The good news was that there were early signs that demand was softening. Photo / NZME
The good news was that there were early signs that demand was softening. Photo / NZME
The New Zealand economy will slow sharply as interest rates rise in the coming months but won't enter a recession, according to a new quarterly outlook from the Westpac economics team.
"An over-stimulated economy in the wake of the Covid shock has led to the most serious bout of inflationin decades," said Westpac acting chief economist Michael Gordon.
"Demand needs to be reined back into line with the economy's productive capacity."
Westpac expects the Official Cash Rate to reach a peak of 4 per cent, likely by the end of this year.
"More critically, interest rates will need to remain high for some time, in order to provide the necessary braking effect on the economy," Gordon said.
But the good news was that there were early signs that demand was softening, some of the international price shocks of recent years were now receding, and longer-term expectations of inflation remained under control, he said.
"This suggests that inflation is on track to return to the Reserve Bank's target in the coming years, without the kind of shock treatment that was needed around the world in the 1970s and 1980s."
Westpac's fresh set of forecasts sees annual GDP growth slowing to just 1.8 per cent for 2022 and 2 per cent across 2023.
It sees Consumer Price Index inflation falling slowly but steadily to an annual rate of 5.1 per cent for 2022, 3.2 per cent for 2023 and 2.6 per cent for 2024.
With unemployment only tipped to rise marginally (to 4.2 per cent in 2024) the forecasts see wages growth as likely to outpace inflation next year.
Westpac's view is broadly in line with that of ANZ economists who released their fresh quarterly forecasts last week.
ANZ is forecasting GDP growth of just 1.9 per cent this year and 1.8 per cent next. Its pick for inflation is 6.1 per cent for this calendar year, falling to 2.5 in 2023.
ANZ chief economist Sharon Zollner warned there was still a risk of recession in early 2023 if international tourism and education didn't improve as quickly as hoped.
Westpac's Gordon also sounded a note of caution around the recovery given the constraints on growth created by the tight labour market.
"International visitor numbers have been climbing rapidly since the border with Australia reopened earlier this year, " he said.
Michael Gordon, chief economist Westpac Bank.
"That's been a particularly welcome development for our hospitality sector, with businesses in tourist hotspots like Queenstown reporting a strong lift in bookings."
"However, like other parts of the economy, the hospitality sector is struggling with shortages of staff. Consequently, many service providers in the sector are still being forced to operate below pre-pandemic levels, even as demand has picked up."
ANZ also sees the OCR needing to peak at 4 per cent and warns of the risk it could need to go higher.
There is a general consensus that the Reserve Bank will hike the OCR by 50 basis points in its Monetary Policy Statement tomorrow (Weds) at 2pm.
The RBNZ will also publish its latest economic forecasts for the year ahead, offering clues to its thinking on future interest rate decisions.
"The Reserve Bank will need to keep the cash rate at restrictive levels for some time yet," Gordon said.
"As tough as it may get, the economy will need to push through the pain barrier for a while, because the end results will be worth it."
