New Zealand's economic growth 'to be quite weak', economy 'potentially flirting with recession', new ASB forecasts show

New Zealand's economic growth will likely be weak for the rest of the year as a cocktail of record-high inflation and rising interest rates continue burning Kiwis' back pockets.

In its latest quarterly economic forecast, ASB painted a grim fiscal picture for the rest of 2022 - with falling house prices and a tight labour market also contributing to slower economic growth.

ASB said New Zealand's economic growth, which contracted in the first quarter of this year, was "set to be quite weak, with the economy potentially flirting with recession".

In addition, interest rates were expected to soar to 4 percent in New Zealand by the end of this year and wouldn't fall until 2024, ASB said. Central banks around the world were hiking interest rates to try and combat global inflation.

"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," ASB chief economist Nick Tuffley said. "The Reserve Bank has been reacting to this by rapidly increasing the official cash rate, which we expect to reach 4 percent by the end of the year and remain high throughout 2023."

On the housing market, ASB said steady price declines would continue through to the middle of next year.

Nick Tuffley.
Nick Tuffley. Photo credit: File

"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," the bank said.

"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."

In some good news, fuel prices were down from their extreme highs posted earlier this year and the intensity of COVID-19-related supply chain issues was easing.

But the cost of living and higher interest rates would continue biting, ASB added, with further price increases to come.

The official cash rate (OCR) rose earlier this month to 3 percent and economists have signalled another likely 50 basis point increase in October.  

According to the Reserve Bank's (RBNZ) own forecasts, the OCR would rise to 4 percent next year.

Westpac, like ASB, was predicting interest rates to peak at 4 percent later in 2022.