When will the NZ economy recover?
It might be another year before the economy really feels like it’s improving, Infometrics says.
It has updated its economic forecasts to show that annual gross domestic product (GDP) and private consumption spending are likely to fall in the middle of this year, and there is likely to be slower growth than previously expected during the second half of the year.
While chief forecaster Gareth Kiernan said that might not be particularly notable compared to previous downturns, the difference this time was the growth in the population.
Over the 2023 calendar year, there was a net gain of more than 120,000 migrants. In the year to November, that figure was 140,000.
The fall in spending and output despite that increase showed that the downturn was being felt much more intensely by the average person on the street, Kiernan said.
Excluding the lockdown period of 2020, household spending had the largest decline per person since 1992, he said.
“The economy is being hit harder than expected a few months ago, with hopes of a soft landing disappearing in a flurry of housing market stress and rising unemployment.
“The resilience displayed by households during much of 2023 has been sorely tested by mortgage rates of over 7%, and there is little sign from the Reserve Bank of any relief this year.”
He said the effects of rising interest rates and the general downturn had become more marked for households during the past few months.
The housing market was showing
more signs of stress, with more people wanting to sell, Kiernan said.
“There are anecdotes that people might have been saving up cash when they were fixed at 3% but they are burning through that cash pretty quickly now they have refixed to higher rates.
“It’s a households story – it’s probably just more sharp or acute than we had expected.”
However, he said there was “light at the end of the tunnel”. “There’s no thought that interest rates will go higher from here, give it a year and they will start to come down. It’s primarily an interest rate thing but the global economy and government fiscal policy are certainly not a spur for the economy getting better.”
Inflation data last week confirmed that price pressures continue to moderate across the economy, although near-term risks remain from higher oil prices, persistent wage growth, and other areas of large cost increases such as insurance or local council rates.
Infometrics forecasts that inflation will be back below 3% by early next year, enabling the Reserve Bank to start cutting the official cash rate from November this year, from 5.5% to a neutral rate of 4% by the end of next year.
“It’s probably another 12 months before it will feel like the worst of the downturn is behind us,” Kiernan said.
“Both households and businesses will need to keep a close eye on costs and spending until mid-2025. Between then and 2027, lower interest rates, less contractionary fiscal policy, and the improving world economy will all contribute to an acceleration in economic growth back towards 3% pa.”