New Zealand should avoid another recession as economic 'soft landing' on the cards - Infometrics

  • 20/10/2023

The New Zealand economy is on track for a sought-after "soft landing", according to Infometrics' latest forecasts.   

A 'soft landing' is the process of an economy shifting from growth to slow growth to potentially flat - approaching but avoiding a recession.   

Infometrics chief forecaster Gareth Kiernan said while economic activity is set to remain patchy over the coming quarters, year-end growth is predicted to bottom out at 0.9 percent during 2024: more than a percentage point higher than the low point expected earlier this year.  

"The economic outlook is not without its challenges, which reflect the severe stresses the economy has been under throughout the last three years," said Kiernan.  

"However, trends in current inflation and growth expectations are both relatively good, all things considered. There is a sense that the rebalancing of the New Zealand economy after the pandemic could have been a lot more harrowing than what we are currently experiencing."  

Kiernan noted the addition of 110,000 people to the population over the past year has helped support the economy by filling vacancies in the workforce and boosting demand.   

"Part of the economy's resilience is due to the record high net migration inflows that are currently occurring. The addition of 110,000 people to the population over the last year has... boosted demand even as household budgets are being squeezed, and created a moderate pick-up in the housing market," he added.  

Inflation easing to 5.6 percent in the 12 months to September indicates the Reserve Bank's interest rate hikes are working, he said, with inflation forecast to trend down towards 3 percent - the Bank's target band - by early 2025.   

According to Kiernan, the Reserve Bank is unlikely to lift the official cash rate above 5.5 percent, but lingering price pressures could also prevent any rate cuts until late next year.   

Higher oil prices and transport costs, ongoing wage pressures, or flow-on effects from the housing market's recovery are inflationary risks that could persist into next year, he added.   

"The Reserve Bank is balancing these inflationary risks against weakness in the global economy, particularly in China, which is weighing on export prices," said Kiernan.   

"Significant cost increases since 2020 mean that the profitability of farmers is under major pressure. As a result, provincial regions with agriculturally based economies will struggle more than other regions over the next 18 months."  

Post-election, economists are expecting a boost in buyer demand for housing due to the incoming National government's expected relaxation of tax rules for property investors.   

If interest rate cuts are delayed until late 2024, however, mortgage rates will hold above 6 percent next year and keep housing relatively unaffordable. Infometrics expects prohibitive debt-servicing costs to limit the extent of any house price rises during 2024.   

Earlier this week it was revealed that annual inflation has continued its downward trajectory, providing some relief for Kiwis hit by the cost of living crisis.     

Statistics NZ said the consumer price index (CPI) was 5.6 percent in the 12 months to September, falling 0.4 percentage points from June's annual data.   

Tuesday's figures marked the third quarter in a row inflation has decreased. It's now the lowest it's been since December 2021.    

"Prices are still increasing, but are increasing at rates lower than we have seen in the previous few quarters," consumers prices senior manager Nicola Growden said.  

It comes after economist Cameron Bagrie predicted the CPI to remain around the 6 percent mark.  

"A lot of that we can put down to fuel prices, end of the subsidy, rise in international oil prices, rates look like they're going to be up somewhere between 8-10 percent, which is partly a by-product of local authorities needing more money... so inflation doesn't matter whether you look globally or locally, it's proven to be a lot more persistent, sticky," he said.   

"That era of throwing money around like confetti is coming to an end, that era of incredibly low interest rates has come to an end.   

"So the growth we're going to need to see going forward has got to be of real substance. The danger is we tend to go for quick fixes in regard to growth which is just let a lot more migrants in, which is precisely what we are doing."