Pre-election Economic and Fiscal Update 2023 predicts deteriorating economy

New Zealand’s economy is expected to worsen over the next 12 to 18 months, before conditions improve, according to the Pre-election Economic and Fiscal Update, which was released by Treasury.

"New Zealand’s economic slowdown is unfolding broadly in line" with the forecasts made in the May budget, according to Treasury.

• Economic growth, which was 3.2% in the year to June 2023, has been forecast to fall to 1.3% to June 2024 and then rise to 2.0% by June 2025.
• Inflation, which was 6.0% at June 2023, will fall to 3.8% by June 2024 and 2.5% by June 2025.
• The unemployment rate, which was 3.6% at June 2023, will rise to 4.8% by June 2024 and 5.4% by June 2025.

“Slow economic growth is forecast to continue over the next 18 months as high inflation necessitates high interest rates. Domestic inflationary pressure has remained persistent, and with ongoing domestic demand pressure, interest rates are expected to remain at their current level over the next year in order to reduce inflation,” according to Treasury.

“High interest rates are expected to constrain economic growth to a quarterly average of 0.4% over the next year, and the unemployment rate is expected to rise to 5.4% [from 3.6% now] while wage growth eases from a relatively high 6.9% in June 2023 to 3.7% in June 2027.”

As the economy slowed, the budget position would worsen, according to Treasury.

“Recent tax outturns have fallen short of expectations, and we expect this will persist. This leads to weaker results for the fiscal position in 2022-23 and across the forecast period,” Treasury said. As a result, the budget will return to surplus in the 2026-27 fiscal year, rather than 2025-26.

However, Treasury said there was light at the end of the tunnel.

“After a period of slow growth, annual inflation is expected to return to within the Reserve Bank of New Zealand’s target [1-3%] by December 2024 and interest rates are expected to gradually ease from late-2024. From then on, economic growth slowly lifts, and the unemployment rate starts to fall from mid-2025,” according to Treasury.

That said, conditions would still be challenging.

“Households and businesses are expected to remain under pressure. Subdued house price growth and easing labour market conditions will dampen households’ wealth and incomes, constraining growth in household consumption. For businesses, rising costs and subdued domestic demand will weigh on investment, offset partially by the North Island weather event rebuild.”