Tough year ahead but long term prospects improve – ASB

New Zealanders are set to face a tough year, according to the ASB chief economist Nick Tuffley.

Wednesday, August 31st 2022, 8:43AM

by Eric Frykberg

House prices will fall till the middle of 2023, but general inflation will persist. In addition, growth will be weak and the economy will “potentially flirt with recession”.

The OCR will peak at 4%.

Tuffley's harsh words contrast with a slightly more lenient outlook from Kiwibank economists, though both teams have similar end-point numbers for the OCR and a similar time frame.

Inflation has hit a three-decade high of 7.3% but is unlikely to go much higher, according to Tuffley.

“Inflation likely hit its peak midway through this year, but it’s going to take a while to get down to a sensible level so there’s going to be a long tail,” he said.

“The Reserve Bank has been reacting to this by rapidly increasing the Official Cash Rate, which we expect to reach 4% by the end of the year and remain high throughout 2023.”

He added rising retail interest rates in the wake of this would prove a challenge to a lot of people.

“Many households with mortgages are going to feel added mortgage servicing pressure over the next year,” Tuffley said.

“We still have over half of fixed rate mortgages rolling over in the next 12 months, so there’s going to be people progressively feeling the impact of that even into mid next year.

“Eventually, interest rates are likely to come down, but we don’t envisage that until some time in 2024.”

Tuffley added housing construction were expected to contract gradually amidst declining prices, and a steady closing of the past supply shortfall.

Offsetting this were further price pressures still to come through, particularly the flow-on impacts of labour costs on businesses.

On the other hand fuel prices were down from their extreme – for the time being at least.

“And while we expect supply chain impacts will persist for some time, the intensity and cost escalation is starting to ease,” Tuffley said.

“It’s going to be pretty challenging this year and a chunk of next year, but then we should start to see some relief on the horizon as the housing market stabilises again and inflation and interest rates start to ease a bit.”

Tags: ASB