NZ Faces Another Recession

New Zealand is fighting a losing fight against inflation, and a recession is the likely outcome

New Zealand is set for another recession in 2023.

A recession is a significant decline in general economic activity. It is usually recognised as two consecutive quarters of falling economic output measured by Gross Domestic Product (GDP). GDP is the total monetary or market value of all the finished goods and services produced within a specific area – such as a country or state – during a year. Often, recessions go hand in hand with redundancies, sharp falls in the share market, queues for unemployment benefits, boarded-up shops on the main street, and so on.

New Zealand was plunged into a recession during the lockdowns of 2020, and the latest estimates indicate we’re likely to again be in recession in 2023.

Why the Recent Change in Expectations?

Up until lately, many of the brightest financial and economic minds thought New Zealand’s inflation was under control.

Much of the latest economic concern is focused on the global fight against inflation, which is taking longer than many analysts initially expected. This global inflation has many causes, including the effects of trillions of dollars of stimulus, pent-up demand, increases in shipping costs, ongoing supply-chain disruptions, and rising energy prices. The economy is slowing around the world, and growth is slowing in most countries. Economies and growth rates are slowing around the world and New Zealand is no exception to either of these trends.

Unless you live under a rock, you’ve probably noticed inflation is hitting us hard. Petrol remains pricey, some Tim Tams are now sold in packs of nine instead of packs of twelve with no difference in price, and fruit and vegetables are reportedly 16% more costly than just 12 months ago.  

The New Zealand Inflation Inferno

Our national inflation rate was recently reported as 7.2% in the third quarter, little changed from a 32-year high of 7.3% three months earlier.

That might not sound like much, though unfortunately, this figure was much stronger than analysts had expected. The nasty surprise was such that reputable news sources ran headlines including “Our inflation inferno”. Economists now expect the Reserve Bank of New Zealand (RBNZ) to respond with a more aggressive stance on monetary policy, starting with a strong hike for the Official Cash Rate at the scheduled November meeting and further increases in 2023. This will flow through to higher interest rates for mortgage holders, businesses with debt, and any other borrowers.

“Inflation pressures remain intense,” said ANZ New Zealand senior economist Miles Workman. “Pricing intentions are gradually easing but are not yet indicating a meaningful fall in inflation.”

“Economists are out there warning that interest rates are going to keep going higher -- and house prices likely lower -- until the New Zealand economy goes into recession or something close to it,” Workman said.

Recent thoughts after the strong CPI data “were understandably more pessimistic about activity and had higher inflation expectations,” Workman said.

Independent economic researchers Capital Economics now forecast the NZ economy most definitely will tip into a recession - and our current house price fall will extend as far as 25% from peak to trough.

Capital Economics expects the RBNZ to hike the Official Cash Rate to 5.0% (currently 3.5%) "as inflationary pressures are pervasive".

"That will push the [NZ] economy into recession next year."

The economists think, however, that Australia will "narrowly avoid" a recession as the Reserve Bank of Australia (RBA) "should get on top of inflation before long".

Capital Economics had previously forecast NZ house prices to drop 20% from their peak (which was November 2021), but have now increased that pick to 25%. House prices here are already down around 10% from the peak.

"We ultimately expect house prices to fall by 15% from their peak in Australia and by 25% in New Zealand.

"That underpins our forecast that residential investment will fall by around 20% from peak to trough in both countries, though the resilience of homebuilding in New Zealand means the risks there are tilted to the upside. The upshot is that GDP growth will slow to just 1.2% in Australia and to 0.3% in New Zealand next year, which is about 1% weaker than most anticipate."

The economists say high inflation and interest rates will affect households’ consumption patterns.

Is the Pain Just Starting for NZ Households?

These rising interest rates are also heightening the risk of mortgage shock for many homeowners who locked in fixed rates around two years ago.

A large chunk of borrowers are still sitting on a fixed mortgage rate with a two in front of it (i.e., between 2 – 2.99 percent). Obviously, that is where interest rates were two years ago. We're now seeing mortgage rates at five or six percent. That's a massive jump for people, especially if they have a large mortgage which they've recently taken on. The banks remain confident that most homeowners will be able to withstand the impact of this shock, but some families will be affected.

Many first-home buyers are likely to face the brunt of this hit too, though potentially offsetting that, property prices have dipped and there’s certainly less competition among homebuyers.

It isn't just individuals affected here. Businesses that borrow will be affected as well. That flows through into everything, including businesses and how much they charge people for their products and services. If businesses are facing increased costs to pay wages, they must pass it on to consumers, who are feeling the pressure in every direction.

Learn more:

• ‍Who wins in a recession?‍
• Eight of the best investments in a recession‍
• The best office jobs for a recession – Microsoft research

Are Things That Bad?

No, it’s not all bad:

• NZ’s employment rate is high, there’s plenty of work to go around
• Our lending regulations and legislation have been stringent for some time – it’s unlikely there will be largescale mortgagee sales ‍
• Inflation is high across the world: Australia just reported its annual inflation rate had hit 7.3 percent, in the UK the annual rate is now above 10 percent and in the US it is above eight per cent. So, the central banks the world over are unified fighting inflation with higher interest rates
• Agriculture (especially dairy farming) and other primary industries provide a great cornerstone to the NZ economy and form the majority of our exports. Even if there’s global economic doom and gloom, there’ll always be markets for our exporter's food and primary produce

The Bottom Line: NZ Facing a Recession

Generally-speaking, the future remains unknowable – despite the best intentions and research by smart people – no-one really knows what the next 12 months will bring. So, take anything written above with a grain of salt.

If you’d like to discuss anything above with a trained professional, then please let us know.