A new report says the New Zealand economy is in for a few years of lean growth but should avoid a crash or recession.
The Westpac Economic Overview August 2022, released on Tuesday, says the economy is at a turning point and economic growth will shift down a gear as the impact of inflation and higher interest rates is felt.
The report says high inflation and rising interest rates are putting household budgets under pressure and a slowdown in spending is predicted over the coming year.
New Zealand's rate of inflation is currently running at around 7 percent, and is higher on some goods such as food. In response, the Reserve Bank has aggressively pushed up the official cash rate from 0.25 percent on August last year to 2.5 percent now.
It's widely predicted to rise to 3 percent on Wednesday when the next review is undertaken.
Many households on fixed mortgage rates have been shielded from the effects of the rises, but this is set to change as many come off those rates.
Around 24 percent of mortgages will need to be re-fixed by the end of the year. A further 23 percent will come up by the end of 2023.
"For the average household, the rise in mortgage interest costs will drain around $3000 out of their wallets per annum," the report said.
"That'll take a much larger bite out of their spending than the combined increases in the prices of food and fuel.
"However, the impact of interest rate increases will feel very different for households across the country - many households will have no mortgage, while others may have very high levels of debt."
Westpac predicts the Official Cash Rate will peak at 4 percent by the end of the year but interest rates will need to remain high for some time to put a brake on the economy.
Westpac said domestic demand has been running hot, due in part to the economic stimulus we saw during the COVID-19 pandemic, as well as a very low OCR.
That demand has caused inflationary pressure, putting pressure on businesses and households.
The bank said the good news is there are early signs demand is softening, some of the international price shocks of recent years are now receding, and longer-term expectations of inflation remain under control.
"This suggests that inflation is on track to return to the Reserve Bank's target in the coming years, without the kind of shock treatment that was needed around the world in the 1970s and 1980s," acting chief economist and one of the authors of the report Michael Gordon said.
"As tough as it may get, the economy will need to push through the pain barrier for a while, because the end results will be worth it."
The global economy, suffering from many of the same issues as New Zealand, is also forecast to see slower growth over the next few years. Other federal banks have been aggressively hiking interest rates and Westpac predicts the world's economy will grow by a modest 3 percent in 2022, followed by higher growth of 3.4 percent in 2023.
The report said some of the forces that have restrained the economy during the pandemic are now easing.
"Spending patterns around the world have begun to swing back towards services and away from physical goods, taking the pressure off global supply chains.
"Tourists are starting to return to New Zealand, which means we're getting more value out of our natural assets.
"And the resumption of migration will help to address skill shortages in some areas, if not economy-wide," Gordon said.