Two Years of Stunted Growth Required to Rebalance Economy

The battle to get inflation back under control, both globally and in New Zealand, is set to stunt economic growth throughout the next two years.

The latest forecasts published by Infometrics see New Zealand’s official cash rate being increased to 4.5 percent in early 2023, a full percentage point more than was expected just three months ago. Higher mortgage rates will drag household spending growth down to an average of just 1.1 percent pa during 2023 and 2024 and flow through into weaker outcomes throughout the domestic economy.

“Demand needs to be reined in reduce how stretched resources are throughout the economy and to bring inflation under control,” noted Infometrics Chief Forecaster Gareth Kiernan.

“The effects of skills shortages and supply chain disruptions have been amplified by excessive spending over the last two years, and inflation is set to persist outside the Reserve Bank’s target band until the end of 2024. Wage and pricing pressures will only ease when demand softens, and businesses have to compete harder to make sales.”

The unemployment rate will also push up to 4.2 percent by March 2024 and climb to around 5.0 percent by mid-2026. This lift equates to an increase of almost 60,000 in the number of people who are unemployed, although it is likely to be caused by sluggish growth in job numbers that fails to keep up with improved growth in the labour force, rather than any significant redundancies being implemented by employers.

Export incomes are also under pressure from weaker global demand and falling commodity prices.

“These headwinds mean that agriculturally focused regions, which performed so strongly during the COVID-19 pandemic, will not enjoy such vigorous growth going forward. Some of the negative effects of the global downturn on exporters are being mitigated by the weak New Zealand dollar and the disruption to parts of the international food supply chain caused by the Ukraine conflict,” said Kiernan.

Export volumes will gradually recover from their current constrained levels and, with the ongoing rebound in tourism, they are forecast to add as much as two percentage points to GDP during 2023 and another 1.0-1.5 percentage points during 2024 and 2025.

“Despite this scope for a pick-up in export volumes, we expect economic growth to slip below 2 percent pa in the second half of 2023 and get as low as 0.9 percent pa during 2024,” concluded Kiernan.

“Growth in domestic activity will be even slower as business investment responds to higher interest rates and government spending slows significantly. The next two years represent a necessary sacrifice of short-term growth for longer-term stability and sustainability in the economy.”