NZ Economic Outlook: coming in to land

Economic growth in New Zealand is poised to slow as monetary tightening weighs on domestic demand. But the return of international tourism and weaker demand for imports should provide a decent offset in gross domestic product terms.

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Whether or not New Zealand avoids recession remains a line ball call. But it’s important to note not all recessions are created equal. A recession that brings about a transition from the currently over-stretched economy towards sustainable expansion, while also avoiding a significant household income shock, may not be as bad as the R-word portends. Particularly from a long-run economic stability perspective. 

And if it means squashing the current wage-price spiral before it necessitates even more aggressive action by the Reserve Bank of New Zealand, then it may be a cost worth paying.

One way or another, the economy needs to find its way to a sustainable path. Price (and economic) stability is at stake and so too is very hard-won central bank credibility. Hopefully a 5 per cent official cash rate is enough to get the job done.

The wage-price spiral keeps surprising, necessitating a higher OCR outlook
Our OCR forecast peaks at 5%, but current wage growth momentum means it may need to go higher

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Household debt-servicing burdens will rise, and sharply
But it would take another 300bps on top of our forecast to reach previous highs 

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Net visitor arrivals are poised to recover
But it’s a steep mountain to climb to normality 

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House prices have further to fall We expect a full
unwinding when adjusted for incomes

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Inflation will slow
But it will take slack opening up in the labour market to take care of ‘sticky’ domestic inflation

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Fiscal restraint will help cool inflation and narrow the current account deficit
But the annual current account deficit is expected to widen a little more in the very near term

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Source: Stats NZ, RBNZ, REINZ, Macrobond, ANZ Research

Miles Workman is a Senior Economist at ANZ Institutional and Sharon Zollner is Chief Economist at NZL Institutional

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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