What does the future hold?

Ahead of the July-September quarter, Chief Economist Nick Tuffley looks into his crystal ball to see what might lie ahead.

6 Jul 2022
read time
3 min to read
Unraveled cassette tape on a orange background

What is the outlook for the New Zealand economy?

“Generally speaking, the economy has weathered the Omicron outbreak with far less disruption than in 2020 and 2021. That is a benefit given the broader macroeconomic headwinds we are seeing.

GDP growth is expected to be sluggish over the first half of 2022, despite increased mobility post-Omicron. We expect calendar 2022 and 2023 to deliver growth around 1.5% per annum.

High inflation, the resultant increases in interest rates, labour shortages, and weakening global growth are now the more dominant economic issues to grapple with.

Consumer spending growth will be crimped by reduced real incomes, weaker balance sheets and the squeeze on the mortgage belt. The housing market will continue to weaken as high interest rates impact.

The full reopening of New Zealand’s border in July will allow some recovery later this year in the international tourism and education industries. However, net immigration is unlikely to stage a modest recovery until 2023.”

We are hearing a lot about inflation as rates continue to be tightened. What are you seeing in terms of the inflationary outlook?

“Annual CPI inflation hit 6.9% in the year ended March 2022, its highest in more than 30 years. Short-term inflation has been boosted by higher costs for freight, oil/ materials and housing. Stretched capacity and rising wages could potentially underpin more persistent high-core inflation.

Unfortunately, the inflation outlook is still inherently uncertain. We see the risk of high inflation outcomes persisting.

Annual consumer price inflation is forecast to peak at around 7% in the first half of 2022, remain above 5% over 2022 and get potentially get back to around 3% late in 2023.

The forecast moderation in annual headline inflation is driven by a cooling in external inflation influences, with the risk inflation from this source taking longer to cool. Annual non-tradable inflation is expected to remain elevated, at above 4% over the forecast period.”

What about the outlook for global growth?

“This has been softening for a number of months. Oil, gas and grain costs have risen sharply, partly because of Russia’s invasion of Ukraine.

Central banks are suddenly becoming less complacent about inflation and lifting interest rates, and China’s economic growth is also weakening as it continues to pursue a zeroCovid-19 policy.

These factors will all impact on New Zealand’s export industries in different ways.”

“The labour market is exceptionally tight. The current 3.2% unemployment rate is a record low and labour shortages are the most elevated since the 1970s. Employment growth will be hamstrung by sluggish demand and labour shortages.”

How do you see some of these factors influencing whānau and households in Aotearoa New Zealand?

“The labour market is exceptionally tight. The current 3.2% unemployment rate is a record low and labour shortages are the most elevated since the 1970s. Employment growth will be hamstrung by sluggish demand and labour shortages.

Wage growth is expected to strengthen over the course of 2022. However, household purchasing power will be sapped by the soaring cost of living, including higher borrowing costs.

Households will likely reallocate expenditure, with more household budget going towards the essentials (food, shelter, fuel), crowding out discretionary spending.

Housing has clearly softened under the weight of tighter credit regulations, rising interest rates, and surging construction creating added supply.”

What about the ever-present household value discussion?

“We expect house prices to fall around 12% in total, with circa 5% of that having already happened. That forecast fall is slightly larger than during the Global Financial Crisis, though in inflationadjusted terms is larger (20% vs 15%).”

With households feeling the crunch, what do you anticipate for business over the next quarter?

“Covid-19 disruption for businesses has reduced this year compared to the first two years of the pandemic. Businesses can use lessons from the past few months to refine how they will respond to future waves.

Meanwhile, inflation, supply chain and labour challenges have intensified – and will persist in 2022.

Supply chains should start untangling next year. The Ukraine invasion and China’s Covid-19 lockdowns are, however, prolonging the pain.

Labour shortages will persist through into 2023, even though New Zealand’s border restrictions are going to end.

These challenges, and the aforementioned geopolitical tensions, also mean that businesses need to start thinking more strategically about their future export markets and sources of imports.

Investing in cost- and labour-saving capital and technology is one option for businesses. We expect capital spending to continue to lift.