ASB predicts recession to be deeper, longer than expected


The potential recession could be deeper and more prolonged than previously thought, with the economy forecast to contract at levels last seen during the global financial crisis (GFC).

ASB predicted the economy would contract about 2 percent by early next year - that's more than half the decline seen during the GFC - as living costs outstrip wage growth for many households.

Chief economist Nick Tuffley said if the country was not already in a recession, it appeared to be heading that way, with stubbornly high inflation and a drum-tight labour market.

He said it was going to be a tough year for many, with the cost of living unlikely to ease until early next year.

"Things have overheated, and the stimulus to get us through the pandemic has been arguably too successful at keeping the economy running along, so now we're feeling the effects of that and the economy being stretched," he said.

"We expect rising living costs to add around $150 a week to household spending this year, and income growth is not likely to keep pace with this, despite another year of strong wage growth.

"Overall, we're going to have to endure a year of things cooling down and that putting a bit of pressure on finances, so people will be putting away their wallets for a period and reining in their spending."

Tuffley said home borrowers and those with higher debt levels would disproportionately feel the brunt of the downturn, with inflation expected to remain above 7 percent for the first half of this year.

Consumer habits have been changing over the past year: retail spending has been falling and people are more likely to spend on experiences, such as concerts and travel, rather than durable goods and furniture as they did during lockdowns.

"The continuing tourism recovery is another positive," he said.

"We're back to about two-thirds of pre-pandemic visitor numbers to New Zealand and there's still some scope for markets like China to recover, so that's really going to help our tourism and entertainment businesses, although we expect labour shortages to hamper growth."

Tuffley expected the Reserve Bank would be in a position to start gradually pulling interest rates down to a more neutral level in the first half of 2024, the equivalent of monetary rehydration, he said.

Before then, he expected house prices would continue to decline, with a 25 percent peak-to-trough fall forecast.

House prices were already down about 16 percent in most centres, and over 20 percent in Auckland and Wellington, he said.