Higher interest rates, a weaker labour market and less household spending, have Informetrics predicting a recession for New Zealand’s economy this year. The Reserve Bank is tightening its monetary policy to reduce excess demand and see inflation back within the one to three percent target band by the end of 2023.
We expect a prolonged contraction in the economy through until March 2024 as fixed mortgages roll off and households grapple with higher rates. The Reserve Bank is on track to lift the official cash rate to 5.75 percent by mid-2023, taking mortgage rates above seven percent for the first time since 2008. In tandem with other cost-of-living pressures, higher mortgage repayments are starting to reduce spending volumes compared to the last couple of years,” said Gareth Kiernan, Infometrics Chief Forecaster.
Although household spending and economic growth are expected to stabilise by mid-2024, an unemployment rate of over 5 percent will continue to limit growth throughout the following year. Job losses will directly weigh on people’s spending, but increased nervousness about job and income security will lead to more cautious spending behaviour across a broader range of households. Economic growth in the year to September 2025 is expected to still be below 1 percent per annum, even with the Reserve Bank starting to lower the official cash rate by the middle of 2024. A likely global recession presents additional downside risks to our already negative forecasts.
There is some good news in the battle to bring persistent inflation under control, with many of the supply-side factors now resolving themselves. International shipping costs are down as much as 80 percent from their peak in late 2021, and global production levels are set to be more stable with the end of lockdowns in China. Labour shortages in New Zealand are also becoming less acute as the inflow of foreign workers ramps back up, boosted by the government’s immigration Green List.
Against this backdrop, house prices are expected to end 2023 down 22 percent from their peak two years earlier, with residential consent numbers plunging almost 30 percent as higher building costs make projects unviable. Even so, house prices are still forecast to be 17 percent higher than they were at the end of 2019, meaning that the housing affordability crisis will remain unresolved.
“High-interest rates, rising living costs, a contracting economy, increasing unemployment, and falling house prices (but still unaffordable housing) mean 2023 and 2024 will be incredibly difficult years for households and businesses selling to the consumer sector. They also represent a huge challenge for the Labour government heading into this year’s election. Governments are often judged at the polls by the state of the economy, and by October, all the indicators are likely to be pointing in the wrong direction for Labour’s re-election chances.”