New Zealanders are being warned to "prepare now" for what one major bank predicts will be a "challenging 2023" due to "stubbornly high" inflation and an official cash rate expected to hit a 14-year high.
ASB on Tuesday released its December quarterly economic forecast, predicting New Zealand will enter a recession in 2023 with rising unemployment, high inflation and climbing interest rates.
Chief economist Nick Tuffley said there is a clear message for New Zealanders: "Prepare now for a challenging 2023."
"My advice to New Zealanders is act now: don't wait until challenges land at your doorstep to get on top of your finances," he said.
"Take advantage of the help available from your bank to get your loan structure right and take a hard look at your spending and saving levels."
The report forecasts the New Zealand economy will contract by 1 percent by the end of 2023, driven by falling consumer spending and declining building activity as construction struggles with surging costs in what is a cooling housing market.
The prediction of a recession - two quarters of negative growth - is in line with recent projections by both the Reserve Bank and the Treasury.
Both expect New Zealand to suffer three quarters of negative growth in 2023, with last week's Half Year Economic and Fiscal Update (HYEFU) from Treasury forecasting a contraction of 0.8 percent across that period.
"Regardless of whether we actually dip into a recession or not, the New Zealand economy's going nowhere for a period of time," said Tuffley.
"Inflation is proving stubbornly high, and we don't expect it will fall below the Reserve Bank's 3 percent target ceiling until mid-2025. Non-tradable inflation, which is linked to domestic wage growth, is pushing up businesses' operating costs and may continue to accelerate until the middle of 2023."
Inflation sat at 7.2 percent in the September quarter, down from 7.3 percent in the June quarter. While economists had previously thought inflation had peaked, the Reserve Bank came out in November forecasting it will rise again to 7.5 percent in early 2023.
That will see a response from the RBNZ, which expects to hike the official cash rate (OCR) to 5.5 by mid-2023. That'd be the highest the OCR has been since October 2008.
The point of lifting the OCR is to raise interest rates which leads to less inflationary actions like spending and borrowing.
"To curb this wage-price spiral, we expect the RBNZ to press on with increases to the OCR, which we forecast to peak at 5.5 percent in mid-2023 and remain high for a year," said Tuffley.
ASB expects the high inflation and resulting OCR hikes will lead to a fall in household spending, with some families forced to cut back and others taking a cautious approach.
"Discretionary purchases such as cars, appliances and furniture are likely to be most affected after a retail boom in recent years. The Christmas mood is likely to be downbeat, spending patterns will change, and businesses in these exposed sectors need to be ready to adapt to changing customer needs," said Tuffley.
"Unemployment is set to rise, partly through some job losses, but mainly as the population grows and more people miss out on work while job creation stalls in a weak economy.
"While times will be tough, some businesses are likely to want to hold onto staff rather than actively cut back. Recruitment remains challenging at present, with some skills in short supply. Businesses will have an eye on ensuring they have the capacity and capability to manage through the eventual recovery."
Treasury last week predicted unemployment will rise from the near-record-low of 3.3 percent in this year's September quarter to 5.5 percent in 2024.
A weaker housing market will also contribute to people holding back their spending and borrowing, with ASB forecasting house prices could fall by up to 25 percent.
"Mortgage rates are likely to rise slightly further and remain elevated, so if your home loan is refixing in the next year or two, understand how your payments may change and budget for this scenario. Likewise, for businesses, especially those servicing the housing market, or reliant on discretionary consumer spend, be alert to your cashflow and changing consumer behaviour."
An RBNZ report in November found the number of home loan borrowers in negative equity could jump from 2 percent to 7.3 percent if house prices fall another 10 percent. Negative equity means the borrower's mortgage is larger than the current market value of their property.
New Zealand's economy will also be constrained by workforce shortages in tourism and hospitality as international tourists return, ASB believes.
"This is a sector that's rising from the ashes and needs more people in the right places, particularly Queenstown.
"In contrast to other areas of the economy, tourism may continue to face staff shortages, placing pressure on an industry that desperately needs a successful summer. Much will depend on the ability to attract staff from different regions, industries and even abroad.
"But even with the welcome return of international tourists, and a wave of international students in the new academic year, the outlook is for a tough 2023."
The ASB report follows a Westpac survey on Monday showing consumer confidence is at an all-time low. The number of households that believe it is the right time to make a major purchase has also fallen to a record low.