16 May 2023

Recession perhaps avoided so far, but interest rates likely to keep rising - reports

6:59 am on 16 May 2023
New Zealand banknotes being counted

File photo. Photo: 123RF

New economic reports suggest the economy will definitely slow markedly, but has a chance of escaping recession.

Economic consultancy Infometrics' latest regional report is picking the influx of tourists and bounceback from the weather events will result in anaemic, but positive, growth in the first quarter.

Principal economist Brad Olsen said it estimated the regional economic activity for the first three months of the year was up 0.1 percent, for an annual growth rate of 2.7 percent.

"Our preliminary assessment of the first few months of 2023 suggests that New Zealand might have narrowly avoided a recession - so far, at least - with our initial estimate showing a small quarterly increase in economic activity after a weaker end to 2022."

Brad Olsen

Brad Olsen Photo: Infometrics

He said the recovery in tourism had buoyed several regions, including Auckland, Canterbury and Otago, but countering that had been the impact of the floods and Cyclone Gabrielle, which had devastated horticulture, disrupted farming and damaged transport infrastructure.

It was estimated that growth in the worst-affected regions - Hawke's Bay, Tai Rāwhiti and Northland - each fell between 0.7-0.8 percent on a year ago.

But Olsen said there was a resilience in the economy which was "remarkable", and nationwide increasing migration gains were improving the labour supply as well supporting spending, but headwinds were growing.

"Higher interest rates haven't fully hit households yet, and economic sentiment remains subdued, laying a pathway for slowing economic momentum over 2023 as a more challenging environment emerges."

Already flirted with recession

However, Westpac's latest quarterly report picked the economy shrank 0.2 percent in the first quarter, which on top of the 0.6 percent fall in the last quarter of 2022, would meet the technical definition of recession.

But after that it forecast modest growth, slowing to an annual rate of 0.9 percent in 2024; although the recovery in tourism and migration is putting a floor under the economy, which was not slowing as much as expected.

"It's less likely now that we'll see the economy tip into outright recession, and the house price cycle looks to have bottomed out sooner than expected," chief economist Kelly Eckhold said.

He said the Reserve Bank's rate rises have taken the steam out of the economy, but inflation was stubbornly above the central bank's 1-3 percent target band, and stronger-than-expected immigration would be treated as a further risk.

"Getting inflation back to sustainable levels won't be easy and that more mahi is required to achieve this goal within a reasonable timeframe. As a result, we've revised up our forecast for the peak in the official cash rate (OCR) to 6 percent."

Westpac was forecasting 25 basis point rises in the OCR in July and August, and being held at 6 percent before a cut in mid-2024.

The two economic reports came on the heels of fresh data showing the services sector contracting for the first time in more than a year, adding to weakness in the manufacturing sector.

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