![]() Consumer prices rose by 1.2 percent in the March quarter, which saw the annual inflation rate dropping from 7.2 percent at the end of last year to 6.7 percent now. Westpac said inflation is now "past its peak". They expect unemployment to rise from its current level of 3.4 percent to 5 percent by the start of 2025. "In fact, with high levels of economic activity and very low unemployment, average hourly earnings have risen by more than 7 percent over the past year, broadly keeping pace with the rise in living costs."īut Westpac predicted the labour market will eventually run out of steam as economic conditions turn down more generally. "Even so, the resilience in retail spending has been notable, and highlights that the current strength of the labour market is helping to insulate many households from the other factors squeezing their finances. "While spending levels in the economy have continued to push higher in recent months, this mostly reflects the impact of price rises - households are having to splash out more cash, but are getting less bang for their buck," Westpac said. With higher interest rates along with rising living costs, Westpac said these will drain households' wallets and many will be forced to wind back their spending over the coming year. That will see the average household's spending on interest costs increasing from around 5 percent of their disposable income in 2022 to 10 percent in 2024, and some borrowers will face much larger increases." "Around 50 percent of all fixed-rate mortgages will come up for repricing over the year ahead, and the average mortgage rate is set to rise by a further 150 bps by early 2024. "In fact, accounting for the extent of interest rate fixing, we estimate that the average 'effective' mortgage rate that New Zealand borrowers are actually paying has increased by around 120 bps since early 2022," they said. ![]() While widespread mortgage rate fixing insulated many borrowers from the impact of those increases for a short time, Westpac said large numbers of mortgages have now rolled on to higher interest rates. In response to strong inflation pressures, the Reserve Bank has continually hiked the Official Cash Rate. Right now though, Westpac said the major factor that is squeezing households' finances and weighing on economic growth is the large rise in debt servicing costs. Going forward, they expect the rapid economic growth seen in the wake of the COVID-19 lockdowns will now give way to an extended period of subdued growth. "Nevertheless, the slowdown in activity over the past few months does highlight that the ground beneath the economy has become increasingly soggy, with the sharp rise in interest rates over the past year now clearly weighing on demand." In addition, much of the downturn in the March quarter reflects temporary disruptions caused by the recent storms. "The labour market remains strong and businesses are continuing to take on staff. However, we don't think this represents an actual recession in the New Zealand economy," the report said. That might fit the label of a 'technical recession' (that is, two consecutive quarters of falling activity). "We estimate that economic output fell by 0.8 percent over the December and March quarters combined. And on top of that, parts of the economy have been grappling with the aftermath of the devastating storms in January and February. ![]() ![]() Most significantly, a sharp rise in interest rates combined with large increases in household living costs is restraining domestic demand.Īt the same time, the pace of the rebound in international tourism has slowed after the initial surge in visitors when the borders reopened. Westpac's report found that several of the factors that boosted growth in recent years have now moderated or even reversed. The extra bit of work we think is required is very much in the vein of a stitch in time saves nine." The New Zealand economy "None of this takes away from the point that the interest rate cycle is very mature and the peak in interest rates is near. However, they will also add to demand pressures in the economy and offset some of the impact that rising interest rates are having."Įckhold said it's less likely we'll see New Zealand's economy tip into outright recession, adding the house price cycle looks to have bottomed out sooner than expected. These new entrants will bring valuable skills to a stretched labour market. "Net migration has rebounded faster than expected and population growth is set to rise to its highest level in decades. "Getting inflation back to sustainable levels won't be easy, especially since the economy likely won't slow as much as we feared a few months back," he said. ![]()
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