Pressure on interest rates to ease - possibly

A fall in GDP numbers could slightly ease pressure on interest rates, Westpac says

Friday, June 17th 2022, 1:59PM

by Eric Frykberg

Yesterday's 0.2% fall in GDP might make the Reserve Bank's job slightly easier, according to advice done for Westpac.

Acting chief economist Michael Gordon thinks it might lessen any need to push the OCR close to 4%, as had been warned.

Gordon said even though the economy was still running ahead of its non- inflationary equilibrium, there was now a greater option for a soft landing, which could make interest payments for borrowers slightly easier in future years.

But the margin won't be great - Gordon is still forecasting an OCR peak of 3.5% and a return to growth next quarter.

Kiwibank economists, who earlier had forecast growth this quarter, say the impact of Covid was far greater than expected, while worker absenteeism played a role in the decline.

They expect to see a bounce back in activity over the second quarter, but are worried about the outlook into 2023.

They say growth will halve next year, driven down by the cost of making interest payments at the same time as a falling housing market could induce hesitation about spending.

“Both consumer and business confidence are in the doldrums already,” they said.

ASB economist Nathanial Keall had earlier forecast growth for the March quarter and admitted he was wrongfooted.

Looking ahead, he said substantial headwinds were mounting.

“We don't want to sound too pessimistic,” Keall said,

“Just as recent house price falls were not a bloodbath, so the economy is not on the brink of caving in.

“We can take some comfort from New Zealand's favourable terms of trade and the constructive outlook for our export sector. Nevertheless, we see growth slowing to circa 1% to 2% over 2022 and 2023, in contrast with the whopper 5.4% we expected last year.”

The Government blamed the lower result on global economic worries that had reduced the appetite for New Zealand exports.

Tags: GDP