Talking Economics: Recession? Not this year

Peter Nicholl

Most recent economic predictions for New Zealand in 2023 are that the economy will go into recession with the main debate being about when, by how much and for how long.

This became the predominant view when the Reserve Bank suddenly became much more hawkish late last year. It raised its policy interest rate more strongly than previously and forecast more large increases and a higher peak in their OCR, saying this would push the country into a recession in 2023.

Interestingly, this sudden change in tune came very shortly after Adrian Orr was appointed as governor for another term.

This bleak outlook for 2023 scared many people, especially those with a large mortgage who faced an interest rate reset. But a lot of the economic news over the last month or two indicates to me that 2023 may not be as bad as the scenario forecast by the Reserve Bank and accepted by most other commentators.

The recent positive signs include:

  • A significant drop in energy prices. For example, oil in July 2022 was around US$120 a barrel. It has been trending down since then and is currently around US$80 a barrel.
  • The prices of shipping containers skyrocketed in 2019 and peaked at around US$10,400. The price has been falling steadily over the last year and is now around US$2,400, the level it was in early 2019. This will affect the price of most goods that are traded internationally.
  • The return of overseas tourists to New Zealand has exceeded expectations since the border reopened.
  • The US share market has risen by almost 10% since its trough in October, 2022, despite rising interest rates. This doesn’t happen when market participants are expecting a recession.
  • US inflation in the year to December, 2022 was 6.5 per cent. While this is still well above the Fed’s inflation target of 2 per cent, it was the lowest annual inflation rate in the US for more than a year and was the fourth month in a row that their annual inflation rate had slowed a little. Fed spokespeople have already made statements saying that their next rises in interest rates will now be lower than they had previously forecast and the peak level of their policy interest rates will be lower too.

This latest picture from the US Fed should be good news for most other countries, including New Zealand. Because of the critical role of the US$ in trade and international financial flows, most other countries’ central banks have little choice but to follow the track of US interest rates.

The annual inflation rate in New Zealand was 7.2 per cent in the year to September, 2022. The next CPI figure will be released next Wednesday.

In their last Monetary Policy Statement the Reserve Bank forecast the CPI level for the year to December 2022 to keep rising to 7.5%. I think the December CPI number will be lower than that. That should lead the Reserve Bank to lower their interest rate forecasts – and  stop talking about a recession in 2023.

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