Some economists have delivered a miserable economic forecast, despite progress with labour shortages. Photo / 123rf
Some economists have delivered a miserable economic forecast, despite progress with labour shortages. Photo / 123rf
Wellington-based economists Infometrics have delivered a grim prognosis for the New Zealand economy.
They are forecasting inflation will be harder than expected to beat and the Reserve Bank will need to lift the Official Cash Rate to 5.75 per cent.
“There is very little evidence that inflationary pressures have startedto moderate yet, despite New Zealand’s economy probably being in a recession that started in the final quarter of 2022,” said Infometrics chief forecaster Gareth Kiernan.
Infometrics is forecasting annual inflation (currently 7.2 per cent) will still be stuck at 6.6 per cent at the end of 2023 and 3.8 per cent by the end of 2024.
“We now think it could be mid-2025 before inflation is back within the Reserve Bank’s target band of 1-3 per cent per annum,” Kiernan said.
That is a gloomier outlook than the Reserve Bank, Treasury and all the major bank economists currently hold.
The RBNZ’s last forecasts have inflation back at 4.2 per cent by the end of March 2024 and the OCR peaking at 5.5 per cent.
ANZ economists have inflation forecast to fall to 5.8 per cent by the end of this year. They see it back within the target band (1-3 per cent) by September 2024.
The Reserve Bank lifted the rate by 50 basis points to 5.25 per cent last week - a move many described as aggressive.
We should expect more of this, Kiernan said.
“The hawkish tone of the Reserve Bank’s most recent Monetary Policy Review suggests that the official cash rate will increase to 5.75 per cent in the next few months,” he said.
“Perhaps the biggest concern for mortgage-holders is that the downward path for interest rates from mid-2024 is much slower than the rate of increases has been.
“As a result, the average interest rate being paid across all mortgage debt could remain higher than current levels throughout the next five years.”
But unlike some other forecasters, Infometrics does not believe the Reserve Bank is overdoing the slowdown.
“Insipid growth is needed to correct the imbalances that have manifested themselves across a wide range of indicators, from the housing market, to the current account deficit, and inflation outcomes,” Kiernan said.
The after-effects of Cyclone Gabrielle are showing through in produce prices, and rents and building costs are also likely to be pushed up in impacted regions.
Economist Gareth Kiernan of Infometrics. Photo / File
Domestic transport costs also remained problematic for businesses and upward pressure on labour costs was still significant, he said.
One area where the economy was starting to see some relief was in terms of worker shortages, Kiernan noted.
“The Government’s immigration Green List and increased processing capacity at Immigration NZ has seen work visa approval numbers soar, and arrivals are following suit,” he said.
“This increase in the supply of workers, at the same time as monetary conditions are tightening, will contribute to the unemployment rate reaching 4.3 per cent by the end of this year and almost 5.0 per cent by mid-2024.”
Following a small 0.1 per cent contraction in annual GDP in the year to March 2024, Infometrics expects growth to average just 0.8 per cent (per annum) during 2024 and 2025.
“Even with infrastructure repairs following Cyclone Gabrielle providing a limited boost to growth, sluggish exports and household spending will weigh on the economy for several quarters,” Kiernan said.
StatsNZ releases the latest official Inflation data, for the March quarter, next Thursday at 10.45am.
