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Media Release: Recession softened by migration surge as inflation eases

Inflationary pressures are finally moderating throughout the New Zealand economy, according to Infometrics’ latest economic forecasts, after two years of costs and prices running out of control. Recent data has shown demand across the economy moderating as higher interest rates and cost-of-living pressures have squeezed household spending. With international inflation also abating, the Reserve Bank is now on track to get inflation back to the top of its 1-3%pa target bank 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,” says Infometrics Chief Forecaster Gareth Kiernan. “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.”

The labour market remains tight and wage inflation is still elevated, but the influx of foreign workers over the last nine months is rapidly alleviating the most critical labour shortages previously caused by the border closures. In terms of employment, businesses have been in catch-up mode in the first half of this year, filling roles that had been vacant for an extended period during 2022. Infometrics expects this pent-up demand for additional workers to peter out in coming months, job growth to slip below population growth, and wage inflation to moderate. Annual net migration is set to peak at a record high of over 93,000 in the second half of this year, but ease to a more sustainable level of below 40,000pa by the end of 2024 as the unemployment rate pushes up to around 5%. With fewer job ads indicating weaker hiring intentions, our central view is for a “fast up, fast down” track for migration, but the current momentum in visa and arrival numbers poses a risk that migration heads higher and stays there for longer than we are currently forecasting.

Against this backdrop, further official cash rate (OCR) increases appear unlikely, particularly given that average debt-servicing costs will continue to rise well into 2024 as existing fixed mortgages come up for renewal. “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,” says Mr Kiernan. “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 surge in net migration are raising speculation that house prices are close to bottoming out. Although faster population growth is likely to put a floor under house prices, Infometrics still sees housing affordability and high mortgage rates being a key constraint on the amount buyers can pay for properties throughout the next two years. In addition, the pick-up in population growth coincides with rapid expansion of the housing stock, as record high dwelling consent numbers in the last two years are translated into newly completed homes. As a result, Infometrics forecasts house price growth averaging just 2.2%pa between 2024 and 2028.

Strong population growth will also mask the extent of the economy’s weakness over the next 12 months. “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,” says Mr Kiernan. “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. 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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