NZ sees a moderation of inflation as higher migration softens recession
According to the latest economic forecasts from Infometrics, New Zealand is finally experiencing a moderation of inflationary pressures after a two-year period of escalating costs and prices.
Recent data indicates that the demand across the economy is stabilising as higher interest rates and cost-of-living pressures have impacted household spending. Additionally, international inflation is also showing signs of abating, which puts the Reserve Bank on track to reach its 1-3%pa inflation target by the end of 2024.
“Although inflation is still higher than normal, there have been signs that underlying cost pressures are becoming less broad-based, which is the reverse of the trend experienced during 2022,” said Gareth Kiernan (pictured above) Infometrics chief forecaster. “Expectations about future inflation are also easing, and previous disruptions to supply chains have dissipated. Weaker demand conditions mean that firms now have less pricing power, leading to sharper pricing and a greater degree of discounting than throughout the last three years.”
Despite the labour market remaining tight and wage inflation remaining elevated, the influx of foreign workers over the past nine months has alleviated critical labour shortages caused by border closures, Infometrics said. Businesses have been working to fill long-vacant positions during the first half of the year, driven by pent-up demand. Infometrics predicts that this demand for additional workers will diminish in the coming months, causing job growth to fall below population growth and wage inflation to moderate.
Annual net migration is expected to peak at a record high of over 93,000 in the second half of this year before settling to a more sustainable level of below 40,000pa by the end of 2024 as the unemployment rate rises to around 5%. While fewer job ads indicate weaker hiring intentions, there is a risk that migration numbers could exceed current forecasts.
Given this context, further increases in the official cash rate appear unlikely, especially as average debt-servicing costs continue to rise due to the renewal of existing fixed mortgages.
“The Reserve Bank will be content to let the effects of its previous interest rate rises continue to dampen demand over the next 12 months,” Kiernan said. “From May next year, we expect the Bank to start reducing the OCR, but relief for mortgage holders will not be massive. Our forecasts see the OCR only getting down to 4% by the second half of 2025.”
The peak in mortgage rates and the surge in net migration have sparked speculation that house prices may be nearing the bottom. However, Infometrics believes that housing affordability and high mortgage rates will remain constraints on buyers' purchasing power in the next two years. While population growth is expected to provide some support to house prices, the rapid expansion of the housing stock, driven by record-high dwelling consent numbers, will likely offset significant price growth. Infometrics forecasts an average annual house price growth of 2.2% between 2024 and 2028.
Strong population growth will mask the extent of the economy's weakness in the next 12 months. Despite a mild downturn compared to the Global Financial Crisis, a 2.2% decline in per-capita GDP by June 2024 signifies a significant contraction. This downturn reflects the reversal of households' fortunes as the economy slows down. The impact on businesses, with customers spending less, will only be mitigated by an increase in customer numbers associated with robust net migration.
Kiernan projected that the economy will continue to show signs of weakness throughout the remainder of 2023 and into 2024.
“We expect the economy to flirt with negative growth between now and the end of 2024 which, at first glance, is a mild downturn compared with the Global Financial Crisis,” he said. “However, a 2.2% decline in per-capita GDP in the year to June 2024 represents a much more significant contraction. This result demonstrates the reversal of households’ fortunes as the economy has slowed. The effects on businesses of each of their customers spending less will only be mitigated by an increase in customer numbers associated with strong net migration.
“Be it a continued slowdown, a double-dip recession, or any other description, the economy is still going to look and feel weaker throughout the rest of 2023 and into 2024,” he said. “That’s the price we’re paying to get inflation under control and put the New Zealand economy on a more sustainable path. At least we’re now seeing the effects of the tightening in monetary conditions coming through.”
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