Per capita, GDP has fallen almost as sharply as it did in the Global Financial Crisis.
ASB expects the economy to remain flat over the next year, with another dip into recession in late 2023.
But strong net migration gains are flattering headline GDP numbers and masking the pain people are feeling, says ASB chief economist Nick Tuffley.
Per capita, GDP had slumped to levels almost on par with the Global Financial Crisis, he said.
“It would be best to think of the outlook as a skipping stone, potentially oscillating between shallow increases and decreases,” Tuffley said in a new outlook report released this morning.
But with net immigration running hot, the contraction in per-capita GDP would be more substantial, he said.
“There is more pressure on individuals than the headline figure implies,” he said.
Strong migration flows since the start of the year had made a difference in holding up the headline GDP figure.
Migrant arrivals have continued to soar in the year to June 2023, although this is being offset as more Kiwis depart.
Annual net migration rose again in the year to June, at 86,800 - made up of a net gain of 121,600 non-New Zealand citizens and a net migration loss of 34,800 New Zealand citizens, according to the latest figures from Stats NZ.
“The per-capita GDP figures show how tough people have been finding things,” Tuffley said.
“By March 2023, per-capita GDP had fallen 1.8 per cent, and on our forecasts could fall nearly 4 per cent - nearly on par with the fall around the time of the Global Financial Crisis.”
Net immigration was a major swing variable in the economy, he said.
“Typically, sizeable increases in immigration boost domestic demand and the housing market. However, the impacts of migration on the NZ economy appear to be quite different this time around.”
The demand side of the economy also showed little evidence to date of an immigration boost, with household spending in a per-capita recession and the housing market failing to fire as yet, Tuffley said.
“Overall consumer spending volumes are likely to contract slightly into early 2024 as higher mortgage rates and continued high inflation bite into spending power,” he said.
“On a per-capita basis, we expect volumes to drop upwards of 3 per cent in total over 2023 and 2024 from their early 2023 level. The bounce in migration is helping to put a floor under overall spending.”
But the average mortgage rate being paid by households was currently around 5 per cent and was set to rise to 5.7-5.8 per cent by the early months of 2024, keeping the pressure on.
In contrast, the housing market was starting to show some signs of life, with sales lifting, and inventory and the median time taken to sell coming down, Tuffley said.
“House prices are around the bottom and likely to edge up over 2024, gaining more momentum as interest rates eventually fall. Buyer sentiment will be sensitive to the election outcome, given the very different tax positions of the parties in Parliament.”
New data from CoreLogic, also released today, showed housing affordability has been improving as property values fall, incomes rise and interest rates stabilise.
Mortgage repayments as a percentage of gross annual average household income reduced from a peak of 53 per cent in the fourth quarter of 2022 to 49 per cent last quarter, the CoreLogic Housing Affordability Report showed.
But that remains well above the long-term average of 38 per cent.
CoreLogic NZ chief property economist Kelvin Davidson said the situation still looked “pretty testing” for new buyers.
“Even after the recent improvements, almost half of a household’s income being eaten up by interest repayments is relatively unaffordable compared to long-term averages,” he said.
“Although lower mortgage rates seem likely over a one to two-year horizon, we’re not expecting any relief via rate cuts in the immediate to short term.”
If interest rates do fall sooner than expected, it will likely be because global economic conditions have turned darker.
Slower global economic growth is already a headwind for the local economy and was noted as a serious medium-term risk by the Reserve Bank in its Monetary Policy Statement last week.
“There were hopes that a strong recovery in China would offset the weaker outlook elsewhere,” Tuffley said.
“That hasn’t happened – recent data has underperformed and consumer confidence remains weak.”
A softer global economy was a recipe for lower commodity prices and less demand for New Zealand’s key primary exports.
The ASB Commodities Index is down about 20 per cent since last October, and this would be reflected in softer export receipts in the near term, he said.
Yesterday, trade data showed the value of goods exported by New Zealand fell $890 million (14 per cent) to $5.5 billion in July 2023, compared with July 2022, according to Stats NZ.
The fall in earnings was led by the dairy sector. Milk powder, butter, and cheese (our largest export commodity group) fell by $350m (19 per cent) to $1.5b.
Recent fears about the slower growth of the Chinese economy were cited in a 24 per cent fall in exports to China for the month, compared with a year earlier.
Broadly, though, ASB economists see the economy working through the pain, with inflation likely to keep falling through 2024.
“We expect annual CPI inflation to end 2023 at around 5 per cent, with higher fuel excise and persistently-elevated services inflation blunting the disinflationary impacts of easing pressures in the goods sector,” Tuffley said.
Food price inflation was expected to only gradually abate, but annual CPI inflation was expected to fall below 3 per cent by the end of 2024.
On that basis, ASB expects the Reserve Bank will wait until around August 2024 before cutting the OCR.
It doesn’t forecast another OCR hike, but acknowledges the risks around that are weighted to the upside.
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.
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