Economy at ‘breaking point’
The New Zealand economy has become “stretched to breaking point”, according to the latest forecasts from experts at Wellington-based Infometrics.
It says demand has been pumped to unsustainable levels by monetary and fiscal stimulus over the past two years, which was introduced ahead of an expected major recession caused by Covid-19.
Infometrics notes supply constraints and disruptions have become a “more persistent outcome from the pandemic” and have led to a number of impacts on the economy.
Gareth Kiernan, chief forecaster, says inflation is forecast to peak at 7.6 per cent per annum this year and to still be outside the Reserve Bank’s one to three per cent per annum target band at the end of 2023.
“The Reserve Bank has failed to meet its inflation mandate and has been too slow to recognise that its emergency monetary policy settings were no longer required,” he explains.
“The irony is that the bank will now need to take firmer action to try to regain some of its inflation fighting credibility, with the official cash rate set to reach 3.25 per cent in 2023.”
The Reserve Bank increased the official cash rate to 1.5 per cent on April 13 as it brought forward monetary tightening measures to reduce the risk of rising inflation expectations.
Kiernan, pictured, says government policy is also exacerbating demand pressures. He notes despite little rationale for further spending increases, growth in government consumption is still accelerating and has reached its fastest rate since the late 1970s.
Capital expenditure is also expected to increase up this year but he warns such spending programmes risk being gobbled up by price increases rather than achieving the growth the government is aiming for.
The high cost of living and unaffordable housing also threatens to create a brain drain over the next two years.
“We expect to see a big increase in the number of people leaving for Australia, or to Europe on their OE,” adds Kiernan.
“Population growth will hit a 33-year low of 0.3 per cent per annum this year and stay below one per cent per annum until mid-2025.
“Government immigration policy will also keep arrival numbers relatively subdued, providing little relief for businesses struggling to find staff.”
Infometrics also suggests the unemployment rate looks set to stay below 3.5 per cent until the end of 2023, putting workers in a strong position to demand larger wage increases. It expects wage inflation to hold above five per cent per annum throughout 2023.
“The current environment means that businesses will feel more comfortable passing these cost increases on to their customers, threatening to prolong the period of above-average inflation and create a wage-price spiral,” a statement from the company explains.
Kiernan continues: “There are challenging times ahead for New Zealand. The economy will find it harder, and more expensive, to achieve the 2.1 per cent per annum growth we expect over the next three years.
“We face some tough choices about our spending priorities as we shift away from emergency Covid supports, and the hard reality of unwinding stimulus begins.”
