The likelihood of a soft landing for the global economy has increased, according to an International Monetary Fund report. Photo / 123rf
The likelihood of a soft landing for the global economy has increased, according to an International Monetary Fund report. Photo / 123rf
The New Zealand economy is on track for a much sought-after “soft landing”, says Infometrics’ chief forecaster Gareth Kiernan.
“Soft landing” is a term typically used by economists to describe successfully controlling inflation via a cycle of rising interest rates, without tipping the economy into recession.
“The economic outlook isnot without its challenges, which reflect the severe stresses the economy has been under throughout the last three years,” Kiernan said.
“However, trends in current inflation and growth expectations are both relatively good, all things considered. There is a sense that the rebalancing of the New Zealand economy after the pandemic could have been a lot more harrowing than what we are currently experiencing.”
Although economic activity was set to remain patchy in coming quarters, Infometrics was now forecasting year-end growth to bottom out at 0.9 per cent during 2024, Kiernan said.
That was an upward revision of more than a percentage point from the trough that had been expected earlier this year.
“Part of the economy’s resilience is due to the record high net migration inflows that are currently occurring,” said Kiernan. “The addition of 110,000 people to the population over the last year has filled workforce vacancies and skill shortages, boosted demand even as household budgets are being squeezed, and created a moderate pick-up in the housing market.”
At the same time as demand has held up, the easing in the annual inflation rate to 5.6 per cent suggested that the Reserve Bank’s tighter monetary conditions are working as hoped, he said.
Much of the slowdown in inflation to date had been driven by weaker global price pressures and the normalisation of international supply chains, but inflation was still forecast to trend down towards 3 per cent by early 2025.
The Reserve Bank was unlikely to lift the official cash rate above 5.5 per cent, but lingering price pressures could also prevent any rate cuts until late next year, Kiernan said.
Domestic inflationary risks remained and could persist into 2024, he said.
They included higher oil prices and transport costs, continued wage pressures if the labour market remains tight, or flow-on effects from the housing market recovery into broader consumer spending trends.
“The Reserve Bank is balancing these inflationary risks against weakness in the global economy, particularly in China, which is weighing on export prices,” Kiernan said.
“Significant cost increases since 2020 mean that the profitability of farmers is under major pressure. As a result, provincial regions with agriculturally based economies will struggle more than other regions over the next 18 months.”
Economist Gareth Kiernan from Infometrics. Photo / NZME
The incoming government’s likely relaxation of tax rules for property investors was set to boost buyer demand for housing.
However, if interest rate cuts were delayed until late 2024, mortgage rates would hold above 6 per cent next year and keep housing relatively unaffordable, he said.
Infometrics expected prohibitive debt-servicing costs to limit the extent of any house price rises during 2024.
Last week the International Monetary Fund (IMF) released a report suggesting the global economy was on track for a soft landing.
Fears of widespread recession among the world’s leading economies were fading, the IMF’s quarterly World Economic Outlook report said.
“Overall, the likelihood of the soft landing has increased,” said IMF chief economist Pierre-Olivier Gourinchas.
Global growth was expected to slow to 3 per cent this year and 2.9 per cent in 2024, Gourinchas said.
Stronger growth was expected in the US and large emerging markets downward revisions for China and the Euro-area.
Globally, headline inflation continued to recede from 6.8 per cent this year to 5.7 per cent next year.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
