November 2023: Ups and downs (PDF 1.57MB)
The battle between economic tailwinds and headwinds continues to play out. A turning housing market, surging net migration, and expansionary fiscal policy are landing some hefty blows against contractionary monetary conditions, softer global demand, and heightened geopolitical tensions and global market volatility. There are clear winners and losers in the resulting patchy outlook. Overall business sentiment is well off the floor, but remains generally low. Until the RBNZ has CPI inflation back in the bag, it’s hard to see economic conditions turning ‘rosy’ any time soon. However, whether it’s a stronger housing market, a lower exchange rate (adding fuel to the net exports recovery), or a stronger household sector, it’s still a case of be careful what you wish for. With inflation this high, monetary policy would have to lean against any sources of renewed (or sustained) inflation pressures with a higher OCR than otherwise, whether that’s a higher peak than the current level of 5.5% or a deferral of eventual OCR cuts. In that context, muddling along and quietly disinflating isn’t a bad adjustment path, if the economy can hold the line. Let’s dig into some key drivers in a little more detail.
August 2023: Waiting on the last domino (PDF 1.64MB)
Drivers of economic momentum are traveling in all directions at present. Fiscal policy will be expansionary in the near term. Monetary policy will not. Net migration is very strong, but easing quickly. Geopolitical tensions remain heightened. Changes to the RBNZ’s macroprudential settings and consumer credit legislation represent a loosening in financial conditions, all else equal. The housing market is now picking up. Falling export prices (particularly dairy) are weighing. High CPI inflation is eroding household incomes, but wage growth is higher, reflecting the tight (but loosening) labour market. Consumer and business surveys have improved, but are still generally low.
All up, it’s hardly surprising that there’s a range of views out there about where things are going. The economy is clearly softening, but is it softening fast enough to prevent high domestic inflation from becoming entrenched? Our expectation: not quite, which is why we expect the RBNZ to return to the hiking table come November.
May 2023: Moving parts (PDF 2.05MB)
The economy is set to slow as 2023 goes on, with our core macroeconomic outlook little changed from our February edition. We expect the lagged effects of monetary policy to become hard to miss as the months go by, with a stagnant housing market, weakening labour demand, slower household spending, and reduced business and residential investment seeing the economy slip into recession in the second half of the year. Given this narrative is well understood and “textbook”, we skip relatively quickly over our central forecasts before getting to the interesting bit – why we might be wrong! There are significant risks on both the upside and downside when it comes to the outlook for both growth and inflation – and of course, by association, the Official Cash Rate. On balance, we see the risks skewed towards the RBNZ sooner or later deciding more is needed to get inflation down, but downside risks have certainly not gone away – and indeed arguably grow in that scenario. More positively, ongoing supply-side recovery is good for both growth and bringing inflation down, and could be a stronger force than our forecasts build in.
February 2023: Brake point (PDF 1.82MB)
A policy-induced recession is looming. While it’s going to hurt some households more than others, we’re hopeful this slowdown will turn the tide on domestic inflation, and set the broader economy on a more sustainable path over the longer run. Risks remain bi-directional, but we think they are broadly balanced around our recently updated OCR call for a peak of 5.25%. But no doubt 2023 has a few surprises waiting for us. This time last year we were forecasting a peak OCR of 3% – and as we go to print the OCR is at 4.25%! We present two ‘plausible’ scenarios that could see the OCR a year from now higher or lower than our forecast by a similar magnitude. Special topics on how the Auckland floods and what tentatively look like strong net migration inflows have been factored into our outlook are on page 9 and 10 respectively.