Kiwis warned 2023 will be tough and uncomfortable as country pays economic price of controlling inflation

Economists are warning Kiwis are in for an uncomfortable and tough 2023 as the country tries to manage high inflation and global instability. 

New Zealand is currently battling a cost of living crisis driven largely by skyrocketing inflation. 

Inflation jumped to a whopping 7.3 percent as the country came out of the COVID-19 pandemic. 

Data from Statistics New Zealand shows inflation is now the highest it has been in three decades. The last time it went above 7 percent was in the June 1990 quarter when it hit 7.6 percent. 

As a result the Reserve Bank of New Zealand hiked the Official Cash Rate (OCR) up several times in an effort to dampen spending and control inflation.

The OCR is currently at 3 percent after it was raised 50 basis points in August from 2.5 in July. The RBNZ first started increasing the OCR in October 2021 when it jumped to 0.50 from 0.25 percent, which it had been since the pandemic in march 2020. 

The OCR hikes have seen the average mortgage rates jump up with ASB, ANZ and Westpac's 12-month fixed rate all sitting at 5.45 percent while KiwiBank's is at 5.39. This compares to rates which dipped below 3 percent at the peak of the pandemic.

The increasing costs of mortgages and inflation is causing grave concerns among experts but one area of the economy has been defying the doom and gloom. 

The job market has been booming with skilled worker shortages pushing up wages and unemployment down. 

Statistics New Zealand data shows median weekly earnings from wages and salaries rose by 8.8 percent to $1189 in the year to the June 2022 quarter. 

The increases were partly driven by an extremely competitive job market with unemployment sitting at 3.2 percent in March 2022 compared to 4.6 percent in the same month the previous year. 

And while it's good news for employees it's putting a huge strain on employers. 

The strong job market is partly believed to be behind New Zealand avoiding a technical recession in the last quarter, because despite inflation pushing prices up, most people are still employed. 

Statistics New Zealand data released earlier this month show Gross Domestic Product (GDP) jumped 1.7 percent in the past quarter, defying concerns the country might be plunged into a technical recession. 

But despite the growth, household spending is starting to decline as Kiwis tighten their belts in the face of increasing economic challenges. 

Stats NZ data shows household spending declined 3.2 percent in the June 2022 quarter with lower spending on goods like used motor vehicles and audio-visual equipment. There's also been a similar fall in retail trade activity.

While the country desperately needs spending to drop to tame inflation, experts warn it's going to be a bitter pill to swallow. 

Economist Cameron Bagrie said every day Kiwis are already feeling some "real pain" but it's only going to get worse as the country pays the price of reducing inflation. 

Bagrie said while there are some positive signs such as low unemployment and wages increasing, it's not offsetting the skyrocketing cost of the essentials. 

"We've had a sugar-coated economy for a couple of years that has benefited from huge amounts of government spending, low-interest rates and printing money. Now the sugar coating has unleashed the inflationary thief and inflation siphons spending power and there is some real pain out there across New Zealand at the moment in regard to the cost of living."

He said while taming inflation is key it's not going to be comfortable and that discomfort will likely last for some time. 

"What we are going through at the moment is there's a bit of a reality and a reset that's starting to emerge. To get rid of inflation, which nobody likes, then there are sacrifices that need to be made and the sacrifices are, we're entering an environment where it's going to be tough economically for the next couple of years."

Bagrie said the reality of the country's economic position hasn't fully landed yet, which means Kiwis are in for a tough wake-up call next year. 

"We are still sort of looking in the rear-view mirror and thinking life is still pretty dandy. We haven't seen the real impact of containing inflation yet and the real impact is when we start to see the job losses.

"That's the big 2023 story. People have actually been tightening the belt over the past six months. We're still spending but more of that money is being eaten up… it's the inflationary side of it. If you look at the volume of spending, that strips out inflation, the volume of spending has actually been going backwards over 2022. So we're spending more but we're actually getting less. 

He said many people are ticking along hoping they can continue as normal but the longer we put off the pain, the worse things could get. 

"The longer you put it off, the greater the risk that inflation becomes entrenched and then you've got a real problem getting rid of it." 

Rude awakening 

It's a view shared by Infometrics principal economist Brad Olsen who said next year is when things will "really start to bite". 

Olsen said around 44 percent of mortgages are set to roll over in the next year which will see interest rates jump for many, putting stress on people's finances. 

He said as the costs of basics get more expensive and their mortgages increase, Kiwis will clamp down further on spending. 

"They'll make sure to buy the essentials first, they'll pay the mortgage and pay the rent. They'll put food on the table, they'll buy fuel for the car. But after that, all bets are off in terms of just how much money New Zealanders put out there. 

Olsen said at some point something has to give and while Kiwis are already spending less, it's only going to get worse. 

"Just given the level of interest rate rises we've seen across the economy, at some point, something's got to give. Households aren't likely to be sitting there and able to maintain the same level of spending as they have before. 

"I think in general, as we go forward it seems hard to fathom when interest rates go up so much Kiwis would be able just to keep doing the same things they did when interest rates were rock bottom levels. "

But Olsen said as Kiwis become increasingly nervous about the economy, they are spending less which could actually help the economy. 

"There is fatigue setting in that is going to mean the energy levels of the economy are going to pull back. And that's almost exactly what the Reserve Bank wants to see. Them and basically everyone else at the moment still say the economy is trying to do too much with too little. And if that's the case, then we do want that economic temperature to drop just a bit so that we go from sort of running to off and running a temperature down to a more normal level of economic activity." 

NZ isn't alone 

New Zealand isn't the only country facing high inflation and cost of living concerns. Earlier in the week the Bank of England said it would not hesitate to change interest rates after the pound plunged to a record low and British bond prices collapsed in response to the new government's financial plans.

Meanwhile in the United States the Federal Reserve has also hiked interest rates as it battles rampant inflation. 

Bagrie told Newshub it will be "very difficult" for the global economy to avoid a recession. 

"It's just a question of whether we get away with a light one or a real humdinger. But to get the inflationary thief back in jail, there's got to be an economic price to pay on the other side. And the next 12 to 24 months are basically paying that price."