Grim outlook for economy
The Reserve Bank has a big job ahead of it bringing pricing behaviour and inflation pressures under control, reports Infometrics.
The economic forecaster predicts higher fuel prices will drive inflation up to 4.8 per cent per annum in the current quarter – an immediate outcome of the current Middle East conflict the central bank can do little about.
Even with an assumption fuel prices moderate in the second half of this year, inflation is still forecast to be 3.9 per cent per annum in March next year and three per cent by December 2027, with second-round effects from the fuel-price spike hitting the economy for several quarters.
“Inflation expectations are more elevated than at any time during the 2010s, and the 2021-23 experience of less pricing discipline is still fresh in business people’s minds,” says Infometrics chief forecaster, Gareth Kiernan, pictured.
“We’re also conscious that, after three years of weak demand conditions, firms have limited scope to absorb current cost increases. In general, we expect firms to try to raise prices despite the risk of losing customers because the alternative of holding prices will make them unprofitable and effectively guarantee their own demise.”
Infometrics expects the Reserve Bank to lift the official cash rate (OCR) three times this year starting in July, with it reaching four per cent by mid-2027 and going as high as 4.5 per cent in the first half of 2028. Increases starting in May cannot be ruled out.
Inflationary pressures had already been “uncomfortably persistent” before the fuel-price shock, particularly in the context of spare capacity that had developed in the economy over the previous three years. Currently, weaker demand conditions provide no guarantees inflation will also track lower.
“We now expect household spending to grow by just 0.8 per cent this year, a full two percentage points slower than our pre-conflict forecasts,” says Kiernan.
“Household budgets have already been hit by higher fuel costs and will be squeezed further by other price increases over coming quarters. Consumer confidence and spending will come under pressure from further delays to any improvement in the labour market, as well as the prospect of rising interest rates.”
GDP growth will also be slower this year than previously hoped with Infometrics revising down its forecast from 2.5 to 1.3 per cent per annum. This assumes no serious or prolonged disruption to the availability of fuel in New Zealand, but it is possible the government’s fuel-response plan will be elevated to phase two or three at some stage.
“There is a huge amount of uncertainty, making forecasting more challenging than at any time since the first Covid-19 lockdown,” says Kiernan. “But economic growth over the next 18 months will be weaker than previously expected, with the psychological and real effects of the fuel-price shock of the past seven weeks unlikely to unwind immediately.
“We’d hope inflation is less persistent than we are forecasting, but the experience of the past few years shows the problems complacency can bring, with higher inflation eroding real incomes and requiring a bigger economic downturn later on.”
