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New Zealand in 2023

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The high inflation challenge

  • The high inflation challenge has seen interest rates rise rapidly, delivering a sharp correction in the housing market
  • We expect a recession in New Zealand in 2023, before rate cuts later in the year to support some stabilisation
  • There are deeper challenges – in the lead up to the election, policymakers ought to focus on reform and growth drivers

Over the short run, things look tough for the New Zealand economy.

Inflation is too high and has embedded itself in the system with signs of a wage price spiral. The Reserve Bank of New Zealand has lifted rates substantially and rapidly – delivering 400bp of tightening so far – and needs to slow growth markedly to get inflation down. A key result is that housing prices are falling sharply. We see a recession in New Zealand in 2023 and have concerns about risks to financial stability, given our forecast for a 20-25% fall in housing prices.

This is bad news for households. But, it may be necessary for the long-run, if it helps reach a more sustainable growth path. Of course, demand management is important, but policymakers also need to focus on reform to boost potential growth.

Nine years ago we described the New Zealand economy as a ‘rock star’. However, even prior to COVID-19, growth had slowed, highlighting deeper challenges facing the economy. These include sluggish productivity growth, over-valued property assets, a lack of capital and infrastructure, and the limits of a small population and isolated geography – policy can help address some of these challenges.

With the right economic rehabilitation, though, we are upbeat on New Zealand’s medium-term growth outlook. We believe it could once more be a ‘rock star’.

Transitions to higher productivity activities do not happen overnight, requiring sustained investments in physical and community infrastructure alongside training and workforce development efforts.

Productivity Commission, April 2022

A general election is likely to be held in 2H23. While we expect much of the election focus to centre on cost of living issues, there is an opportunity for policymakers to consider the longer-term outlook for the New Zealand economy.

These should be: (1) enhanced migration policy, which is better integrated with both the skills and education systems; (2) further trade policy changes, which could see a renewed focus on services, higher value-add, and future-proofing agricultural exports; (3) policy focused on financial market deepening, particularly as more offshore investment would help bolster infrastructure; and (4) New Zealand could be a world leader in policy for addressing the issues surrounding high methane emissions.

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