NZ's economic growth to stall in mid-2023, says Westpac

The cost-of-living crisis has leapt to the top of the list of New Zealanders’ concerns, with a new generation discovering how to cope with high inflation for the first time.

The finding was released in Westpac New Zealand’s November Economic Overview, with the bank also adjusting its official cash rate target to 5% in early 2023. The current OCR is 3.5%.

Westpac said the Reserve Bank of New Zealand had fared better than most central banks, however the issue of inflation meant it was on the back foot, with no reprieve for New Zealanders in sight.

Read more: War on inflation "hopefully" will be won by the end of 2023

The economic overview says there is “no easy way down” from the current cost-of-living pressures.

Westpac NZ acting chief economist Michael Gordon (pictured above) said OCR rises take time to take full effect on the economy.

“The average mortgage rate that borrowers are paying has barely budged so far due to people fixing at low rates in the past couple of years,” Gordon said. “That will change a great deal over the next six to 12 months as those loans come due for refixing.  Consequently, it’s really the year ahead that will tell us whether the RBNZ has done enough.”

Gordon said Westpac was forecasting further increases in the cash rate after adjusting its forecast of peaking at 5% early next year.

“However, that will increasingly be accompanied by signs of softer consumer spending, slowing business investment and an easing in the scramble to find (or replace) workers,” he said.

“That leaves us forecasting an effective stalling of growth by the time we get into 2024. Indeed, it’s much more likely that we would be predicting an outright recession were it not for the ongoing recovery in international tourism – an important point of difference for how the New Zealand economy will fare in the context of a worldwide slowdown.”

Gordon said 2023 would be a turning point for the economy.

“The strong economic conditions that we’ve seen over the past few years are set to give way to a period of weak domestic demand. In fact, we’re forecasting that economic growth will essentially stall through mid-2023 and early-2024,” he said.

“Driving that slowdown will be the tightening in financial conditions that is already rippling through the economy and which is set to become an increasing drag on demand over the year ahead.”

Gordon said the Reserve Bank had been hiking the OCR at a rapid pace to dampen down the red-hot inflation pressures sizzling away across the economy.

“But a year after the interest rate hiking cycle began, inflation is yet to show signs of cooling off,” he said.

“That means further large interest rate increases are on their way over the next few months. The resilience in inflation reflects that domestic demand has held up in the face of interest rate rises over the past year, which is a large part due to the prevalence of mortgage rate fixing. Around 90% of New Zealand mortgages are on fixed rates and in the wake of the initial COVID-19 outbreak, interest rates hit record lows which meant many borrowers have been shielded from the impact of recent interest rate increases.”

Read more: Adviser helps clients deal with rising interest rates

Gordon said as interest rates had been rising for a year now and further large increases were on the cards, households have yet to feel the full impact of the previous hikes. 

“However, over the coming year many households will face large increases in their borrowing costs, which will see the recent strength in activity give way to a period of subdued economic growth and rising unemployment,” he said.

“As 2022 draws to a close, the New Zealand economy is continuing to run hot with household spending holding firm and businesses continuing to take on staff.”

Gordon said the strength in domestic demand had been reinforced by reopening the borders and the return of international tourists to New Zealand shores.

“However, with resurgent demand and continued supply chain disruptions in the wake of the pandemic, the economy has become increasingly overheated with inflation pressures boiling over in every corner of the country,” he said.

“Over the past year alone, consumer prices have risen by 7.2% and business operating costs have increased by an average of 10%. The pressures in the economy have been clearly evident in the labour market, with businesses struggling to attract and retain staff which results in competition for workers has pushing unemployment to just 3.3% and seen wages rising at the fastest pace on record.”