No Christmas miracle for the New Zealand economy: ASB predicts 2023 recession and rising unemployment in latest outlook

21 December 2022

  • New Zealanders urged to prepare for sustained period of economic slowdown.
  • OCR expected to peak at 5.5% by mid-2023 as RBNZ grapples with stubborn inflation.
  • Consumer spending to fall as household budgets squeezed further.
  • International tourism rebuild starting, but could be hampered by worker shortage. 

"Prepare now for a challenging 2023." That's the key message from ASB chief economist Nick Tuffley in the bank's latest quarterly economic forecast, with high inflation and interest rates expected to pull New Zealand's economy into recession for much of 2023.

ASB forecasts the New Zealand economy will contract 1% by the end of 2023, driven by falling consumer spending and declining building activity, as construction struggles with surging costs in a cooling housing market. "Regardless of whether we actually dip into a recession or not, the New Zealand economy's going nowhere for a period of time."

"Inflation is proving stubbornly high, and we don't expect it will fall below the Reserve Bank's 3% target ceiling until mid-2025. Non-tradable inflation, which is linked to domestic wage growth, is pushing up businesses' operating costs and may continue to accelerate until the middle of 2023.

"To curb this wage-price spiral, we expect the RBNZ to press on with increases to the Official Cash Rate, which we forecast to peak at 5.5% in mid-2023 and remain high for a year," says Mr Tuffley.

The economic report signals a marked fall in household spending, driven by the impact of higher interest rates, cost of living increases, and a weaker housing market, in which prices could fall up to 25%. Some households will be forced to cut back, while others will take a cautious approach.

The most exposed sector to the downturn is household durables, says Mr Tuffley. "Discretionary purchases such as cars, appliances and furniture are likely to be most affected after a retail boom in recent years. The Christmas mood is likely to be downbeat, spending patterns will change, and businesses in these exposed sectors need to be ready to adapt to changing customer needs.

"Unemployment is set to rise, partly through some job losses, but mainly as the population grows and more people miss out on work while job creation stalls in a weak economy. While times will be tough, some businesses are likely to want to hold onto staff rather than actively cut back. Recruitment remains challenging at present, with some skills in short supply. Businesses will have an eye on ensuring they have the capacity and capability to manage through the eventual recovery.

"My advice to New Zealanders is act now: don't wait until challenges land at your doorstep to get on top of your finances. Take advantage of the help available from your bank to get your loan structure right and take a hard look at your spending and saving levels.

"Mortgage rates are likely to rise slightly further and remain elevated, so if your home loan is refixing in the next year or two, understand how your payments may change and budget for this scenario. Likewise, for businesses, especially those servicing the housing market, or reliant on discretionary consumer spend, be alert to your cashflow and changing consumer behaviour."

The welcome return of international tourist dollars to New Zealand is a bright spot in the outlook, but widespread worker shortages in tourism and hospitality will constrain the economic potential.

"Before the pandemic, tourism was New Zealand's largest export earner, delivering significant positive impact and employment to our regional economies. International visitor numbers have picked up sharply since the border reopened, air capacity and demand from our Pacific Rim markets have ramped up, but the potential lack of staff could continue to hold tourism and hospitality back.

"This is a sector that's rising from the ashes and needs more people in the right places, particularly Queenstown. In contrast to other areas of the economy, tourism may continue to face staff shortages, placing pressure on an industry that desperately needs a successful summer. Much will depend on the ability to attract staff from different regions, industries and even abroad.

"But even with the welcome return of international tourists, and a wave of international students in the new academic year, the outlook is for a tough 2023."

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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