- Inflation has likely peaked but it could be 2024 before it drops back below 3%.
- House prices expected to continue to fall through to mid-2023.
- The OCR is expected to increase to a peak of 4% by year-end before starting to fall in 2024.
New Zealanders are set to face a tough year as the continued pressures of inflation, housing and a tight labour market combine, according to the latest ASB Quarterly Economic Forecast. Growth is set to be quite weak, with the economy potentially flirting with recession.
Inflation hit a three-decade high in the middle of 2022. ASB chief economist Nick Tuffley says although the outlook is still uncertain, inflation should ease gradually over the next couple of years.
“Inflation likely hit its peak midway through this year, but it’s going to take a while to get down to a sensible level so there’s going to be a long tail. The Reserve Bank has been reacting to this by rapidly increasing the Official Cash Rate, which we expect to reach 4% by the end of the year and remain high throughout 2023,” says Mr Tuffley.
“Many households with mortgages are going to feel added mortgage servicing pressure over the next year. We still have over half of fixed rate mortgages rolling over in the next 12 months so there’s going to be people progressively feeling the impact of that even into mid next year. Eventually, though, interest rates are likely to come down, but we don’t envisage that until sometime in 2024.”
The latest economic forecast showed households, the housing market and home-building are most likely to feel the effects of high inflation and interest rates, with house prices expected to continue declining until mid-2023. Housing construction
is also expected to contract gradually amidst declining prices, rising interest rates and building costs, and a steady closing of the past supply shortfall.
“A wide range of household living costs have lifted noticeably over the past year. In the short term, wage growth has not kept up, the upshot being that households’ purchasing power has taken a dent this year. There are further big lifts in prices still to come through, particularly the flow-on impacts of labour costs on businesses. But fuel prices are down from their extreme – at least for the time being – and while we expect supply chain impacts will persist for some time, the intensity and cost escalation is starting to ease,” says Mr Tuffley.
Meanwhile the labour market looks set to remain tight. The availability of working age people is likely to grow at a slower pace compared to the pre-pandemic trend. Net inbound migration is unlikely to rebound to previous levels, at least not for some time. Demographic shifts are also slowing growth in the pool of potential workers.
“The labour market is proving to be a double-edged sword,” says Mr Tuffley.
“On the one hand, we’re seeing continued strong wage growth which will outpace inflation next year and lift people’s purchasing power, but on the other hand, this is going to be a real challenge for employers when it comes to finding and retaining people. Employers will need to start thinking longer term about how they cope with those challenges because we don’t see much relief anytime soon.
“The message is it’s going to be pretty challenging this year and a chunk of next year, but then we should start to see some relief on the horizon as the housing market stabilises again and inflation and interest rates start to ease a bit.”
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