NZ economy 'might be able to avoid a recession' but will feel like it's contracting anyway, Infometrics forecasts

The economy "might just be able to avoid a recession" in 2022 despite growth contracting in the first quarter of the year and inflation driving a cost of living crisis. 

That's according to the latest forecasts from Infometrics, which came with a grim warning. The forecasts indicate that, even if a technical recession is avoided, "the bulk of the economy will feel like it is going through a contraction anyway".

A recession is when there are two successive quarters of negative growth. Since New Zealand's gross domestic product (GDP) contracted in the first quarter of this year, another contraction over the June quarter would put New Zealand officially in recession. 

"The economy is trying to do too much with too little and demand needs to reduce closer to what the economy can supply if we're to limit price increases to a more manageable level," said Brad Olsen, Infometrics' principal economist.

"Economic growth will only remain in positive territory thanks to the impending revival of the tourism sector and profitability for domestically focused businesses will be heavily eroded by continued cost pressures and a drop-off in revenue as consumers go into their shells."

Infometrics' forecasts indicate the average mortgage rate will rise to 5.7 percent by the second half of 2024 - well above the Reserve Bank's prediction of the official cash rate peaking at 4 percent. 

"The Reserve Bank's late start in tightening monetary policy will continue to weigh on the domestic economy for the next two years," Olsen said.

"By the end of 2024, Infometrics expects economic growth to have slowed to 1.6 percent per annum as demand consolidates to more sustainable levels. An unemployment rate back at 4 percent will indicate a less critically stretched labour market and the Reserve Bank will be able to start reducing the official cash rate."

Olsen said rising inflation would also continue biting, with Infometrics predicting it will still be above 3 percent at the end of 2024 - largely in line with Treasury's 3.6 percent peak forecast for that year. 

"Tourism will drive a temporary and uneven bounce in economic activity over the coming summer months and push GDP growth to 2.8 percent for 2023," Olsen said. "But even this patchy growth will not be without its challenges. The rebound in visitor numbers could be hampered by a faltering global economy and high fuel prices."

He said the tourism sector could also struggle to meet demand amid critical staffing shortages across multiple industries. 

"By the end of 2024, Infometrics expects economic growth to have slowed to 1.6 per annum as demand consolidates to more sustainable levels.

"Over the next two years, the risks of a wage-price spiral with limited economic growth are real," Olsen said.

Westpac's quarterly economic overview in May also found growth was set to slow during the next few years. Westpac forecasts private consumption GDP to rise by 1.5 percent this year but slow to only 0.6 percent growth in 2023. 

"A period of slower growth is certainly on the cards," said Westpac acting chief economist Michael Gordon. "In fact, that is what is needed to dampen the demand-related domestic inflation pressures that are currently bubbling over.

"As global central banks tame the inflation beast, global growth is set to slow… All up, we expect global growth to slow to 3.4 percent and 3.3 percent over 2022 and 2023, respectively."