ASB predicts economic flatlining ahead of 2024 rebound

23 August 2023

  • The New Zealand economy is expected to be flat until early 2024
  • RBNZ predicted to hold the OCR until the second half of 2024 before making cuts
  • Net immigration is up and providing a boost to the labour market
  • Inflation expected to remain above 5% for the rest of 2023

The latest ASB Economic Forecast points to continued tough times for New Zealanders in the year ahead with high inflation and interest rates expected to keep the pressure on. Despite this there are early indications some things may be nearing a turning point.

ASB Chief Economist Nick Tuffley says after officially hitting a recession earlier this year, the New Zealand economy will likely dip in and out of contraction for the rest of 2023 before momentum picks up next year.

"We are seeing some bright spots, particularly in the housing market. It looks like that market is stabilising and we expect prices will start creeping back up in the coming year. So the first part of the economy to get hit hard by rising interest rates also looks like it's the first to find a base and recover.

"The Reserve Bank will be keeping an eye on this, and all indications point to headline inflation dropping and wage growth having peaked, however it is still early days so they will be being cautious. Overall things are going in the right direction but it's a slow journey.

"Inflation fell slightly in June to 6%, the lowest since 2021, but is still expected to remain at or above 5% this year before falling to around 3% in the second half of next year, according to the report.

"Interest rates look like they're on hold for now but it's going to be a slow grind down for inflation going forward," says Mr Tuffley. 

"The Reserve Bank will want to be sure that inflation will get back below 3% in the second half of 2024 but getting that confidence will take time, and high interest rates will be needed for a while yet to ensure inflation does indeed fall. We expect the Reserve Bank will wait until around August next year before cutting the OCR.

"Meanwhile, the global economic outlook is subdued, resulting in lower commodity prices and less demand for New Zealand's key primary exports. A weaker than expected post-COVID lockdown rebound in China is also having an impact says Mr Tuffley.

"Generally, food commodity prices have been softening. Part of that has been driven by slow global growth this year and the other thing from a New Zealand perspective is that China isn't rebounding as much as expected. They're missing in action when it comes to dairy auctions as well which is pushing down dairy prices. So, from a farming point of view, there are a lot of challenges - weather, cost and global demand in particular. 

"We're in for a much softer season than we have just had, and the overall outcome of this year's extreme weather events is still not clear.

"Employment growth has remained strong over the past few years and a surge in immigration this year will further support the country's labour market, with the Economic Forecast predicting net immigration inflows of about 70,000 this year.

"There has been an uptick in the number of New Zealanders moving overseas but this has been more than balanced out by a massive rise in those arriving in the country, with the new arrivals younger than leavers and likely to be adding strongly to the workforce.

"This is really helping to fill skill shortages, and because employers have choice, we're seeing early signs that wage growth is peaking and coming down. It's positive that despite the economy being in recession, the job market is holding up really well," says Mr Tuffley.

"It is going to be a slow recovery for the economy overall but we are definitely seeing some signs that things are turning."

"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

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