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Let's Take A Look At The Crystal Ball

The shape of 2023 very much depends on how quickly the economy slows down, writes John Bolton.

By: John Bolton

30 November 2022

The thing with writing these columns is that you’re asked to submit the content well in advance of the magazine actually going to print.

As I write, we’re still a couple of weeks out from the Reserve Bank’s last OCR announcement of the year.

Most of the market is predicting a 75-point increase, but I’m picking the Reserve Bank could opt to go with another 0.50 per cent hike. My rationale being the hefty increases we’ve already had this year, and a sense that the RBNZ will want to understand how those are biting before pushing much harder.

For now, it all remains to be seen. But, of course, as you read this the announcement will have been and gone, so you’ll know how things played out and, ultimately, who got it right.

WHAT COMES NEXT?

The answer to that depends on one thing: how quickly the economy slows down. And if you ask me, I think it’s going to happen pretty quickly.

With global shipping costs having returned to pre-Covid levels, and commodity prices down, there’s a lot happening already to ease inflationary pressure, and we should see several other forces increasingly come into play next year to help speed up the process.

1. Higher interest rates are changing the way we consume.

People tend to spend what they earn. So, it’s probably fair to say that most Kiwis don’t have a whole lot of surplus income to play with each month – maybe $500 on average.

With some people paying up to $500 more a week on their mortgages, that just isn’t enough to cover the difference, and we’re having to make big changes to how
we spend to meet that added expense.

The first things to go are nights out, ordering in, holidays, and small asset purchases like cars, fridges and TVs.

In other words, spiking interest rates have dramatically reduced people’s discretionary spending, and that will have a huge slow-down effect on major parts of the economy like retail and hospitality

‘There’s a lot happening already to ease inflationary pressure’

2. Falling house prices are making it harder to borrow.

A lot of our recent economic growth has been fuelled by a growing trend of Kiwis borrowing to spend. Low interest rates have made it easier, and less expensive, to borrow, and household debt levels have skyrocketed as a result.

Right now, house prices are down about 20 per cent. They’ll recover eventually, so it’s not the end of the world, unless you were hoping to make a quick buck, but the fall has (on paper at least) wiped about $300 billion of wealth off New Zealand’s $1.5 trillion property market.

That loss of wealth has made it much harder for people to leverage their assets to borrow, while also making the option of selling to access liquidity pretty unattractive. And with less borrowed money pumping into the economy, that’ll help to slow things down too.

3. Immigration should start to take pressure off the labour market.

Immigration is really the last big piece in the inflation puzzle.

With extended border closures having stopped the flow of overseas workers into NZ, labour shortages have led to massive wage pressure for Kiwi employers in recent months.

But indications from across the immigration sector are that they’re finally starting to get through the backlog of working visa applications. It’ll be slow going, but as more workers come into the country, the benefits of that will trickle through, and we should start to see unemployment return to a level that supports lower inflation.

WHAT DOES THAT MEAN FOR INTEREST RATES?

Whichever way things go on November 23, the impact on fixed interest rates should be minimal, with the market already pricing an OCR of about 5 per cent.

There will be some short-term volatility, and rates may briefly hit 6.50 per cent (slightly higher than I anticipated) but they shouldn’t take long to come back to 5.50-6 per cent.

By the next OCR announcement in February there should be enough evidence of a slowing economy that pressure on interest rates will start to ease, and I’d expect they’ll start to come back as a result.

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