Long recession ahead – expert
The economy has entered a protracted period of recession despite growing hopes among banks that interest rates may not need to rise as high as previously thought, according to a prominent forecaster.
Infometrics chief forecaster Gareth Kiernan said the research house expected ‘‘a prolonged contraction in the economy through until March 2024’’ as fixed mortgages roll off and households grapple with higher interest rates.
He believed GDP data due out later this month and in May would show the economy went into recession in September and is forecasting only one quarter of positive growth in the six quarters between then and the start of the June 2024 quarter.
Slighter weaker-than-expected inflation and employment data has prompted all the major banks to trim their forecasts of how much the Reserve Bank will raise the official cash rate when it releases its next monetary policy statement on February 22. All are now expecting a 50 basis point rise in the OCR to 4.75%.
But Kiernan said Infometrics was sticking to its forecast of a 75 basis point rise and still expected the OCR to peak as high as 5.75% by the middle of the year.
That would take mortgage rates above 7% for the first time since 2008, he said.
‘‘In tandem with other cost-ofliving pressures, higher mortgage repayments are starting to reduce spending volumes compared to the last couple of years,’’ he said.
Although household spending and economic growth were likely to stabilise by mid-2024, an unemployment rate of over 5% would continue to limit growth throughout the following year, he also said.
‘‘Job losses will directly weigh on people’s spending, but increased nervousness about job and income will lead to more cautious spending behaviour across a broader range of households.’’
Commenting on Infometrics’ relatively downbeat take on interest rates, versus the banks, Kiernan said there had not been enough in the latest inflation or labour market data to convince it that the Reserve Bank was sufficiently on top of inflation to think it could ease back on monetary tightening.
He pointed to the hawkish tone of the bank’s previous statement and review in October and November.
If the Reserve Bank started to scale back that response, based on the lack of evidence it had yet about its impact, that might signal it was a bit soft on inflation, he said.
‘‘Given the record in late 2021 and in 2022 when they were too soft, we think that would be illadvised.’’