With the economic rule book still in shreds after the GFC, making predictions for 2023 is risky business. But New Zealand’s handling of inflation, and the engineered recession, loom as the major issues for the coming year, as Andrew Bevin writes
Economics is a dark art at the best of times, but with so many balls in the air, few things are a given.
GDP figures released in mid-December are a prime example, with economists at ASB and Westpac picking GDP growth of just 0.9 percent for the quarter ended September. The Reserve Bank picked it at 0.8 percent, while BNZ came in above the rest at what seemed like an awfully high 1.3 percent.
Yet the retrospective figure came through at two percent, far above even BNZ’s radically different prediction.
If predicting the past in the current environment is proving difficult, what does that mean for 2023 forecasts?
BNZ’s chief economist Mike Jones, who joined the bank in late October after a stint at ASB, said the traditional economic rule book had been tossed out with the GFC in 2008 and hadn’t really reasserted itself.
Jones said the phrase “unprecedented times” had become tiring through the pandemic, but it was the reality of the situation and one that was continuing into the current period.
“It’s hard to remember a time when uncertainty was more pronounced, there are so many different balls in the air.”
Handling of inflation and the engineered recession will be the key story for 2023.
Jones said BNZ was of the view that inflation had either already peaked or was in the process of peaking, and predicted relief from inflation in 2023.
However, that relief wouldn’t mean lower prices – rather, just slower increases in prices. “I wouldn’t say it’s good news, just some less bad news.”
Getting inflation back into the target band of between one percent and three percent isn’t likely to happen last year unless something drastic like an oil market collapse takes place.
“The issue that keeps the Reserve Bank up at night is that wage inflation is just so strong in New Zealand now that there is an element of a wage price spiral that’s appearing, which means it’s going to be that much more difficult to get inflation down and keep it down on a sustained basis.”
One major factor in the performance of the economy over the coming year that is known is the Reserve Bank’s OCR treatment in response to that inflation, projecting a peak of 5.5 percent in April followed by a recession from the middle of the year.
Jones said there was a possibility RBNZ wouldn’t need to hit those sorts of heights to rein in the economy if inflation figures and expectations came in lower than expected, which BNZ believes has a relatively high chance of happening.
The OCR determines the rates banks offer their customers on loans, so in theory, the higher the cash rate, the more expensive the mortgage.
Jones said in the final stages of the tightening cycle, the mortgage story became a bit more nuanced.
“The longer dated three-, four- or five-year mortgage rates may not be that far away from from peaking because they already factor in their OCR view. Shorter term rates still have a little bit further upside to go.”
Mortgage rate rises stopping would also see the downward property market find a floor in the first half of the year, but Jones said he was reluctant to put too much confidence in what might happen to property prices out of the generally accepted 20 percent peak to trough correction forecast.
He said mortgage rates could also move independently from whatever the Reserve Bank does with the OCR.
“We’ve got some of the more imaginative of crisis tools from the Reserve Bank rolling off, whether it’s the bond buying Large Scale Asset Purchase program or the funding for lending program, which means some of that liquidity we saw injected into the system is being drained.
“That’s going to put pressure on mortgage rates to rise independently of what the Reserve Bank does. So, we sort of tend to lean against these calls that mortgage rates have or will soon peak, particularly those short-term rates.”
According to the Reserve Bank, just over half of all mortgages will roll over in 2023.
Jones said the average mortgage rate was something like four percent and regardless of future Reserve Bank actions, it would go to around 6.5 percent in 2023.
“If you run the numbers on a half-a-million-dollar mortgage, you’re potentially going to have households with an extra $300 or $400 a week coming through on their mortgage bill, and for some that won’t be expected at all.
“There are not many household budgets that can accommodate another $300 or $400 weekly without something else having to go.
This could be particularly tough for those that bought at the peak of the housing market.
“There are going to be some tough conversations around the dinner table in the next wee while. It’s the main reason why we have this view that discretionary and durable spending is going to come under some pressure.”
Every household will be different, but retail, hospitality, some elements of construction and domestic tourism are all expected to feel the spending pullback the most.
Jones said BNZ had a small technical recession (two or more consecutive quarters of economic contraction) forecast in 2023 for quite some time which had been reinforced by the Reserve Bank’s interest rate moves.
There’s kind of three things that have caused recessions in New Zealand in the past; global growth shock, a drought or aggressive monetary policy tightening. So we’ve kind of got two of them at the moment, which is why I think it is going to be something that’s difficult to avoid.”
An uneven recession
Looking below the headline figures, Jones said there would be notable differences in how the recession would be felt around New Zealand.
Regional centres would be supported by solid export prices and outperform places like Wellington and Auckland.
The prospect of a recession could be very different this time around.
“The term recession, even though some of it’s a technical term, does inspire this dread, understandably, because it’s traditionally been a time of heavy job losses, which is really for most people is where these sorts of things are felt.
“Famous last words, but this time does feel different as the labour market is entering the slowdown from the most stretched it’s ever been almost in the history of data we’ve got from New Zealand.”
Jones said unemployment would likely rise, but through the supply of workers from offshore, rather than the axing of existing jobs.
“I think firms are going to be keen to actually hold on to labour through this downturn.”