The Reserve Bank of New Zealand (RBNZ) recently delivered its most significant Official Cash Rate (OCR) rise, as it continues efforts to rein in rampant consumer inflation.
Hiking the OCR by 75 basis points to 4.25 percent, the rate follows five consecutive 50 basis points movements and represents the fastest monetary policy tightening by the RBNZ since 1999.
But what’s really concerning Kiwis are dire predictions of a recession to come 2023, with forecasts revealed in the RBNZ’s latest Monetary Policy Statement (MPS) showing an expected OCR peaking around 5.5 percent.
In its statement, the Monetary Policy Committee said the economic contraction would, partly result from higher interest rates, as the central bank works hard to ease inflation and guide employment to a more sustainable level.
WHAT IS A RECESSION?
Defined as a period with two successive quarters of negative economic growth, New Zealand has thus far evaded a recession. However, commentators are now picking the event to occur by the middle of 2023.
Despite New Zealand’s GDP falling 0.2 percent in quarter one of 2022, data from Statistics New Zealand showed 1.7 percent growth in GDP for the second quarter, primarily owing to the return of tourism and a reopening of Aotearoa’s international border.
However, in the November MPS, the RBNZ detailed its forecast for a four-quarter long recession that will total one percent of Gross Domestic Product (GDP) and lift the unemployment rate to five percent by the beginning of 2024.
With forecast inflation showing an excess of six percent by the end of next year, drastic moves to dampen consumer demand by the RBNZ are warranted. However, it’s expected that pain now will deliver a swifter recovery later on – although that may be cold comfort for Kiwis facing higher debt servicing costs in the future.
HOMEOWNERS BRACE FOR IMPACT?
Katrina Shanks, chief executive of Financial Advice New Zealand, told Newshub that recessions don’t impact significantly on most people.
“What it does is causes a bit of fear and caution for people, but for most, it’s not too bad.”
Despite this, data shows around 90 percent of New Zealand’s mortgages are on fixed rates, with many of these borrowers still benefitting from record-low lending metrics offered during the early stages of the global pandemic.
This means a large proportion of households have yet to feel the impact of rate hikes, which has allowed many to maintain their spending patterns.
For most homeowners, however, negligible falls in residential property prices won’t make any practical difference – because their home will still be worth more than it was two, five and ten years ago.
Research firm CoreLogic’s recently released ‘Pain and Gain’ report showed that 97 percent of property resales made a gross profit in the three months to September 2022 – which, while slightly down from a 99 percent peak in 2021, remains a far cry from 75 percent recorded circa 2001 and 80 percent during the GFC.
In a recent statement to the Parliamentary Committee, Orr echoes this sentiment of resilience, noting that New Zealand is currently in the lowest quartile for both inflation and unemployment in the OECD.
While this may need to change to achieve economic targets, Orr says the domestic financial system is stable, and household, public and business balance sheets remain resilient.
This is supported by high income growth and aggregate demand, which continues to outstrip supply, boding well for Kiwis’ abilities to weather the oncoming economic challenges.