The New Zealand economy is heading for a well-signalled recession this year, as higher interest rates and a weaker labour market hit household spending, according to Infometrics’ latest forecasts published today. The Reserve Bank’s tightening in monetary policy is set to take full effect over the next 18 months, reducing excess demand in the economy and bringing inflation back within the Bank’s 1-3%pa target band by the end of 2024.

“We expect a prolonged contraction in the economy through until March 2024 as fixed mortgages roll off and households grapple with higher rates,” says Infometrics Chief Forecaster Gareth Kiernan. “The Reserve Bank is on track to lift the official cash rate to 5.75% by mid-2023, taking mortgage rates above 7% for the first time since 2008. In tandem with other cost-of-living pressures, higher mortgage repayments are starting to reduce spending volumes compared to the last couple of years.”

Although household spending and economic growth are expected to stabilise by mid-2024, an unemployment rate of over 5% will continue to limit growth throughout the following year. Job losses will directly weigh on people’s spending, but increased nervousness about job and income security will lead to more cautious spending behaviour across a broader range of households. Economic growth in the year to September 2025 is expected to still be below 1%pa, even with the Reserve Bank starting to lower the official cash rate by the middle of 2024. A likely global recession presents additional downside risks to our already negative forecasts.

There is some good news in the battle to bring persistent inflation under control, with many of the supply-side factors now resolving themselves. International shipping costs are down as much as 80% from their peak in late 2021, and global production levels are set to be more stable with the end of lockdowns in China. Labour shortages in New Zealand are also becoming less acute as the inflow of foreign workers ramps back up, boosted by the government’s immigration Green List.

Against this backdrop, house prices are expected to end 2023 down 22% from their peak two years earlier, with residential consent numbers plunging almost 30% as higher building costs make projects unviable. Even so, house prices are still forecast to be 17% higher than they were at the end of 2019, meaning that the housing affordability crisis will remain unresolved.

“High interest rates, rising living costs, a contracting economy, increasing unemployment, and falling house prices (but still unaffordable housing) mean 2023 and 2024 will be incredibly difficult years for households, as well as businesses selling to the consumer sector,” says Mr Kiernan. “They also represent a huge challenge for the Labour government heading into this year’s election. Governments are often judged at the polls by the state of the economy, and by October, all the indicators are likely to be pointing in the wrong direction for Labour’s re-election chances.”

ENDS