Interest rate projection for 2023 not pretty, report reveals
The ongoing battle to get domestic and international inflation back under control is set to stunt economic growth throughout the next two years.
New forecasts by economics consultancy Infometrics sees New Zealand’s official cash rate increasing to 4.5% in early 2023, a full percentage point more than was expected just three months ago.
With higher mortgage rates predicted, this will pull household spending growth down to an average of just 1.1% during 2023 and 2024 and flow through into weaker outcomes throughout the domestic economy.
“Demand needs to be reined in to reduce how stretched resources are throughout the economy and to bring inflation under control,” said Infometrics chief forecaster Gareth Kiernan (pictured above).
“The effects of skills shortages and supply chain disruptions have been amplified by excessive spending over the last two years and inflation is set to persist outside the Reserve Bank’s target band until the end of 2024.”
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Kiernan said Infometrics has forecasted an uncomfortable couple of years ahead for households.
“House prices have already fallen 12% from their peak in late 2021 and will remain under downward pressure throughout 2023 as mortgage rates rise towards 6.5% by the middle of next year and further limit the amount of debt buyers can take on,” he said.
“Mortgagee sales also become an increasing risk with interest rates at these levels.”
Kiernan said the unemployment rate would also push up to 4.2% by March 2024 and climb to around 5.0% by mid-2026.
“This lift equates to an increase of almost 60,000 in the number of people who are unemployed,” he said.
“Although it is likely to be caused by sluggish growth in job numbers that fails to keep up with improved growth in the labour force.”
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Kiernan said these headwinds would mean that agriculturally focused regions, which performed very strongly during the COVID-19 pandemic would not enjoy such vigorous growth going forward.
“Some of the negative effects of the global downturn on exporters are being mitigated by the weak New Zealand dollar and the disruption to parts of the international food supply chain caused by the Ukraine conflict,” he said.
“Export volumes will gradually recover from their current constrained levels and with the ongoing rebound in tourism, they are forecast to add as much as two percentage points to GDP during 2023 and another 1% to 1.5% during 2024 and 2025.”
Kiernan said Infometrics expects economic growth to slip below 2% in the second half of 2023 and as low as 0.9% during 2024.
“Growth in domestic activity will be even slower as business investment responds to higher interest rates and government spending slows significantly,” he said.
“The next two years represent a necessary sacrifice of short-term growth for longer-term stability and sustainability in the economy.”
