Where Is The NZ Economy Headed In The New Year?

Thursday, 22 December 2022, 7:40 pm
Press Release: Kalkine

Summary

• Amid recession concerns, a series of new factors have shaped up that have clouded the estimated strength of the NZ economy in 2023.
• The economy has remained buoyant in the September quarter, with GDP rising by 2%.
• Higher migration, a less aggressive monetary policy and depleting business confidence could be some factors that build the NZ economy in 2023.

Recession concerns have largely shaped the outlook for the New Zealand economy for the coming year. However, rising prices may not be the only cause of concern in the coming year, as a few other troubling factors have also cropped up as 2022 ends. The slowing housing market and the Reserve Bank of New Zealand’s (RBNZ) aggressive stance on monetary policy could further heighten fears during 2023.

Before examining how New Zealand could fare in the coming year, it is worth noting that the economy has remained buoyant despite many headwinds. The latest data by Statistics NZ show that the Gross Domestic Product (GDP) increased by 2% in the September 2022 quarter. This rise in September quarter GDP came after a 1.9% rise during the June 2022 quarter.

Not surprisingly, the services industry led the rise in the GDP in the September 2022 quarter, with the transport, postal and warehousing industries being the biggest contributor. However, the bump in GDP seen in the September quarter might not be enough to mitigate the slowdown expected in the coming months.

Here are a few of the factors that are shaping up the 2023 outlook for the New Zealand economy:

Increased migration

As global travel takes centre stage, the trend is only expected to grow in the coming year. After remaining at a standstill for two years, international travel and migration picked up pace in 2022. However, labour shortage was another key issue plaguing the global economy.

The NZ economy might get relieved of the worker shortage stress as more migrants flow into the country in the next year. This could help ease wage pressures as more labourers enter the workforce. With wage pressures cooling down, the costs to businesses would also reduce, ultimately leading to lower prices for consumers.

Food prices have been worrisome, with the latest data by Statistics NZ showing that food prices were 10.7% higher in November 2022 compared with November 2021. On a monthly basis, food prices remained flat during the month of November. Thus, a cost-of-living crisis is imminent unless higher migration and an effective monetary policy take things under control.

A less aggressive monetary policy

The RBNZ has opted to increase interest rates to combat the ongoing price surge. However, given the alarming outlook for the global economy in 2023, the RBNZ might change its course of action in due time.

A recession could prompt the RBNZ to keep an interest rate hike at bay. The RBNZ projected a rate hike of 125 basis points for 2023. However, given some of the other circumstances shaping up, it would be difficult to say whether the central bank would proceed with such a drastic hike.

Speculation is rife that a rate hike of 50 basis points could be seen in February 2023, potentially the last hike in the RBNZ's monetary policy tightening schedule. Overall, falling inflation and slower economic growth could do RBNZ’s work and take some heat away from the economy.

Lower business confidence

The latest ANZ New Zealand Business Outlook report for December shows that business confidence during the month has plummeted to a new low. The sharp increases in the interest rate have been a major factor behind this sudden decrease in business confidence.

The report also showed that activity measures weakened during the month, with inflation and pricing measures remaining intense. There was a decline in retail and manufacturing sector sentiment and an expectation of higher prices in these sectors.

According to the ANZ report, the intention to raise prices is most widespread in the retail sector, where 74% of firms intend to raise their prices in the next three months. The retail sector has also been concerned about the rising interest rates, while manufacturing is the most worried about the weak exchange rate.

Given the fact that businesses perceive the upcoming road to be tough, there could be an uptick in prices to match rising costs. However, with higher migration, some of the cost burdens on businesses would be eased. Overall, it would be interesting to see how these factors play out in the coming year.

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