Economist expects the year ahead to be tough
ASB is predicting the New Zealand economy will head further into recession than previously thought and expects a contraction of around 2% by early next year – that’s more than half the decline seen during the Global Financial Crisis.
The forecast recession came in a bit earlier than expected, with the GDP falling 0.6% in the December quarter.
In ASB’s latest Economic Forecast, Nick Tuffley, ASB chief economist, said high inflation and interest rates will continue to drag down consumer spending in the year ahead, with homeowners particularly impacted.
Tuffley said the cash rate hikes are nearing their end, despite inflation tipped to remain above 7% for the first half of 2023.
“Things have overheated, and the stimulus to get us through the pandemic has been arguably too successful at keeping the economy running along, so now we’re feeling the effects of that, and the economy being stretched,” he said. “The RBNZ is having to work hard to get inflation under control but is near the end of that job, although we can expect to see the impacts of high interest rates flowing through for a while yet.
“We expect rising living costs to add around $150 a week to household spending this year, and income growth is not likely to keep pace with this, despite another year of strong wage growth. It’s going to be a tough year, and home borrowers will feel these impacts disproportionately.”
The report said inflation would further spike in the short term due to the recent extreme weather events, with temporary shortages of some fresh food, household items, and cars. The rebuild, meanwhile, would help boost the slowing construction sector but it could be a while before this happens.
“The rebuild will provide a lift in GDP over the coming years but we know infrastructure replacement can take a long time, as we saw with the Christchurch earthquakes, and particularly in cases where location and design need to be rethought to improve resilience,” Tuffley said.
“Overall, we’re going to have to endure a year of things cooling down and that putting a bit of pressure on finances, so people will be putting away their wallets for a period and reining in their spending.”
Tuffley said there has been a decline in the overall volume of retail spending, but consumer spending habits have also changed in the past year.
“During the lockdown period, there was a big spike in durables and furniture, but spending is now shifting to experiences such as concerts and travel,” he said. “People are spending less but also spending differently now because we're able to do those things again.
“The continuing tourism recovery is another positive. We’re back to about two thirds of pre-pandemic visitor numbers to New Zealand and there's still some scope for markets like China to recover, so that’s really going to help our tourism and entertainment businesses, although we expect labour shortages to hamper growth.”
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