New Zealand Outlook: Rates Ruffle Feathers

A stagnant housing market, weakening labour demand, slower household spending and reduced business and residential investment will see the economy slip into recession in the second half of the year.

"While the economy could surprise us, risks are still skewed to the RBNZ needing to do more to get inflation down."

Whether inflation has been tamed and, subsequently, whether there will be a need for more rate rises is unclear.

On balance, we see the outlook skewing towards the Reserve Bank of New Zealand sooner or later deciding more is needed to get inflation down.

That view is not set in stone. Ongoing supply-side recovery is good for both growth and bringing inflation down – it could be a stronger force than our forecasts build in.

Here’s the story in charts:

New Zealand: the way ahead…

A recession is looming in New Zealand and slower domestic demand will more than offset any boost provided by a recovery in exports.

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Consumer spending and investment will come under pressure as higher rates bite and job security deteriorates.

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Labour demand is easing just as imported labour supply is surging.

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Higher unemployment and slower wage growth are expected which will guide non-tradables inflation lower.

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The external imbalance will improve but it won’t be fun with weaker demand key.

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While the economy could surprise us, risks are still skewed to the RBNZ needing to do more to get inflation down.

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Sharon Zollner is Chief Economist for New Zealand at ANZ

Charts source: Stats NZ, MBIE, RBNZ, Macrobond, ANZ Research

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