NZ Economic Outlook: coming in to land

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