Finance Minister Nicola Willis has a big role to play in the outlook for the year ahead. The final shape of National’s tax cuts, the scale of spending cuts that required to deliver them, will be pushing and pulling the economy in both directions, with economists left to do the maths on the net result for their forecasts.

The much-hyped mini-Budget before Christmas didn’t provide much new detail, effectively leaving us with a cliff-hanger worthy of Shortland Street.

Sharon Zollner offered a short but sweet analysis of the challenge for the new Government: “It’s easier to say you’ll cut spending than to actually do it. Some tough decisions lie ahead.”

“There’s a dual expectation of smaller government at the same time as there is a need to fund a large infrastructure deficit and much higher infrastructure costs, which is a difficult balance to achieve,” Infometrics’ Kiernan said.

The incoming Government was “hellbent” on balancing the fiscal books, said BNZ’s Toplis.

How aggressively they approached this would have a significant impact on economy-wide outcomes over the next few years.

“With the massive infrastructure deficit that exists, and the inability of local authorities to keep raring rates in the current manner, much of the onus for infrastructure funding will fall on central government,” he said.

“While we are not advocates of fiscal laxity, we do believe there should be less focus on the extent of New Zealand’s government debt and more focus on what is driving it. Government consumption clearly needs to be addressed. More tricky is what needs to happen with regard to government investment. The discussion needs to shift away from the dollar value cost of proposed investment activity towards the quality of that investment, ie the returns that the economy will derive from it. If it can be shown that the investment is high quality then some slippage on the debt front might be justified.”

Westpac’s Eckhold puts the spotlight on the Budget in May.

“The first budget of a new government is always important, and Budget 2024 will be no different. This will be when the rubber really hits the road – will the new Government really get on top of operational spending as promised, allowing a prompt return to budget balance and helping to reduce inflationary pressure?” he said.

“Will promises to reduce regulation and red tape be kept? And will the Government address New Zealand’s ongoing infrastructure deficit, and if so how will this be funded? These are key issues that financial markets will pay close attention to next year.”

The finalists

Consumer spending/credit woes

“As the full impact of higher interest rates continue to transmit through the broader economy, credit statistics will provide useful insights into how households and businesses are faring both directly from the higher interest costs and tighter access to finance, as well as from the dampening effects of higher interest rates on demand,” says NZIER princpal economist Christina Leung.

As more people refix onto higher interest rates still in 2024, just how challenging it becomes to convince consumers to part with their cash and actually go shopping rather than just a look through the window will be a big factor, said Brad Olsen.

International turmoil

“Geopolitical risks have heightened with the war in Ukraine, and now the war in the Gaza strip,” says Kiwibank’s Kerr.

“Both wars are unrelenting. The fear is that they escalate and expand. For New Zealand, there’s tension in our own backyard. It may not flare up next year, or the year after, but there is a very real risk China moves to establish more influence in the region. The fate of Taiwan will be part of this puzzle.”

Westpac’s Eckhold also points to the US-China relationship as a key concern.

The year ahead brings the US presidential election and the potential return of President Trump, he said.

“The already simmering China-US frictions will likely only rise – possibly to boiling point – leaving New Zealand stuck in the middle given our strong trade and diplomatic relationships with both aggrieved parties.”

Brad Olsen suggests keeping an eye on Chinese electricity production, retail spending and property activity.

“Changes in these three indicators will provide an idea of production, local consumer demand, and construction activity (alongside demand for New Zealand wood products),” he said.

Cameron Bagrie keeps it broad: “Anything to do with division/the political periphery,” he warns. “We have a divided society and that is unhealthy for the economy. I suspect today is that start of many disruptions. Division is global.”

Climate

NZIER’s Leung noted that 2023 started with some severe weather events.

“We are likely to see more of these over 2024. This highlights the continued need for a cohesive climate mitigation and adaptation strategy, as we can already see the major economic disruptions that will result from severe weather events and other impacts of climate change.”