22 Aug 2023

Inflation, weak economy likely to hit household spending power further - ASB

7:07 am on 22 August 2023
AUCKLAND, NZ - MAY 29:Traffic on Queen street with the Skytower in the background on May 29 2013.It's a major commercial thoroughfare in the Auckland CBD, New Zealand's main population center.

Shoppers will still be feeling the pinch of economic pressures for some time, an economist says. Photo: 123rf.com

Households can expect the economy to remain flat over the next 12 months, with potential for tougher economic pain to come.

The latest ASB economic forecast indicated ongoing inflation and a weak economy could see overall household spending power fall to levels not seen since the 2008 global financial crisis.

Still, ASB chief economist Nick Tuffley said the Reserve Bank may also need to hike the official cash rate (OCR) one more time before the year is out to tame stubborn inflation.

Annual inflation eased to 6 percent in June to the lowest level in two years, and was expected to fall to about 5 percent by the end of the year, before falling back to within the RBNZ's target band in the second half of next year.

"After taking a hit late last year, we expect the economy will be roughly flat through into early 2024. We don't rule out further quarters in which GDP falls as growth bounces around the zero mark," Tuffley said.

"Consumer spending volumes and residential building activity are set to remain weak, given households are directly bearing the brunt of higher interest rates and other living costs."


Airport arrivals board showing New Zealand and Pacific countries

Photo: RNZ/Sara Vui-Talitu

Net immigration flows, which jumped in early 2023 as permanent and long-term arrivals to NZ surged, were volatile, with inflows expected to cool as the backlog of people looking to settle in New Zealand cleared, while Australia lured more New Zealanders away.

"Net immigration is a major swing variable in the economy," Tuffley said.

While immigration usually boosted domestic demand and the housing market, there was little evidence of that to date as the housing market had failed to fire up.

However, Tuffley said the housing market seemed to have found a base, was slowly lifting and expected to gather more steam next year.

NZ dollar

Most retirees will eventually rely on superannuation.

Photo: 123RF

Tuffley expected the New Zealand dollar (NZD) to continue to hover around US$0.60 over the remainder of the year, given the strength of the US dollar.

"Over 2024, the NZD should lift above US$0.65 as the global environment improves and the US Fed cuts interest rates earlier than the RBNZ."

He said the New Zealand dollar would likely hold up against the Australian dollar over the balance of 2023, as New Zealand interest rates remain higher than Australia's.

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