Infometrics’ chief forecaster Gareth Kiernan says the economy will continue to grow even as high interest rates bring down inflation, a situation often referred to as a ‘soft landing’.
The outlook was still challenging, with economic stress still being felt, but inflation was trending down and economic growth was continuing, albeit slowly.
“There is a sense that the rebalancing of the New Zealand economy after the pandemic could have been a lot more harrowing than what we are currently experiencing,” he said.
In a note shared with media on Thursday, Kiernan said economic activity was likely to grow 0.9% next year — up one percentage point from his previous predictions.
“Part of the economy’s resilience is due to the record high net migration inflows that are currently occurring,” he said.
An additional 110,000 people had entered the country over the past year and filled job vacancies and skill shortages. This had boosted aggregate demand even as household budgets were squeezed.
Earlier this week, Statistics NZ’s quarterly consumer price index data showed inflation had slowed from 6% to 5.6% in the three months ended September.
This was the lowest inflation rate in two years despite some one-off effects, such as local rate increase, boosting the price index during the quarter.
Kiernan said this suggested the Reserve Bank’s policy settings were working as hoped and the central bank was unlikely to need to raise interest rates any higher.
Price increases are expected to stall from here and allow the annual inflation rate to reset within the target range, between 1% and 3%, by next September.
There was some risk that inflation stuck around longer than expected because of higher oil prices, wage pressures, or a recovery in the housing market.
The incoming National government’s plan to relax tax rules for property investors was “set to boost buyer demand” for housing. However, mortgage rates are likely to stay above 6% next year and debt-servicing costs will keep a lid on house prices for now.
Economic weakness in China has been weighing on export prices and will cause provincial regions with agriculturally based economies to struggle over the next 18-months.
Core inflation cooling
The Reserve Bank’s core inflation models all dropped in the September quarter, including the important sectoral factors model which fell to 5.2% after being stuck at 5.7% for nine months.
There are various estimates for core inflation, but the sectoral factors model is a key measure of underlying inflation which measures movements in both tradable and non-tradable prices.
Mark Smith, a senior economist at ASB, said these core inflation rates easing meant that underlying inflation was cooling.
“A moderating underlying inflation pulse will encourage the RBNZ to ‘look through’ much of the third-quarter quarterly lift in inflation, with inflation still on track to fall below 3% by the end of 2024”.
Stephen Toplis, head of research at BNZ, said you could see monetary policy at work in the retail sector where prices were “clearly under pressure” with demand decreasing and inventories building up.
“There were outright declines in the quarter for the prices of footwear, furniture, furnishings and flooring, household textiles, household appliances, and glassware, tableware and household utensils”.
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