Economist discusses latest forecast
A recession remains a possibility in 2023 and a further interest rate rise is likely, says Westpac chief economist Kelly Eckhold.
In the current period of rapidly rising interest rates, talk of a recession has continued to gain traction. Responding to questions from MPs at a finance and expenditure committee in November, which followed a 0.75% rise in the official cash rate, Reserve Bank of New Zealand governor Adrian Orr accepted commentary that it was deliberately engineering a recession to combat inflation.
Eckhold (pictured above) told NZ Adviser that the bank continued to forecast a recession this year.
The bank has pencilled in about one percentage point of negative growth in aggregate over a couple of quarters, he said. Westpac also expects the unemployment rate (3.4% in the December 2022 quarter), to rise by two percentage points.
Taking historical experience into consideration, Eckhold said the bank’s forecast represented “a fairly standard recession”.
“We [see] it starting towards the end of the year… some of the other banks have it starting a quarter earlier and the RBNZ (in their last forecast) had it starting closer to the June quarter,” Eckhold said.
Gross Domestic Product fell by 0.6% over the December 2022 quarter. The RBNZ said in its April monetary policy review that economic growth was anticipated to slow due to the effects of slowing global growth, a weaker housing market and interest rate rises.
Noting that a margin of error applied to all forecasts, Eckhold said Westpac would be “watching carefully” to monitor the depth and timing of the recession.
Further interest rate rise forecast
Westpac has pencilled in a further 0.25% rise to the official cash rate on May 24, taking it to 5.50%.
Eckhold said that the larger than expected 0.50% rise in April solidified market expectations that the official cash rate would move towards the mid-5% range – a target the RBNZ said in February that it was aiming for.
“The strategy remains the same … the Reserve Bank believes that they need to have interest rates around those mid-5s to sustainably reduce inflation pressures,” Eckhold said.
Falling rates putting downward pressure on bank funding rates
The RBNZ acknowledged in its April 5 review that wholesale lending rates had “fallen significantly” since the February statement, which could put downward pressure on lending rates.
The 0.50% increase in the official cash rate was viewed as “helping to maintain current lending rates,” while also supporting an increase in retail deposit rates.
Given that international interest rates were falling, Eckhold said that the RBNZ’s desire to “cement the current level of interest rates” was a challenge.
“That’s putting downward pressure on bank funding costs and pushing things in the opposite direction to what the RBNZ would ideally like,” he said.
Is inflation starting to slow?
Annual inflation stalled at 7.2% over the December 2022 quarter, Statistics NZ figures show.
While headline inflation is likely to have peaked (subject to a range of factors such as oil prices), Eckhold said that it was less clear whether core inflation pressures had also peaked.
Examples were non tradable inflation (such as services, wages), and goods and services that do not face international competition, which he said tended to be quite “sticky”.
“The reality is there’s still a bit further to go before you start putting downward pressure on that,” Eckhold said.
He acknowledged that this was shaping up to be a “tough year” for households and businesses, particularly as borrowers rolled off lower fixed rates negotiated over 2020 and 2021.
While nominal spending had held up (due to higher prices), real spending was not increasing, he said.
“Rates are going to be significantly higher, and people are going to have to find extra money in their budgets,” Eckhold said.
He said Westpac had already observed some interest rate-sensitive sectors, such as construction start to contract.
“People are working through their pipeline of projects, but the new projects aren’t coming forward as you would expect … it’s going to be a relatively tough time for the domestic economy.”
One potential bright spot is the opportunity for some of New Zealand’s key trading partners to perform better than over previous years. One example is China, the economy having reopened after prolonged lockdowns.
“We should expect to see some benefits from that as they come back into markets and buy our exports,” Eckhold said.
Following ANZ’s announcement of increases to variable and fixed home loan interest rates, Westpac has announced a 0.40% increase to the interest rate on its variable home loans. The bank also said it was cutting interest rates on its three, four and five-year fixed term home loans by up to 0.60%.
