Storm clouds building for economy, BusinessNZ says

Kirk Hope says household spending is set to be slashed and mortgage-holding Kiwis could be in for a tough time. Photo / Michael Craig

The New Zealand economy faces significant headwinds right out to 2024, the lobby group BusinessNZ said.

The latest BusinessNZ Planning Forecast showed that while things might look favourable at first, several factors were still cause for economic concern.

Both Treasury and the Reserve Bank have predicted the economy will go into a shallow recession by the second half of next year.

BusinessNZ chief executive Kirk Hope said household spending is set to be slashed and mortgage-holding Kiwis were in for a tough time.

“Inflation remains well above the Reserve Bank’s 1-3 per cent target and interest rates are set to soar in the New Year, meaning many households will not feel the full impact until mortgages start to be re-fixed from 2023,” Hope said.

“Combined with elevated levels of household debt, increased mortgage payments will potentially put significant pressure on people and their budgets, even more so when our record low unemployment level starts to rise again,” he said.

Internationally, the global economic outlook has deteriorated with both continuing geopolitical risks and supply chain disruption.

“There is some evidence of inflationary pressures declining in some key markets like the United States, while international oil prices have taken a dive largely on the back of recession fears,” Hope said in a statement.

The BusinessNZ Economic Conditions Index was at zero for December quarter, down 6 points on the previous quarter and down one on this time last year.

Continuing low levels of business and consumer confidence, combined with entrenched inflationary expectations and rising interest rates, are taking a toll on the index, BusinessNZ said.

The Index tracks 33 economic indicators including GDP, export volumes, commodity prices, inflation, debt, and business and consumer confidence.

The remnants of a Russian convoy in Bucha, Ukraine, on Sunday earlier this year. Vladmir Putin's invasion has sparked inflationary and supply chain issues. Photo / Ivor Prickett, The New York Times

“Although on the surface everything might look cosy, with currently historically low levels of unemployment, modest Crown debt by international standards, and commodity prices still holding up reasonably well, a number of areas will continue to provide the Government, businesses and individuals with cause for concern,” it said.

Inflation remains well outside the Reserve Bank’s target range of 1-3 per cent, but perhaps more concerning is that inflationary expectations are now entrenched,” BusinessNZ said.

“This will force the Reserve Bank to crank up interest rates further to ensure its credibility does not go completely out the window.

“It is concerning that several surveys point to concerns about the Bank’s ability to put the inflation genie back in the bottle.

“To be fair to the bank, it hasn’t been helped in its belated fight against inflation by retaining far too loose monetary policy settings for far too long while some hard-to-fathom Government policy decisions have not helped,” it said.

This included an inability to get to grips with the need for a significant inflow of migrants to produce the goods and services the NZ economy requires.

Several regulatory measures were also blamed for increasing costs and potentially creating greater uncertainty for business.

Domestic factors were not the sole contributors to inflationary pressure, BusinessNZ said.

It pointed to the Russian invasion of Ukraine and associated supply constraints affecting Europe and input costs, particularly in respect to New Zealand’s agricultural sector.

Disposable incomes are also increasingly under pressure, and combined with an extremely tight labour market, could see the beginning of a wage-price spiral.

On the international scene, most international forecasting agencies have downgraded global economic growth for this year and beyond.