The New Zealand economy is growing at an unsustainable rate, fuelled by the massive fiscal and monetary stimulus applied over the last 16 months in response to the COVID-19 pandemic. Infometrics’ latest forecasts predict that economic growth will climb to over 5%pa this year, with growth in household spending reaching 10%pa. These strong demand conditions are being accompanied by a wide range of cost pressures that are creating serious inflationary risks, with the burst of demand unlikely to hold up.
“Last year’s stimulus was an appropriate response to the massive uncertainty presented by COVID-19, and if our economy had contracted by 8% during 2020 like the UK, such stimulus would still probably be necessary,” says Infometrics Chief Forecaster Gareth Kiernan. “But New Zealand’s exceptional public health outcomes and return to ‘normal’ mean that the stimulus has fuelled rampant household spending, an overinflated housing market, and a rapidly tightening labour market. Firms are being forced to pay more for inputs and workers, and they will increasingly look to pass those costs on as customers continue to stream in the door.”
Inflation could climb above 3%pa this year, with mounting questions about the Reserve Bank’s assumption that this spike will be temporary. “Pressures on inflation include a tripling of container costs for international shipping, higher commodity prices because of recovering global demand, rising prices for oil and electricity, and higher wages needed to attract and retain staff in an increasingly tight labour market. The pressure on prices remains high, and that will eventually be felt in people’s back pockets,” says Mr Kiernan.
The government’s reluctance to consider access to foreign workers for businesses is exacerbating the scramble for staff and is set to be a significant constraint on economic growth over the next few years.
Current levels of economic activity are unsustainable and will eventually give way to slower trend growth, with spending brought forward limiting how much spending can occur in the next few years. Infometrics forecasts that GDP growth will average just 1.2%pa between 2022 and 2026. The official cash rate will rise to 1.5% by the end of 2023, squeezing the life out of household spending. However, mortgage rate increases of this magnitude will not be enough to cause house price falls, even with residential consent numbers running at record high levels.
“New Zealand has brought forward a lot of our future growth by slashing interest rates and pumping more than $55b into COVID-19 relief and recovery,” says Mr Kiernan. “It’s unrealistic to expect current growth to continue, and both the Reserve Bank and the government need a clear plan to scale back the stimulus, turn down the heat under the economy, and ensure households and businesses can plan with a more sustainable path ahead.”
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