Slowing global demand clouds New Zealand’s growth outlook - Quarterly Predictions, September 2023

August 29, 2023

New Zealand Institute of Economic Research (Inc)
Media Release, 29 August 2023

For immediate release

NZIER Quarterly Predictions, September 2023

Slowing global demand clouds New Zealand’s growth outlook

There remains a large degree of uncertainty over New Zealand’s growth outlook, as the decline in dairy prices from softer global demand adds to the dampening effects of higher interest rates on demand more broadly. These challenges are particularly evident in the retail sector, with retailers feeling downbeat in the face of softening demand. 
Over the longer term, we expect migration-led population growth to support demand. The recovery in net migration has been robust since international borders reopened last year. The more immediate impact of the net migration inflows has been on easing labour shortages. This should drive an easing in inflation pressures in the New Zealand economy. 

Adding to the dampening effects of higher interest rates

On the demand side, the impact of migration-led population growth is offsetting the effects of higher interest rates. Although the Reserve Bank of New Zealand has indicated it did not expect to raise the Official Cash Rate (OCR) further in this cycle, the full impact of interest rate increases has yet to flow through the New Zealand economy. With over half of New Zealand mortgages due for repricing over the coming year, we expect a further slowing in retail spending as many households roll off historically low fixed term mortgage rates onto significantly higher rates. 

Nonetheless, there are signs of a recovery in some parts of the economy. The pick-up in net migration, along with the reduced deposit requirements for new borrowers and expectations that the OCR has peaked, is driving renewed interest in housing. For now, the recovery in housing market activity is tentative and largely led by Auckland and its neighbouring regions. The upcoming general election also adds to uncertainty over the general economic outlook more broadly. 

We expect annual average growth in GDP to ease below 1 percent over the coming year before picking up towards 3 percent from 2027. 

OCR is unlikely to increase further in this cycle 

Given the uncertainty over how these risks will play out and which will have the more dominant influence on inflation, we expect the RBNZ to keep the OCR on hold at 5.5 percent over the coming years. While the central bank, in its August Monetary Policy Statement, left open the potential for further monetary policy tightening, we expect the OCR to have peaked in this cycle as the full impact of interest rate increases undertaken to date continue to transmit through broader economic activity. 

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, 021 992 985