Economy predicted to flatline until early 2024
New Zealanders will continue to face financial pressures in the year ahead due to high inflation and interest rates, although there are signs that things may be nearing a turning point, according to an ASB economist.
In ASB’s latest Economic Forecast, Nick Tuffley (pictured above), chief economist, said after New Zealand officially slipped into recession earlier this year, the economy will likely “dip in and out of contraction” for the remainder of this year “before momentum picks up next year.”
“We are seeing some bright spots, particularly in the housing market,” Tuffley said. “It looks like that market is stabilising and we expect prices will start creeping back up in the coming year. So, the first part of the economy to get hit hard by rising interest rates also looks like it’s the first to find a base and recover.”
The Reserve Bank will be monitoring this, with all indications pointing to a decline in headline inflation and wage growth having peaked, the ASB report said.
“However, it is still early days so they will be being cautious. Overall things are going in the right direction but it’s a slow journey,” Tuffley said.
Inflation slipped to 6% in June, which was the lowest since 2021, but was still expected to remain at or above 5% this year before a decline to around 3% in the second half of 2024.
“Interest rates look like they’re on hold for now but it’s going to be a slow grind down for inflation going forward,” Tuffley said. “The Reserve Bank will want to be sure that inflation will get back below 3% in the second half of 2024 but getting that confidence will take time, and high interest rates will be needed for a while yet to ensure inflation does indeed fall. We expect the Reserve Bank will wait until around August next year before cutting the OCR.”
The ASB report also noted a subdued global economic outlook, as well as a weaker-than-expected post-COVID lockdown rebound, has resulted in lower commodity prices and less demand for the nation’s key primary exports.
“Generally, food commodity prices have been softening,” Tuffley said. “Part of that has been driven by slow global growth this year and the other thing from a New Zealand perspective is that China isn’t rebounding as much as expected.
“They’re missing in action when it comes to dairy auctions as well which is pushing down dairy prices. So, from a farming point of view, there are a lot of challenges – weather, cost, and global demand in particular.”
The New Zealand economy, Tuffley said, was in for a much softer season than the previous one, and the overall outcome of this year’s extreme weather events remained unclear.
New Zealand’s labour market, which enjoyed strong employment growth over the past few years, will be further supported by a surge in immigration, with ASB predicting net immigration inflows of about 70,000 this year.
“There has been an uptick in the number of New Zealanders moving overseas but this has been more than balanced out by a massive rise in those arriving in the country, with the new arrivals younger than leavers and likely to be adding strongly to the workforce,” Tuffley said.
“This is really helping to fill skill shortages, and because employers have choice, we're seeing early signs that wage growth is peaking and coming down. It's positive that despite the economy being in recession, the job market is holding up really well.”
Overall, the ASB economist is expecting a slow recovery for the economy overall, but there are definitely some signs that things are turning.
Read the latest ASB Quarterly Economic Forecast.
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