Quarterly Economic Update

The good news is that the inflation rate has likely peaked, but there are still a few potential economic hazards in 2023 as New Zealand rebuilds from Cyclone Gabrielle.

Market recap:

Inflation remains high globally but may have already plateaued and is predicted to fall in 2023.

Despite this likely easing of inflationary pressures in the coming months, central banks are continuing to raise cash rates – not least in New Zealand. The Reserve Bank of New Zealand (RBNZ) increased the Official Cash Rate (OCR) to 4.25% in November 2022, the highest since January 2009. The increase of 75 basis points was the ninth consecutive increase and the biggest in the bank’s history. The RBNZ has now increased the OCR by 400 basis points since October 2021, the most aggressive tightening of NZ monetary policy since 1999.

In the US, the Federal Reserve also announced another 0.25% lift in the benchmark rate in February – its eighth consecutive increase – to a range of 4.475-4.5%. Analysts currently expect it to go above 5% (although the rate of increase has slowed). 

Following four rises in 2022, the European Central Bank raised its key rate by 0.5% in February to 2.5%. with another 0.5% increase currently expected in March. 

The global economy grew strongly in 2022 as the impact of the COVID-19 pandemic started to recede, but monetary tightening to combat inflation is expected to result in much slower growth in 2023 and beyond. 

Quarterly GDP growth in NZ to the end of September was 2% for an annualised figure of 2.7%. It is currently expected to reach 3.5% by the end of the June quarter 2023 before dropping off markedly going into 2024. 
 

NZ’s unemployment rate is expected to rise through 2023 from the near-record low of 3.3% recorded in the September 2022 quarter. It’s forecast to peak at about 5.5% in mid-2024¹. 

In its November 2022 Monetary Policy Statement, the RBNZ noted a number of constraints on the local economy including stronger than expected inflation, labour shortages, upward pressure on wages, and robust household spending despite falls in house prices and lower consumer confidence². 

Tourism grew significantly in 2022 following the lifting of COVID-related travel restrictions and is expected to continue to grow into 2023. Stats NZ reported that 1.4 million people visited New Zealand in 2022, the majority in the final quarter of the year. By December 2022, monthly visitor numbers had reached 68% of pre-pandemic levels³. 

Global share market volatility in 2022 was driven by the impact of the war in Ukraine, supply-chain disruptions and inflationary pressures, resulting in one of the worst years on record for US stocks. The S&P/500 was down 20%, the NASDAQ 100 fell by 33% and the Dow Jones by 8.8%. 

Local markets fared better with the NZX 50 index down by 11% over the year but finished with a strong final quarter going into 2023.

The Inflation rate has likely peaked

Inflation reached a peak of 7.3% in New Zealand for the June 2022 quarter, dropping to 7.2% in the following two quarters. The NZ Treasury forecasts that inflation is now near its peak but will be relatively slow to fall away, not moving back inside the 1-3% target band until at least the end of 2024.

Other economies have seen a similar plateau in the inflation rate. In the US, the annual Consumer Price Index (CPI) fell to 6.4% in January, down from 6.5% in December. It was the seventh consecutive monthly fall after it hit a high of 9.1% in June 2022⁴.  In the UK, inflation fell to 10.1% in January, down from 10.5% in December and a peak of 11.1% in October 2022⁵. 

The International Monetary Fund (IMF) expects global inflation to fall from 8.8% in 2022 to 6.6% in 2023.  For major developed economies, the Organisation for Economic Co-operation and Development (OECD) projects inflation to moderate from 9.4% in 2022 to about 6.6% in 2023⁶ and 5.1% in 2024⁷. 

This downward trend in inflation is expected to continue in 2023 as tighter monetary policies take effect, post-COVID-19 demand pressures subside, and supply chains normalise. The pace of decline will vary across countries and, while a faster fall is possible, there is still much uncertainty in the outlook.

Outlook – what’s expected next?

Inflation and interest rates will continue to occupy the minds of investors and economists over the coming months. However, the focus is likely to also include growth and unemployment as the pent-up demand in the economy, post-COVID supply shocks start to wane, and higher interest rates begin to bite. There is still a danger that higher interest rates over an extended period could force the economy to make a harder than expected landing.

In its half-yearly economic and fiscal update in December 2022, the New Zealand Treasury said the economy was facing “multiple challenges that are expected to lead to slower growth in the period ahead”⁸.  The economic forces shaping the current cycle included inflationary pressures, sharply higher interest rates, supply chain challenges, adverse effects from the Russian invasion of Ukraine, deteriorating global growth, falling house prices, and low consumer and business confidence.

As a result, the NZ Treasury forecasts NZ economic growth to slow in 2023, with a contraction of 0.8% over the three quarters to the end of 2023, followed by a gradual recovery in 2024 and beyond. 

The OECD country outlook projects real GDP growth in New Zealand to slow to 1.0% in 2023 and 1.2% in 2024. It predicts the unemployment rate to increase from 3.8% in 2023 to 5.5% in 2024.

For the global economy, the IMF estimates 3.4% growth in 2022, falling to 2.9% in 2023. That’s below the long-term average but higher than forecast in October 2022. The OECD now projects global GDP growth to slow to 2.2% in 2023, well below the rate predicted before the war in Europe, then recovering to 2.7% in 2024.

Current forecasts for global growth in 2023 suggest a divergence between developed and emerging markets. Growth in the US is expected to hover at about 1% for the next two years and be even lower in the EU and UK. In contrast, the OECD expects the major Asian emerging-market economies will account for close to three-quarters of global GDP growth in 2023; the IMF expects China and India alone to account for 50% of global growth in 2023.

The local property market in NZ continues to encounter headwinds. House prices fell 13.9% nationally in the year to the end of January, down 16.2% from the height of the market in November 2021⁹.

With variable mortgage rates now increasing, an estimated 23% of fixed-rate mortgage holders are due to come up for renewal of their loans by the end of 2023. This could adversely affect household spending if property owners are looking to refinance while at the same time experiencing negative equity in their properties.

The impact of severe weather events, including the aftermath of Cyclone Gabrielle, are another factor which may have a negative effect on growth and economic activity. However, while there is an initial hit to the economy in terms of lost production and damage to infrastructure, the clean-up phase could see an increase in activity, although it may be constrained by an already tight labour market. Long term, labour market shortages could lead to a wages spike and renewed inflationary pressure.