Extreme weather events present fresh challenges for the New Zealand economy - Quarterly Predictions, March 2023

February 28, 2023

New Zealand Institute of Economic Research (Inc)
Media Release, 

For immediate release

NZIER Quarterly Predictions, March 2023

In recent weeks, the northern floods and Cyclone Gabrielle have wreaked havoc across many regions and presented new challenges for the New Zealand economy. The widespread devastation comes at a time when businesses and households were already feeling downbeat. Prior to the extreme weather events, the NZIER Quarterly Survey of Business Opinion showed business confidence already at record lows. Principal Economist Christina Leung says, “Even before the floods and Cyclone Gabrielle, businesses had already been pessimistic about the economic outlook. These extreme weather events recently have added to the woes of many businesses, particularly in the affected regions.”

High costs and rising interest rates have been the key headwinds for the New Zealand economy over the past year as the Reserve Bank of New Zealand (RBNZ) embarked on its tightening cycle to rein in inflation. Central banks worldwide continue to grapple with high inflation globally as capacity pressures drive up costs. 

Widespread destruction and rebuilding will mean a tough balancing act 

The recent extreme weather events have caused widespread destruction to physical property, infrastructure, crops and livestock and brought significant disruptions, given the restricted access to regions, and resulted in considerable wealth loss. While it is too early to put a solid estimate on the cost of damages, preliminary estimates by Finance Minister Grant Robertson put the cost at around $13 billion. 

Beyond replacing damaged property and stock, the rebuilding over the coming years will underpin growth, particularly from 2024. This could exacerbate capacity pressures in the New Zealand economy just when there were starting to be early signs of cooling. 

RBNZ holds onto tough stance on inflation  

Despite the widespread speculation about whether the RBNZ would persevere with interest rate increases in the face of the widespread devastation, the central bank remained resolute in reining in inflation at its February Monetary Policy Statement. Alongside its 50 basis points OCR increase was a continued hawkish tone, with the RBNZ continuing to project an OCR peak of 5.5 percent over the coming year. Principal Economist Christina Leung says, “We expect a lower OCR peak of 5 percent as the negative impact of higher interest rates on demand becomes more apparent from mid-2023. However, we recognise the upside risk stemming from the impact of the rebuild on capacity pressures in pockets of the New Zealand economy.”

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members. 

For further information, please contact: 
Christina Leung, Principal Economist & Head of Membership Services 
christina.leung@nzier.org.nz, 021 992 985