ASB predicts deeper 2023 recession and tough year ahead in latest outlook

• Overall GDP fall of around 2% expected by early 2024.
• RBNZ expected to increase the OCR by another 25bp before holding until the first half of 2024.
• Consumer spending is shifting from durables and furniture to experiences.
• International tourism is already back up to two thirds of previous levels, but could be hampered by worker shortages.

The New Zealand economy is expected to tip further into recession than previously thought according to the latest ASB Economic Forecast, with a contraction of around 2% predicted by early next year - more than half the decline seen during the Global Financial Crisis.

The forecast recession has set in a little earlier than expected, with GDP falling 0.6% in the December 2022 quarter.

ASB chief economist Nick Tuffley says high inflation and interest rates will continue to slow consumer spending in the year ahead, with homeowners in particular feeling the pinch. Although inflation is expected to remain above 7% for the first half of this year, Mr Tuffley says the Reserve Bank (RBNZ) is nearing the end of its OCR increases.

"Things have overheated, and the stimulus to get us through the pandemic has been arguably too successful at keeping the economy running along, so now we're feeling the effects of that and the economy being stretched. The RBNZ is having to work hard to get inflation under control but is near the end of that job, although we can expect to see the impacts of high interest rates flowing through for a while yet.

"We expect rising living costs to add around $150 a week to household spending this year, and income growth is not likely to keep pace with this, despite another year of strong wage growth. It's going to be a tough year, and home borrowers will feel these impacts disproportionately."

Recent extreme weather events would likely spike inflation further in the short-term according to the report, with temporary shortages of some fresh food, household items and cars. Meanwhile the rebuild would help boost the slowing construction sector but this could be some time away, says Mr Tuffley.

"The rebuild will provide a lift in GDP over the coming years but we know infrastructure replacement can take a long time, as we saw with the Christchurch earthquakes, and particularly in cases where location and design need to be rethought to improve resilience.

"Overall, we're going to have to endure a year of things cooling down and that putting a bit of pressure on finances, so people will be putting away their wallets for a period and reining in their spending."

Mr Tuffley says the overall volume of retail spending has been falling, but consumer spending habits have also changed in the past year.

"During the lockdown period, there was a big spike in durables and furniture but spending is now shifting to experiences such as concerts and travel. People are spending less but also spending differently now because we're able to do those things again.

"The continuing tourism recovery is another positive. We're back to about two thirds of pre-pandemic visitor numbers to New Zealand and there's still some scope for markets like China to recover, so that's really going to help our tourism and entertainment businesses, although we expect labour shortages to hamper growth."

The latest ASB Quarterly Economic Forecast will be available online at https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html

Other recent ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html