NZ Economy: Consumer spending put to the test, says Fitch research arm BMI

New Zealand’s economic growth will slow to just 1 per cent for the 2023 year, says a risk report by the international research group BMI.

High inflation and tighter monetary policy will put consumer spending to the test, the new report said.

But there is hope on the horizon, with unemployment likely to stay much lower than in previous economic downturns.

“New Zealand families are highly leveraged and thus exposed to tightened monetary conditions,” it said.

“With price pressure remaining elevated over the coming months, we believe that real wage growth will remain negative or only marginally positive at best, which means that workers are unlikely to recover lost purchasing power in the short term.”

The research was released after first-quarter GDP data that showed New Zealand had slipped into a technical recession.

BMI expects the economy to pick up through 2024 as easing monetary conditions, lower inflation and stronger global growth provide tailwinds that should then offset headwinds from a higher unemployment rate.

But risks to that growth outlook remain tilted to the downside, the report said.

“As the economy falters, we believe that policymakers will start to prioritise growth over inflation from now on, leaving the OCR [official cash rate] at its current level over the remainder of 2023 before cutting it to 4 per cent by end-2024.”

The labour market will remain tight, adding to inflation as wage growth picks up, the report warns.

Despite edging up from the lows in 2022, the unemployment rate has continued to hover around multi-year lows, at 3.4 per cent, BMI noted.

This is feeding through to a pick-up in wage growth, which rose by a multi-year high of 4.3 per cent (year-on-year) in the first quarter of 2023, further fuelling headline inflation.

“While firms are reporting that labour shortages have eased, job vacancies are still at high levels, pointing to tight conditions in the months ahead.”

But while softening economic activity would eventually take a toll on the labour market, BMI believed unemployment would increase far less than in past recessionary cycles, averaging 4 per cent in 2023.

BMI Country Risk & Industry Research is a division of Fitch Solutions but is not related to the credit rating division.

Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.