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