Worse economic conditions expected to come
As 2022 comes to an end, we look ahead to what the Treasury is forecasting for the years to come.
The coming years are forecast to get even more challenging for New Zealanders, and the Treasury has lowered its short-term expectations across multiple key economic indicators in the 2022 Half Year Economic and Fiscal Update (HYEFU) released today.
Persistent demand growth in New Zealand has been met by ongoing supply constraints, leading to record high levels of inflation, and all-time low levels of unemployment. The New Zealand economy is currently operating well-above capacity. In response, the Reserve Bank of New Zealand (RBNZ) is attempting to bring balance to demand and supply, and its consequent impact on prices, by raising interest rates through the official cash rate (OCR).
A shallow recession is forecast for the year ended June 2024.
Expectations of economic growth have decreased notably in the short-term with the Treasury now expecting a shallow recession in the year ended June 2024, following three periods of consecutive economic decline to close out 2023. This recession is tabled through the headline figure of real annual gross domestic product (GDP) contracting by 0.3 percent to the year ended June 2024. As opposed to the forecasted growth of 0.7 percent in budget 2022. This is not surprising, given that the RBNZ has seemingly attempted to artificially engineer a shallow recession.
Higher and more persistent inflation now forecasted.
Admittedly, forecasts now reflect a more cyclical nature to impacts rather than transitory. Inflation, as measured by the consumer price index (CPI), is expected to remain higher for longer, in comparison to budget 2022, as presented below. Interestingly, forecasts suggest inflation has reached its peak and will begin its lengthy fall back to within the RBNZ target range (between one and three percent). Although, these forecasts are caveated with the uncertainty of global forces which would materially change economic conditions.
This adjustment in expectations has resulted in an extension of multiple cost of living support packages into March 2023. Consequently, higher, and more persistent than expected inflation will continue to be tackled by tightening in monetary conditions throughout 2023 and into 2024, as also forecast by the RBNZ in their 2022 November monetary policy statement (MPS).
These conditions have had a profound impact on interest rates forecasts, which similarly, are expected to remain higher for longer, compared to budget 2022. Specifically, 90-day interest rates are expected to peak at 5.1 percent across all four quarters of 2023, compared to the previously expected peak of 3.6 percent in budget 2022 during this period.
The shift in inflation and interest rate forecasts will have a compounding impact on households in the short-term, as the end of 2023 and start of 2024 look bleaker than previously thought, with household wealth forecast to fall as mortgages begin to roll-over. This will offset much of the recent growth in household incomes.
Unemployment peaking at 5.5 percent for the year ended June 2024.
Currently, in the December 2022 quarter, unemployment sits at a near record low of 3.3 percent, with an extremely tight labour market. This is expected to climb to 5.5 percent for the year ended June 2024, above the initial forecast in budget 2022 of 4.4 percent. The higher and more persistent inflation requiring stronger monetary policy is attributed to this change in the unemployment forecast. Unemployment isn’t anticipated to return to around historical sustainable levels of around four percent until late 2026.
As a product of the shallow recession that is predicted, employment is expected to fall, with a drop in the number of employed people between December 2022 and June 2024 of around 50,000. This is a serious decrease considering net migration (currently steadily increasing) is anticipated to be a positive, with net inflow of 20,000 in the year ended June 2024.
As history goes, it is likely that young people will feel the brunt of this impact, as they tend to be in less stable, short-term employment, and often in industries more pronouncedly impacted by changes in economic cycles.
No hiding from the worsening of economic conditions to come.
The pressure currently faced by households and New Zealanders is seemingly only a warm-up for what is to come. Higher and more persistent inflation for much of 2023 will continue to push the RBNZ into action as they attempt to get a handle on prices. As a result, higher than previously forecasted interest rates will be the bane of 2023 and 2024 for households. Young New Zealanders will likely bear most of the impact of job losses in the coming years.