High interest rates to take their toll on economic growth, say ANZ economists.
High interest rates to take their toll on economic growth, say ANZ economists.
ANZ economists see the economy “muddling through” the next few months but warn it will be “hard yards” overall as high interest rates take their toll on economic growth.
ANZ has today released its quarterly economic outlook - titled “ups and downs” - with an assessment of the fiscal positionunder the new Government.
That wouldn’t be materially different in the short term, with inflation gains from greater spending cuts likely being offset by a bump in the housing market which would boost demand.
“Overall we see the economy muddling through, with some unders and overs, and certainly winners and losers as the big forces (monetary, fiscal, global and demographic) that are buffeting the economy play out,” said ANZ chief economist Sharon Zollner.
“But unfortunately, whether more medicine via another OCR hike is needed to bring it about or not, it’ll likely feel like hard yards overall.”
ANZ economists currently forecast one more rate hike in February, to take the OCR to 5.75 per cent.
They forecast headline inflation to return to the RBNZ’s 1-3 per cent target band by the end of 2024, helped by the tailwind of falling tradables (international) inflation.
ANZ forecasts include “small tweaks” to GDP, with topline growth looking slightly stronger due to higher net migration.
However, per capita growth will remain “very weak”.
“The economy is expected to continue its post-pandemic normalisation, with services exports (chiefly international tourism and education) continuing to recover. Meanwhile, domestic demand is expected to remain subdued as restrictive monetary conditions weigh,” Zollner said.
The agricultural sector was contending with a significant reduction in incomes with export prices low and operating costs (including interest costs) trending higher, Zollner noted.
ANZ sees annual average growth at just 1 per cent in 2024.
“Hopefully, the reward for all this restraint will be steadily falling inflation and an improving balance both fiscally and with the rest of the world that will set the economy up for future success,” she said.
But in the short term, the unemployment rate will continue to rise.
ANZ Bank chief economist Sharon Zollner. Photo / Dean Purcell
“We are expecting to see the labour market cool fairly quickly from here. Weaker labour demand as economic activity softens, combined with solid growth in labour supply from net migration are together expected to see the unemployment rate rise to a peak of 5.3 per cent in 2025.”
The size of New Zealand’s current account deficit - the gap between national earnings and expenditure - remained a risk for the economy.
“At a still whopping 7.5 per cent of GDP, New Zealand’s deficit remains deep in ‘out of balance’ territory, particularly when compared to other advanced economies, including Australia,” Zollner said.
ANZ’s forecast has the current account narrowing to 5.3 per cent of GDP by the end of 2025 - “still too wide to call sustainable”.
“At these levels, the current account remains a key vulnerability for the economy. Tighter monetary and fiscal policy settings have a key role to play in constraining import demand, but with risks to our export performance skewed south, New Zealand has a potentially lengthy, and not very fun, path towards macroeconomic sustainability to walk,” she said.
“Higher interest rates (via a widening risk premium) and a weaker currency may well prove to be necessary parts of that transition.”
Slowing growth in China was a key risk to the rebalancing and returning New Zealand’s trade balance to surplus could prove difficult, Zollner said.
The threat of drought this summer, if El Nino caused dry weather patterns, was also a risk to New Zealand’s potential export earnings.
On the immediate fiscal front, ANZ doesn’t see the new Government making a material difference to Treasury forecasts.
“All up, while the change in government doesn’t appear to be a game changer in terms of the ‘on paper’ fiscal policy impacts on aggregate demand, the housing market is likely to be a little stronger than otherwise.”
That presented a small upside risk to CPI inflation that would be broadly offset by the risk that Government spending is cut by a little more than signalled.
“But to get a handle on that, we’ll probably have to wait until May’s Budget.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
